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RETAIL SALES: GOING UP?

PRICIEST HIGH-END RENTAL FROM LIKERS TO ADVOCATES

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CONTENTS

story 22 Cover Wellness apps and wearables dominate

FIRST 06 Retail sales: Going up? 07 High-end rental accommodation in Hong Kong the priciest in Asia

08 HK’s hotels top global rankings 10 From likers to advocates: Getting

REGULAR 16 Economy Watch 18 Financial Insight 28 Legal Briefing 30 CMO Briefing

Ranking Firms seek younger lawyers willing to drop old ways

COVERAGE HIGH FLYERS 2016 34 EVENT

OPINION 46 Tim Hamlett: The Patten problem: What will history make of us?

48 Hemlock: HK prepares for ‘20 Years of Joyous Yippee Fun’ celebrations

millenials to devote to brands

12 Pharmaceutical spending poised to head higher, listing process to be harder

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 | MARCH 2017 262 Des Voeux Road Central, Hong Kong

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ECONOMY

Here are three economic risks Hong Kong could worry about Will retail sales’ consistent decline blow the economy hard? Hang Seng Bank expects Hong Kong’s growth to pick up to 1.8% this year, with further economic recovery in advanced countries and the stabilisation of the mainland China economy. “There are upside risks to our projection but we also take note of the economic uncertainties. Mr Chan may offer more insights in the Budget 2017/18,” says the report.

RESIDENTIAL PROPERTY

HR & Education

Residents move into “coffin homes” as housing prices hit all-time high More than 200,000 people live in these 20 sq ft spaces. A report by Business Insider says Hong Kong’s housing prices are currently at an all-time high, with the average price per square foot now hovering around US$1,380 (New York $1,645). Hong Kong’s chief executive, Leung Chun-ying, has called the housing crisis “the gravest potential hazard” to society, as only 7% of the city’s land is zoned for housing.

Key factors driving demand for skilled candidates in Hong Kong A market survey report by global mobility specialist Expatfinder. com says technology and finance look to dominate the job market this year as the industries actively hire in Mumbai and Hong Kong, respectively. Hong Kong has faced a prolonged skills shortage, especially in finance due to its position as a financial centre and regional hub for Greater China thereby creating continuous candidate demand.

Chinese capital investment creates job growth in Hong Kong BY DEAN STALLARD Chinese capital investment in asset management firms and private equity fund houses is creating new job opportunities for qualified accountancy & finance professionals in the non-banking financial services industry. Demand is high for fund accountants who are bilingual in English & Mandarin, who understand the investment market, can account for a portfolio and advise firms and Chinese investment partners.

Keeping businesses connected in Hong Kong’s skyscrapers BY JOHN HAWKINS Now home to more than 3,000 buildings that qualify as skyscrapers, Hong Kong’s first structures of notable height stood just six stories tall. Although less impressive today, these so-called high rises of the early 20th century brought about an age in which Hong Kong and the world fell in love with skyscrapers. Two main things going for them: they’re impressive to look at, and they make a small footprint work really hard.

MOST READ COMMENTARY Here’s where B2B businesses in Hong Kong should head in 2017 BY LAWRENCE CHIA If you run a B2B business in Hong Kong, these days your clients are making decisions about your offerings based on more than your price and specifications – they are also evaluating your products or services in multiple dimensions. An increasing number of these are digital and in 2017, B2B businesses that neglect these digital dimensions are putting themselves in peril. Let us start with social media marketing.

4 HONG KONG BUSINESS | MARCH 2017

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FIRST the canary in the retail coal mine has been watches. Hong Kong is the world’s number one seller of Swiss watches, and saw 21 months of consecutive double-digit sales declines through November 2016 when they finally stopped falling.

HK FIRMS Embracing innovation

Hong Kong businesses are not letting themselves be left behind, with 96% of surveyed chief information officers (CIOs) implementing measures to boost company innovation over the next 12 months. According to a survey by specialist recruiter Robert Half, the overall majority of Hong Kong firms are taking measures to boost innovation with an approach that consists of a combination of both technology and people. Robert Half says data infrastructure tops the list with more than half (53%) of Hong Kong CIOs planning to build more data centres to leverage data more efficiently. Almost half (49%) will reshape network infrastructure to improve operational processes, followed by 41% who plan to hire new IT talent with the unique skills needed to build a more innovative business. Leveraging technologies “As one of the world’s key commercial hubs, Hong Kong businesses are increasingly adopting innovative methods to drive their company agenda. Moreover, by pioneering innovation, Hong Kong companies are increasing their competitiveness within the global marketspace at a time when many regional competitors are offering lower cost structures,” notes Adam Johnston, managing director, Robert Half Hong Kong. Johnston says mobile, cloud, and big data technologies are giving Hong Kong companies a competitive edge in the delivery of services and improved productivity. “Leveraging these technologies and building on them doesn’t only have the potential to enhance the customer experience and reduce costs but it also boosts employee productivity which in turn has a positive impact on overall company success.” 6 HONG KONG BUSINESS | MARCH 2017

Mall operators saw increased foot traffic and sales growth

Retail sales: Going up?

ong Kong’s apartment renters must be looking on with awe at the kinds of rental decreases being offered to the city’s retailers. Rent reductions of between 30% and 50% are the standard now for street front shops hit badly by the downturn in spending from mainlanders. The tenants’ revolt may be hurting the landlords who enjoyed a few years of outstanding rent increases, but for retail brands it’s an opportunity to restore their fortunes in a heavily battered sector. In more good news for retailers, the spending showed signs of increasing, with CLSA analysts noting that in the final quarter of 2016, October was better than September, November was soft but that December saw the shoppers come out in force. Perhaps it was the Trump effect, or more likely the stock market which also rose over the period and saw bellweather shopping mall operators like Sun Hung Kai post a 12% increase in foot traffic and 10% growth in sales in its 12 malls over Christmas. But this late quarter turnaround still wasn’t enough to stop Hong Kong recording its worst annual sales decline since 1998 – the year following the handover, with sales coming in down 8.1%. Perhaps

Shops that were commanding rents as high as $2,500 per sq ft just two years ago can be leased for just $1,000 per sq ft.

‘Blooming diversity’ But amidst the slump and declining rents is a blooming diversity which augers well, argues JLL’s Denis Ma, head of research in Hong Kong. Take Russell Street in Causeway Bay as an example. What used to be ranked as the world’s most expensive shopping strip has undergone remarkable transformation since 2014. “Previously lined with store after store of renowned luxury watch and jewellery brands, these retailers today account for just 43% of shops leased, compared with 67% back in 2014. Balancing this pullback has been the growth in Beauty & Cosmetics retailers, which have doubled their presence along the street from 7% in 2014 to 14% in 2016,” notes Ma. He explains that the move away from luxury watch and jewellery towards more middle-market brands has occurred, in part, thanks to the lower rentals on offer. “Shops that were commanding rents as high as $2,500 per sq ft just two years ago can be leased for just $1,000 per sq ft. Lower rents and opportunities to secure shops in prime retail locations has opened up the market to a new range of retailers that were previously overlooked, such as cinemas and even cooking studios,” adds Ma. He says this allows retailers to use their space more creatively and incorporate in-store shopping experiences to woo patrons and build brand awareness.

Russell Street retailer profile

Source: JLL

FIRST Asia top 10 rental costs: High-end 3br apartments

Source: ECA International

Rents in Hong Kong are more than 14% higher than in Tokyo

High-end rental accommodation in Hong Kong the priciest in Asia

ents for an unfurnished three-bedroom apartment across popular expatriate neighbourhoods in Hong Kong average US$10,189 per month, according to ECA International’s latest Accommodation Survey. It compared rental accommodation commonly leased by expatriate staff in over 230 locations worldwide. “Over the past five years, Hong Kong has continued to top our regional rankings. With a high population density and a consistently limited supply of property, average

rents in the territory have long been more expensive than in other high-profile cities,” says Lee Quane, regional director – Asia, ECA International. But Quane notes that despite high rental prices in Hong Kong, average rental costs have fallen by around 13% since 2012. It turns out the residential rental market has been facing downward pressure as, instead of selling, many homeowners are leasing out their properties. “On the demand side, factors such as companies reducing the levels of assistance provided to assignees

The largest rent increases in Asia over 12 months were observed in Tokyo, although this still wasn’t enough to overtake Hong Kong.

and the conversion of assignees to permanent terms, where company assistance in meeting housing costs is reduced or removed, has also meant that landlords with properties in the areas popular with expatriates are having to reconsider the rents they demand,” explains Quane. Less expensive locations ECA International notes that in US dollar terms, rents in the city are more than 14% higher than in Asia’s nextmost expensive location, Tokyo. The gap was bigger five years ago, when rents in Hong Kong were around 20% higher. Following Hong Kong and Tokyo in the Asian rankings are Seoul, Yokohama, Shanghai, Beijing, Singapore, and Mumbai. Across the region, the average rental price for a three-bedroom property averages US$3,124. ECA says the largest rent increases in Asia over 12 months were observed in Tokyo, although this still wasn’t enough to overtake Hong Kong.

The Chartist: OFFICE AND RETAIL RENTAL OUTLOOKS NOT LOOKING GOOD in 2017 Office rental growth in Asia Pacific will remain weak in 2017 and is forecast to slow further to around 1%, notes CBRE in its 2017 Asia Pacific Real Estate Market Outlook report. “Rents in tier 1 cities in China will enter the donward cycle; will be flat in Hong Kong; and will reach the peak in Tokyo in H2 2017,” says CBRE. Meanwhile, no thanks to the combined effects of cautious retailer expansion, the still considerable retail supply pipeline, and the growth of e-commerce, retail rents in most APAC markets are forecast to remain flat. The average growth between 2015 and 2019 is likely to be around 1%. “Rents in Tokyo and Shenzhen will peak this year and then begin to fall, whilst the rental correction in Hong Kong will moderate. ”

Grade A office rental outlook

Source: CBRE Research, January 2017

Asia Pacific retail rental outlook

Source: CBRE Research, January 2017

HONG KONG BUSINESS | MARCH 2017 7

FIRST

HK’s hotels top global rankings

Survey

Hotel investors - where next?

Struggle to recruit

ow much are all of Hong Kong’s hotels worth? It is an interesting question and one which property consultancy JLL has answered with a recent study that puts Hong Kong’s stock of hotels as the third most valuable in the world at US$53.6b, just shy of London at US$57.2b and New York at US$66.5b. But where Hong Kong is number one in the price of hotels measured by the cost per room, is where a Hong Kong hotel will set an investor back a staggering US$820,000 a room. By comparison a room in Sydney costs half that amount. And Hong Kong has around 145,000 fewer hotel rooms than Shanghai, yet the value per room is around four times higher.

Source: JLL

from JLL reveals that alternative accommodation platforms such as Airbnb and HomeAway account for approximately 10% of room bookings in top global markets. For investors, Japan and Australia are hot in 2017. Japan is expected to see one or two trophy asset Non-hotel accommodations deals as well as limited service hotel One thing Hong Kong will see less of portfolios enter the market; Australian is Chinese investors, according to JLL cities have more hotels coming online head of research Frank Sorgiovanni. to alleviate the supply crunch in the “Chinese capital will be active across face of greater demand stemming from global hotel markets, but overall growing tourism numbers, particularly deal flow will reduce, especially for in Sydney and Melbourne. Buyers are transactions above US$1b, due to are also looking at markets such as tighter capital controls. China is Thailand, Vietnam, Hong Kong, and embarking on a massive policy shift designed to stem outbound investment,” Singapore. “The long term arrivals profile is proven with both leisure says Sorgiovanni. and corporate travellers across resort One thing that isn’t going away is markets and financial hub cities.” non-hotel accommodation. Research

Hong Kong has around 145,000 fewer hotel rooms than Shanghai, yet the value per room is around four times higher.

SURVEY

Mainland banks luring MNC bankers with fat packages Deutsche Bank may have scrapped bonuses this year, but for other Hong Kong bankers the year is looking good with more demand coming from an unlikely source. With Western banks cutting jobs, it is the Chinese financial institutions who are moving in and needing to beef up their headcount. The rapid expansion of Chinese-headquartered conglomerates and financial services firms in Hong Kong will fuel the competition for talent in 2017. Survey findings from the 2017 Hong Kong Salary and Employment Outlook by global recruitment specialist Michael Page showed 35% of hiring managers anticipate an increase in headcount, 86% say their organisations support diversity and inclusion, and 62% of Hong Kong employers expect to increase salaries by no more than 5%. “Large Chinese banks, asset management

8 HONG KONG BUSINESS | MARCH 2017

and insurance firms will continue to drive much of the growth in Hong Kong’s financial services sector and are willing to pay up to 70% more than an equivalent role in a multinational,” notes Michael Page managing director Sharmini Wainwright. She says top candidates have been persuaded to join mainland Chinese firms through attractive compensation packages and the opportunity for career growth.

86% say their organisations support diversity

Hong Kong’s banks and financial services companies are facing increasing competition from foreign markets in their efforts to recruit professionals amidst the current skills shortage. According to an independent survey from specialist recruiter Robert Half, three in four (75%) Chief Financial Officers (CFOs) are experiencing increased competition from overseas markets when trying to attract skilled candidates. In terms of the scope of demand for skilled professionals sourced from overseas, more than two-thirds (71%) of CFOs say they intend to source up to 10% of their workforce from foreign markets, with one in five (20%) anticipating they will be recruiting the most overseas talent from Canada and the United States. Competing with foreign markets Adam Johnston, Managing Director at Robert Half Hong Kong says, “High calibre financial services professionals are increasingly embracing global career opportunities. As a consequence, companies are under pressure to compete with foreign markets in order to attract and retain the best talent.” Johnston notes that demand is especially strong for professionals with niche skills, particularly in compliance, security, and risk management. “The resulting skills shortage has further highlighted that Hong Kong is competing on a regional and even international scale to attract suitably skilled and qualified professionals, and recruitment methods should be adapted accordingly.” Three in four (75%) CFOs say the shortage is impacting their departmental workloads.

FIRST

From likers to advocates: Getting millenials to devote to brands

arketers love to talk about loyalty, but a new study in Hong Kong shows that only 2% of millenials are loyal to their favourite brands. Marketing agency ICLP surveyed 750 consumers in Hong Kong and found that 10% of Hong Kong millennials are in a ‘romantic’ relationship with their favourite brands, compared to 21% of those in Singapore and 28% in China. Hong Kong millennials, with the lowest percentage in the APAC territories and countries surveyed, are characterised as having high levels of passion and intimacy but no commitment, and are strongly inclined to recommend brands with a low degree of brand loyalty. Is there any good news then for marketers trying to capture the hearts of unfaithful millenials? Apparently yes, because 33% of Hong Kong millenials are in a ‘liking’ relationship with their favourite brands. This type of relationship only has the component of intimacy, which reflects how Hong Kong millennials have a higher tendency to share and receive information from brands. The figures for Singapore and China are 23% and 20%, respectively. When it comes to asking for their devotion to a brand, only 2% of Hong

Kong, 3% of Singapore, and 9% of China millennials consider themselves to be devoted to their favourite brands, expressing willingness and desire to forge enduring relationships with them. So what is a Hong Kong brand marketer to do to convert the 33% of Hong Kong millennials from a ‘liking’ to a ‘devoted’ relationship with their brand? Communication manner and method The answer, like in all relationships, lies in the manner and method of communication. The survey found that 61% would buy more if their brands were better at communicating with them, and almost a quarter felt that in providing their personal information to retailers they expected they would benefit from this in terms of brand communication. “These findings reveal that retailers in Hong Kong still have some way to go in engaging millennial shoppers, a technologically savvy generation that more businesses are seeking to court in order to tap into their potential as advocates. Brands need to look into a tightly integrated strategy to drive commitment of millennials. Retailers need to understand shoppers’ individual needs by leveraging

Year-on-year growth in Asia Pacific e-commerce sales and offline sales

Source: CBRE Research, January 2017

customer data such as response rate and viewership to track purchase preferences. Brands can then use this information to implement a more comprehensive and tailor-made loyalty rewards programme that can fit their personal needs, thus developing long-term trust with their customers,” says Mary English, general manager at ICLP. Other key findings of the survey are that 22% believe it is important for a brand to recognise them with a personalised message, gift, or offer on their birthday, and 77% would spend more if they were rewarded better. English adds, “Millennials are the most significant generation with drastically different personalities; brands should begin to truly understand their individual buying behaviours and map out integrated solutions to engage them.”

OFFICE WATCH

Ooosh For Startups helps new firms make their mark Founded by entrepreneurial enthusiasts, Ooosh For Startups is a 7,600 sq ft coworking space located in the heart of Lai Chi Kok. It was designed with an emphasis on the balance between space, accessibility, and privacy. “We have managed to build a workspace that is cozy enough for people to mingle, but also practical enough for raising productivity,” says Jeffrey Cheng, co-founder, Ooosh For Startups. They took a minimalistic yet practical approach on design direction, with the space featuring inspirational decorations, soundproof walls, greenery partitions in their open space, and noise cancelling partitions in meeting rooms. Ooosh For Startups’ design was led by Ison Cheng, managing director of i&i Interior Design, who has over 19 years of expertise in interior design and has worked on numerous exquisite projects across commercial spaces, residential flats, and retail premises. 10 HONG KONG BUSINESS | MARCH 2017

The 7,600 sq ft co-working space has soundproof walls

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FIRST NUMBERS

#squadgoals

Drug expenditure accounts for 10% of the HA’s total spending in FY2015/16

Pharmaceutical spending poised to head higher, listing process to be harder

recent analysis has noted that the rationalisation of pharmaceutical spending will be a central theme in the Hong Kong market. According to BMI Research, this is underpinned by the steady growth in public expenditure on drugs, prompting a more mature approach by the Hospital Authority. This in turn will have significant ramifications for the listing of novel pharmaceuticals on the drug formulary. Given the dominance of the public healthcare sector, it is a commercial necessity for firms to engage the authorities over issues of costs, and BMI Research expects further use of alternative funding solutions such as risk-sharing agreements to facilitate access. More austere approach According to the research note, Hong Kong authorities are expected to adopt an increasingly austere position. This is reinforced by the fact that pharmaceutical spending is the second largest area of spending for the HA, accounting for 10% of the total in FY2015/16. With regards to absolute year-on-year increases in expenditure, medicine spending saw the third highest increase, after building projects and staff costs. In relation to these, high-value

12 HONG KONG BUSINESS | MARCH 2017

pharmaceuticals will face significant difficulties getting listed on the HA’s drug formulary, notes BMI Research. For the full year of 2016, the Drug Advisory Committee (DAC), which evaluates listing applications, rejected a total of seven applications on the basis that the “justification of the treatment’s cost in relation to its benefits is insufficient.” BMI Research says that to address the difficulties in financing highvalue pharmaceuticals, it expects multinational pharmaceutical firms to work closely with the authorities to facilitate access to novel treatments. “Despite its small pharmaceutical market, we continue to view Hong Kong as attractive to innovative drugmakers, given its well-developed regulatory regime and higher percapita medicine spend at US$169.”

We continue to view Hong Kong as attractive to innovative drugmakers.

Hong Kong: Public spending on drugs (HK$m)

Sources: Hospital Authority, BMI

Source: www.PrudentialRelationshipIndex.com

ANALYSIS: CONSUMER CONFIDENCE strong. Despite a slight drop of 2% from the third quarter, over half (52%) of the respondents in Hong Kong are optimistic about their own personal finance in the last quarter. This can be evidenced by their strong inclination to put their spare cash into savings (from 67% in Q3 2016 to 71% in Q4 2016) as well as the stronger appetite in investing in stocks and mutual funds. Almost half of the respondents (46%) said they will invest their money in stock markets after covering their essential living expenses, compared to 44% in the third quarter.

Over half of the respondents in Hong Kong are optimistic about their own personal finance

Consumer confidence shows signs of bottoming out

Hong Kong consumers’ appetite on discretionary spending is still strong, with 45% of survey respondents ready to spend in the next 12 months.

ollowing a drop of 11 index point during the beginning of 2016, Hong Kong consumer confidence picked up gradually and remained steady at an index of 93 in the fourth quarter of 2016, according to the latest Nielsen Global Survey of Consumer Confidence and Spending Intentions conducted between October 31 to November 18, 2016. In the latest round of survey covering 30,000 respondents in 61 markets, global consumer confidence increased two points to 101. Regionally, North America consumer confidence rebounded significantly to 120, an increase of 15 points, followed by South East Asia and Asia Pacific at 115 (also 115) and 111 (from 109) respectively. Consumer confidence for Latin America (83), Africa/ Middle East (83), and Europe (81) remained at a lower level during the quarter. Within Asia Pacific region, 14 HONG KONG BUSINESS | MARCH 2017

Although retail sales in Hong Kong were still recording a 4% decrease in the last quarter of 2016, Hong Kong consumers’ readiness to spend is a good sign to the retail market after a gloomy year.

Indonesia and Philippines continued to lead the confidence at 136 and 132 respectively. Sustained optimism The steady consumer confidence in Hong Kong was attributed to the sustained optimism in job prospects, state of personal finance, and spending intent amidst a cautiously optimistic economic outlook. As the survey report revealed, almost one-third of respondents in Hong Kong are optimistic about their job prospects, a slight decrease of 1% from the third quarter. This is mainly due to the stable and relatively low unemployment rate in the market. The recent steady rebound of tourist arrivals has also led to the boost of retail sales which has only recorded a 4% decrease in the fourth quarter, compared to an 8% decrease in the third quarter. Hong Kong consumers’ outlook towards their state of personal finance remained

Strong appetite on spending Despite the uncertain economic outlook, Hong Kong consumers’ appetite on discretionary spending is still strong. Almost half (45%) of respondents in Hong Kong are ready to spend in the next 12 months. Close to four in 10 respondents (37%) will spend their spare cash on out of home entertainment after covering the essential living expenses, an increase of 6% from the third quarter. A respective 31% (+5%) and 21% (+3%) said they will spend the spare cash on holidays / vacations and new clothes. “Although retail sales in Hong Kong were still recording a 4% decrease in the last quarter of 2016, Hong Kong consumers’ readiness to spend is a good sign to the retail market after a gloomy year. It is important for retailers and manufacturers to cater to the spending appetite and interest to capture the right group of customers,” says Angel Young, managing director, Nielsen Hong Kong & Macau. “In 2017, business operators should adapt to this new normal and capture the opportunities from a wide range of consumers, ranging from the 7.4 million local Hong Kong consumers with stable spending, 42.8 million of mainland tourists who are big spenders and digital media savvy, to the 1.4 billion of consumers in China who are so fond of making cross border purchases.” From a report by Nielsen

econoMY WATCH

For now the economy has gained some breathing room

Hong Kong economy to see subdued growth in 2017

Real gross domestic product growth is forecast to reach 1.3%, whilst a more optimistic view expects a 1.8% expansion but with upside risks.

hen Hong Kong’s economic report card revealed better-thanexpected growth in the third quarter of 2016 and Financial Secretary Paul Chan Mo-po signalled even higher fourth quarter results, the good news lent cause for celebration. But those cheers will be short-lived amidst challenges both in the domestic and global fronts that will hamper full recovery. Analysts seem optimistic that there will be a bit more room for the economy to recuperate, but uncertainties abound and business outlooks are deeply dour. The Hong Kong economy has gained breathing room as monetary headwinds temporarily ease, but Duncan Wooldridge, economist at UBS, says a strong rebound is not in the cards. Instead, the territory will see subdued growth in 2017 and 2018, with real gross domestic 16 HONG KONG BUSINESS | MARCH 2017

While Hong Kong’s nearterm macro has become less bad, we don’t expect much recovery ahead.

product (GDP) growth forecast to only reach 1.3% and 1.4%, respectively. Restrained growth “Whilst Hong Kong’s near-term macro has become less bad, we don’t expect much recovery ahead. Growth is likely to remain subdued and chug along an L-shaped path in 2017 and 2018,” says Wooldridge, referring to the previously higher 2 to 3% GDP growth range the territory posted from 2013 to 2015. He also expressed skepticism that the battered retail and hospitability sectors will bounce back since demand is not likely to improve significantly, even taking into consideration dipping domestic costs. “Whilst these sectors are indeed finding a floor, as the supply sides become more favourable and the relative Hong Kong dollar

appreciation pauses, any recovery thereafter still critically hinges on better end-demand,” says Wooldridge. “However, tourist spending is still hindered heavily by continued RMB depreciation and tighter rather than looser Chinese visa policy.” The silver lining for the Hong Kong economy is that the headwinds caused by tighter monetary conditions have lessened since the latter half of 2016: The US dollar, which had been appreciating, retreated somewhat in the third quarter of 2016, allowing the Hong Kong dollar to stabilise in real exchange terms; and expectations for US rate hikes lessened after the “Brexit” vote in late June. “The stabilisation in monetary conditions since the second half of 2016 has allowed the city to temporarily muddle through,” says Wooldridge, adding that even if growth will be restrained, domestic spending should at least pick up in 2017 if wealth effects from property turn more constructive. Sylvia Sheng, China economist at Merrill Lynch (Hong Kong) likewise expects Hong Kong’s economic growth momentum to remain modest in 2017, which would help keep domestic inflation pressure in check. “Looking ahead, we expect inflationary pressure to remain moderate in the near term,” says Sheng. “On the external front, import price inflation will likely remain contained amidst a strong Hong Kong dollar on a trade-weighted basis on the back of US dollar strength.” Optimism and uncertainties Meanwhile, a more optimistic Hang Seng Bank expects Hong Kong’s economy to expand by 1.8% in 2017 as recovery in advanced countries gains pace and mainland China stabilises. This growth forecast comes with a couple of notable upside risks, namely a stronger low base effect and a stimulus package from the Trump administration. “The low base effect may be bigger than we anticipate as retail sales and trade have both persistently declined for the past two or three years,” says Thomas Shik, acting chief economist at Hang Seng Bank. “Economic

econoMY WATCH confidence on global growth may further improve following the planned announcement of economic stimulus plans by the Trump administration later this year.” Ongoing uncertainties surrounding the Hong Kong economy, including potential changes in international trade policy and the mainland’s economic transition, may dampen growth. Julia Wang, economist at HSBC, notes that significant changes to US trade policy under the Trump administration is a key downside risk, along with the sluggish pace of global recovery. Hong Kong will need to brace for impact when trade conflicts do break out. “Should our base case view of the avoidance of an outright trade-war play out, our economists predict stronger growth in the US and continued stability in China. This should have a positive impact on Hong Kong’s economy,” says Wang. “However, in the scenario of rising protectionism abroad, Hong Kong’s economy stands to be impacted negatively.” SME dour outlook On the home front, majority of small and medium enterprises (SMEs) do not expect the economy to improve in 2017. The Standard Chartered Hong Kong SME Leading Business Index (SME Index) revealed that only 10% of SME respondents expect better economic growth. The remaining majority was equally split between expecting deterioration and a status quo. Released jointly by Standard Chartered Bank and the Hong Kong Productivity Council, the SME Index fell to 41.9 in the first quarter of 2017 from 42.5 in the fourth quarter of

2016, 50 being neutral. This was the first drop after two consecutive quarters of improvement from the record-low 40.4 reached in the second quarter of 2016, indicating that companies have not been able to shake off their pessimistic sentiment, says Kelvin Lau, senior economist, HK at Standard Chartered Bank (HK) Limited. “SMEs are bearish on Hong Kong’s economic outlook,” says Lau. “Resilient hiring sentiment was not enough to turn things around.” SME sentiments on sales and profit margin also dropped to their second-weakest levels in more than four years. Still, he reckons the cautiousness reflected in the sales and profit margin sub-indices related only to short-term business performance, which contrasts with continued confidence in the territory’s longterm business outlook. Sector expectations Looking at the SME index by industry, manufacturing fell to 39.2, the second-lowest on record, from an already-weak 40.3 prior. On the other hand, import/export/wholesale trade rebounded in the first quarter of 2017, seen by Lau as a reversion following its underperformance throughout 2016. Finally, retailers were not any more upbeat than more externally oriented respondents, with the 38.9 reading for retail barely above its third quarter of 2016 low. As a consolation for retailers, Wang says retail sales have been falling at a slower pace in recent months as tourist arrivals have shown signs of stabilisation, although sales of consumer durables and luxury items remain weak. In terms of business performance,

The Standard Chartered Hong Kong SME Leading Business Index revealed that only 10% of SME respondents expect better economic growth.

21% of SMEs anticipated expansion, by an average 10%. This contrasts with 29% of respondents expecting contraction, by an average 11%. Lau notes that one in five respondents said Trump’s election as US president had weakened their business confidence. Most businesses also expressed worries about possible changes to US trade policy (57%), followed by intensifying foreign exchange volatility (23%) and an uncertain rate-hiking outlook. Property focus Whilst the Hong Kong economy seems to have gathered some strength in 2016, challenges remain in 2017, and all eyes will be on how well the property sector copes, says Wang. The property market has staged a notable recovery since early 2016 when prices corrected from an all-time high reached in September 2015 whilst transaction volumes also improved. This helped lift Hong Kong’s growth to 1.9% in the third quarter of 2016, up from 1.7% in the second quarter. But Wang warns that the Hong Kong property market could be doubly impacted by local tightening measures and the likelihood of a more aggressive rate hike cycle in the US. She cites the increase in the double stamp duty on residential property to a flat rate of 15%, from a sliding scale of 1.5%-8.5% previously, as likely impacting the recovery in the housing market. “Furthermore, our US economists have now pencilled in a more aggressive path of Fed tightening, amidst expectations of more fiscal stimulus and higher growth in the US,” she says. “Should this materialise, Hong Kong will face higher mortgage costs which is likely to bring more challenges for the housing sector in 2017.”

Growth momentum has improved in 2H 2016

Expected economic performance: 2017 vs 2016

Sources: CEIC, HSBC

Sources: Hong Kong Productivity Council, Standard Chartered Research

HONG KONG BUSINESS | MARCH 2017 17

FINANCIAL INSIGHT: INVESTMENT BANKING

What used to be a Western-dominated market has rapidly changed

Wall Street i-banks hit by PRC firms

Local players in investment banking are stepping up, with Hong Kong coming first in terms of funds raised by initial public offering in 2016 and beating rival markets like Shanghai and even New York.

hen 2016 clocked in, the Hong Kong investment banking scene took a sudden underdog storyline: Smaller local players began gobbling up more deals in equity capital markets (ECM), eating into a market previously cornered by global players. Analysts reckon this trend favouring smaller as well as mainland players will persist in 2017 due to the challenging environment that has put dominant international houses on a slump. “The market in Hong Kong is changing rapidly. It used to be dominated by Western-oriented international and global investment banks,” says Keith Pogson, senior partner, Asia-Pacific financial services at EY. “But this has changed quite dramatically, with both a combination of mainland players and smaller local players having a much larger share of the action and role to play.” In the ECM space, in which Hong Kong has remained as one of the most vibrant markets globally, deals are increasingly managed and underwritten by mainland or local houses. Pogson reckons this reflects China’s dominance of the deal flow at the large end of the market, and the abundance of deals with local houses and boutiques at the smaller end. Global players, by contrast, have been constricted to super large deals or deals that require a wider market nexus, and they will not likely regain their dominance in the coming years. “Capital markets deal flow has become more bifurcated,

18 HONG KONG BUSINESS | MARCH 2017

The biggest IPO on the Hong Kong Stock Exchange in 2016 was the listing of the Postal Savings Bank of China.

between the previously dominant international houses, who are generally getting a smaller slice of what was a reasonable-sized pie in 2016, versus local and mainland players who have clearly been on an upswing in terms of market share,” says Pogson. “Pricing has remained tight given the dynamics and this, in the long run, is difficult to see recovering back to the richer levels historically enjoyed.” Big advantages of being small A key theme in 2017 will be a shift in focus to seizing “smaller deals with great potential,” says Mark Chan, managing partner at HM Chan & Co in association with Taylor Wessing, although there will be an occasional mega transaction. He notes a lack of sizeable transactions, especially in the initial public offering (IPO) space. There has also been a boom in boutique banking and financial advisory firms, which have embraced their advantage as smaller financial institutions and are gaining market share by charging lower fees and granting more flexible fee arrangements. Thus it is harder for traditional investment banking players to protect their leading market share. With competition heating up and regulatory noose expected to tighten further, 2017 will likely test the patience and risk threshold of investment banks in Hong Kong. “2017 would be a challenging year for the investment banks as the global IPO market will be

FINANCIAL INSIGHT: INVESTMENT BANKING exposed to such uncertainties and volatility with major factors including the economic policies of the new US government, the pace of interest rates hikes, development of Brexit, and leadership changes in Europe,” says Wing On Chui, partner and China-appointed attesting officer at Bird & Bird. “The Hong Kong regulators will also tighten their regulatory oversight on the investment banks in the coming year. Should the PRC authorities open the door for listing of PRC enterprises on the local exchanges, it may affect the number of China enterprises listing in Hong Kong in 2017,” he adds. Market risk is soaring, with Hong Kong regulators suing some of the bulge bracket banks in relation to their role as sponsors in previous IPO transactions. “This has definitely made investment banking a riskier business,” says Chan. “Additionally, there is still a fair bit of uncertainty from the global political and economic perspectives, so this has inevitably impacted market conditions which remain challenging for industry players.” Still, despite all these uncertainties, the Hong Kong stock market remains a preferred fundraising platform in the region, which has partly improved analyst outlooks. “We are cautiously optimistic of the Hong Kong capital market given the robust position of the Hong Kong stock market with enterprises still viewing it as the first choice of fundraising platform in Asia and with the support of the mainland,” says Chui. “There is also a trend of more IPOs on the growth enterprise market of the Hong Kong Stock Exchange.” Biggest deals of 2016 Hong Kong came first in terms of funds raised by IPO in 2016, pulling ahead of rival markets like Shanghai and New York, although the total funds raised in 2016 was lower than the previous year. The biggest IPO on the Hong Kong Stock Exchange in 2016 was the listing of the Postal Savings Bank of China, probably the last of China’s commercial banks to do so, which raised proceeds of around US$8b. Some international investment banks were involved in the mega-deal as sponsors and underwriters, pushing through with the deal despite the string of uncertainties that have dampened market sentiment and activity, including slow global economic recovery, the US presidential election, Brexit, and rising interest rates. “It was good to see such a large deal easily get taken by the market,” says Pogson of the biggest deal of 2016 in the

EY says investment banks need to be more strategic

ECM space. He also highlights the steady stream of M&A deals, such as the China Chem Syngenta deal and Dalian Wanda deals, which continued to hit the market. M&A activity flourished as Chinese businesses focussed on global outbound activity, and expressed keen interest in acquiring offshore assets despite deteriorating economic conditions. “The M&A markets have been a really positive light for the year,” says Pogson, “with China dominating at the large end of the market. Deal flow has been strong though in some instances the ability to close and complete has been a large irritant, predominantly due to the speed and or lack of approval from mainland central authorities.” He adds, “We will still see M&A deals still coming from the mainland. Although with mainland authorities having a tighter focus on foreign exchange (FX), these may be more focussed in terms of segments and rationale.”

Wing On Chui

Average return on equity for leading investment banks Mark Chan

Sources: Company accounts, EY analysis Source: KPMG

Keith Pogson

Major trends Looking back at 2016, analysts identified some major trends that shaped dealmaking activity. The debt capital markets (DCM) underwent big changes, says Pogson, and has become dominated by long-term relationship bankers, enabling mainland commercial banks to capture a larger market share. The Panda bond market and the RMB market both matured, although they will need more time to develop. Another noticeable trend has been the use of internal deal teams by serial acquirers from the PRC. “This has given these players a focus, speed, and execution capability unseen before in the region,” says Pogson, “but has also taken large chunks of potential fees away from the banks, with the banks left in these situations to support difficult regulatory situations or providing financing.” Analysts are keeping a close eye on the gradual reacceleration of the Chinese domestic stock markets, and how this may challenge the Hong Kong market in the long run. Pogson explains that Hong Kong has long provided a quick solution for those desperate to list from HONG KONG BUSINESS | MARCH 2017 19

FINANCIAL INSIGHT: INVESTMENT BANKING singapore view

Investment banks operating performance (in US$b)

Will 2017 see the “great adjustment”?

Sources: Company accounts, EY analysis

the PRC, but this unique advantage could erode soon. “I think we will see a continuing relaxation of the pipeline constraints on the mainland exchanges. This will continue to raise challenges for the Hong Kong exchange in terms of longer term volumes and proposition.” The opening of the Shenzhen-Hong Kong Stock Connect in the end of 2016 is also viewed by some as a possible game-changer, but whether it will drive up listing interest in the territory remains to be seen. “We have yet to see how the launch of the Shenzhen-Hong Kong Stock Connect, which together with the Shanghai-Hong Kong Stock Connect, could expand the investment base and improve investor sentiment in the Hong Kong market and attract more enterprises to come to list in Hong Kong,” says Chui. Global challenges In EY’s report “Capital Markets: Building the investment bank of the future,” it says the investment banking industry continues to face an uphill struggle to deliver sustainable returns to investors. “Investment banks have been in reactive mode, making incremental and tactical changes, often in response to the urgent demands of regulators. The short-term focus of the regulatory agenda has constrained their ability to make discretionary strategic choices, and their long-term vision has been impaired,” says EY. The report cites investment banks’ multiple strategy reviews since the crisis. “They’ve been preoccupied with scaling back their business; withdrawing from geographies, asset classes and customer segments; and reducing their workforce. Despite this downsizing, the average return on equity (ROE) for the top 14 global investment banks was just 6.3% in 2015,” notes EY. Although some managed to post ROEs greater than 10%, EY says performance across the industry is forecast to decline further, with regulatory pressures continuing to drive up costs and prudential rules driving up riskweighted assets. “In particular, banks are challenged by the fundamental review of the trading book, rules around counterparty credit risk, credit valuation adjustment, and capital requirements (especially as a result of total lossabsorbing capacity and leverage ratio proposals).” As a result, EY believes that without any cost restructuring or capital optimisation, industry ROE could fall below 5%. It says banks must become more strategic and more sharply focussed on transforming their businesses in order to meet the challenges. 20 HONG KONG BUSINESS | MARCH 2017

A key theme in 2017 will be a shift in focus to seizing smaller deals with great potential.

If investment banks in Singapore had a hard time coping with the flurry of challenges and changes in 2016, then 2017 will provide a much-needed breather, especially for banks that have started shaping up their operations. Analysts forecast a thrilling year ahead marked by an improving outlook as well as opportunities to collaborate with financial technology firms. Consolidation, innovation, and compliance will be the key themes in 2017. “The winners in this environment will be investment banks that restructure successfully and develop a sharp focus on the things they do best and embrace innovation,” notes Liew Nam Soon, ASEAN managing partner, financial services at Ernst & Young Solutions LLP. Liew says investment banks face a slew of hurdles that are driving down return on equity (ROE). Business restructuring Not only is economic growth slowing, but revenue for fixed income, commodities, and currencies is on the decline. Banks must also contend with new tax and compliance regulations that impose tougher penalties. As a result, ROE amongst investment banks has declined in the past years, forcing some to restructure their businesses. Liew says EY has been working with investment banks to restructure operations and implement new models to optimise business, taking into consideration legal entity structures and transfer pricing. “We have seen a lot of downsizing in the past couple of years for investment banking and I think that has resonated across many financial institutions,” says Ow Kim Kit, deputy head of banking and finance practice, RHTLaw Taylor Wessing LLP. “The result is that many senior level people have been displaced, most of them very experienced, having seen through several market cycles.” She reckons the wave of restructuring was a survival necessity, preparing financial institutions for the opportunities this year. “I saw the second half of 2016 as a time when investment banking players regrouped and built the backdrop for what may be a very exciting 2017,” says Ow. “The markets will assimilate into the new set of circumstances and a positive outlook should soon emerge within the first quarter, barring any severe and unexpected situations.”

Strong banking and investment environment

Note: 100 - lowest risk; 0 - highest risk Source: BMI Trade and Investment Risk Index

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Hong Kong’s hottest startups 2017

Turning concepts into solutions

Wellness apps and wearables dominate This year’s ten hottest startups in Hong Kong have an average funding of over HK$17m.

his is our sixth edition of the hottest startups issue where we present notable and up-and-coming local startups. In compiling the list, we first looked at the startups we have featured on our website, www.hongkongbusiness.hk, and we then filtered by amount of funding raised. Startups whose funding is not disclosed are not included, and they must have started operating in the last three years. We then checked our list with industry players to get

1. Prenetics FounderS: Danny Yeung, Lawrence Tzang Funding: HK$100,000,000; Ping An Insurance, SXE Ventures, 500 Startups, Venturra Capital, REAPRA Start of operation: 2014 Prenetics is the leading genetic testing / digital health company in Southeast Asia. Prenetics empowers individuals with valuable health information. With a simple saliva sample, individuals can discover how their genes affect their diet, drug response, disease and cancer risk. This information enables people to make health a choice, by living healthier and proactively preventing diseases. 22 HONG KONG BUSINESS | MARCH 2017

recommendations and to weed out those that do not make the grade. For this year’s list, the lowest funding is at HK$3.8m. We don’t claim that this is the most comprehensive list, and whilst we have tried to verify funding quantums, we cannot verify all amounts declared. Nevertheless, we feel this list represents the most talked about startups in Hong Kong. Enjoy the read and send feedback to research@charltonmediamail.com.

2 . S ou n d b re n ne r Limited Founders: Florian Simmendinger, Julian Vogels Funding: HK$15,600,000; Wistron Corporation, Asgard Capital, Brinc.io Start of operation: 2014 Soundbrenner is a platform that empowers musicians to master rhythm in a more effective way. The Soundbrenner Pulse, a wearable, smart vibrating metronome, allows musicians to feel the beat instead of hearing the click. It works hand-in-hand with its metronome mobile app, as well as with digital audio workstations through their desktop application.

Hong Kong’s hottest startups 2017 3. Lamplight Analytics Founders: Fergus Clarke, Nathan Pacey Funding: HK$11,600,000; Vectr Ventures, Private Investors Start of operation: 2014 Lamplight Analytics is a social data analytics firm that analyses online conversations from traditional and social media sources to give marketers, strategists, and business leaders various insights to their audience, and help them make smarter commercial decisions.

7 . V e r i d at e Founder: Peter Hatz Funding: HK$6,600,000; Private Investors Start of operation: June 2015 Veridate Financial Limited is a provider of fund administration and back-office services to private equity funds and hedge funds, and consolidated reporting services to family offices. Its mission is the end-to-end automation of investor on-boarding, administration, accounting, and reporting.

4. Oddup

c l i m 8

Founders: James Giancotti, Jackie Lam Funding: HK$8,700,000; 500 Startups, Click Ventures, Kima Ventures, Bigcolors, Justin Dry, Andre Eikmeier Start of operation: 2015 Oddup is a data-driven research platform that gives analytical information on startups. It gives ratings and a curated view on the company’s capability by pinpointing potential high return of investments. More than 50,000 users utilise Oddup’s platform.

Founders: Florian Miguet, Pierre Mouette, Julien Guéritée Funding: HK$6,000,000+; Angels - HK/Dubai, Cyberport Incubation Programme Start of operation: March 2015 Clim8 is a thermal clothing technology that monitors, analyses, reacts to, and regulates users’ skin temperature. With clim8’s intelligent garment, wearers achieve regulated body temperatures whilst doing whatever activity in any weather condition.

5 . Ta l k p u s h

9. Orii

FounderS: Founder: Kevin Johan Wong, Yan Shun, Max Armbruster Marcus Leung-Shea Funding: Funding: HK$7,700,000; 500 Startups, HK$4,500,000; Alibaba, Cyberport Seedcamp, Cocoon Incubation Programme, The Mills Start of operation: Fabrica, The Elevator World Tour 2014 Start of operation: Talkpush is a recruitment platform 2015 that leverages the power of messaging and social media. The solution Orii is a ring that combines bone conduction technology and a phone’s consists of Stanley, the first recruitment Facebook chatbot, which voice assistant. As the world’s first wireless audio wearable worn on the collects all the relevant interview responses, and an application hand, Orii opens up the world of stylish, screen-free interactions. management tool, which allows recruiters to compare candidates. 6. G r o k i n g L a b L i m i t e d Founders: Serena Pau, Ming Tong Funding: HK$7,000,000; Private Investors Start of operation: December 2014 Groking Lab is the maker of Ozmo Smart Cup and Water App (www.ozmo.io), an innovative smart technology that tracks users’ water and coffee consumption to support overall energy and optimum health. It works with activity trackers to coach people in staying hydrated. Health institutes, trainers, family, and caregivers can manage water intake accurately.

1 0 . V a loo t Founder: Ovi Olea Funding: HK$3,800,000; Private Investors, Cyberport Start of operation: June 2016 The process behind FX conversion when a card is used to pay abroad is not transparent and is heavily in favour of the banks. Consumers bear the conversion costs, whilst the merchants receive no rebate. Valoot offers consumers the option to pay in their home currency at ultra-competitive rates sourced directly from the FX markets, and at the same time give the merchants a rebate. HONG KONG BUSINESS | MARCH 2017 23

RANKING: LAw Firms

Looking for young blood to invigorate the legal sector

Firms seek younger lawyers willing to drop old ways Expect more junior partners and less physical presence amidst rising rents.

apidly rising costs and intensifying competition are pushing Hong Kong’s lawyers to rethink their business models and methods of practice. Recent developments in the physical and digital spaces across industries are also leaving marks on Hong Kong’s legal sector despite the fact that it remains to be a robust industry with a stable clientele. According to a report by Colliers, Hong Kong remains the gateway of choice for many international law firms entering and servicing Asia. In fact, the legal sector of the city constitutes a large portion of the space in the central business district, with 94% of these international law firms located in the CBD. However, traditional perceptions of the legal sector may likely shift soon. BLP and Ince & Co. have signed themselves at Quarry Bay, a trend that Colliers says is likely to continue as both the Causeway Bay and 24 HONG KONG BUSINESS | MARCH 2017

Law firms are seeking younger talents in favour of senior lawyers who have a tendency to hold to traditional business models.

Quarry Bay districts reposition themselves. However, it notes that this will be limited to law firms with greater exposure to shipping or insurance clients and those with small litigation practices. Other law firms have seen it fit not to relocate but to restructure existing leases. Breaking traditions “The increasing awareness amongst law firms that more efficient business models are essential to progress. The rigorous challenging of existing practices continues through greater deployment of aligned technologies and the questioning of traditional processes. We see in Europe and Hong Kong firms continuing to question their use and location of physical space and their deployment of lawyers,” says Roger Parker, managing partner Asia at Reed Smith. According to the 2016 Deloitte report “Future Trends for Legal Services,” in-house teams are looking

for tech-savvy, integrated service providers who offer more than traditional legal advice. It says law firms across the globe are trailing behind other professional services when it comes to offering integrated multidisciplinary services. Beyond increasing technological innovation, law firms are also investing more in the area of regulatory compliance. Dean Stallard, regional director, Hays Hong Kong, says that they are seeing a high demand for financial regulatory lawyers and legal talent for corporate mergers and acquisition work. “This is to support private equity activity and we expect this to remain the case over the year ahead. Competition for these candidates will be fierce especially if they are mid-level and trilingual with English, Cantonese, and Mandarin language skills. On the remuneration front, salaries within private practice are again on the rise, particularly amongst firms doing well and anxious to stop talent leaving to join direct competitor,” Stallard adds. The need for more lawyers Law firms are also seeking younger talents in favour of senior lawyers who have a tendency to hold to traditional business models and perceptions of practice. Whilst years’ worth of experience is definitely considered an asset, young professionals bring in lots of creativity and flexibility without too much of a demand on remuneration. Hiring activity is expected to come from both private practice and large MNCs. Mainland businesses also continue to enter Hong Kong whilst many in the territory are planning to expand, thus a need for more lawyers. In terms of the number of legal professionals per firm, Deacons tops Hong Kong Business’ list, with 213 legal professionals. Clifford Chance moves up from 3rd to 2nd place after an increase in the number of legal professionals, from 186 in 2015 to 191 in 2016. Mayer Brown JSM moves down to the 3rd spot, with five less legal professionals compared to 2015.

RANKING: LAw Firms 2016

Company Name

2015

Foreign/ Local

2016 Legal Professionals

2015 Legal Professionals

Managing Partner

Deacons

LOCAL

213

LILIAN CHIANG

Clifford Chance

FOREIGN

191

186

GERAINT HUGHES

Mayer Brown JSM

FOREIGN

190

195

TERENCE TUNG

King & Wood Mallesons

FOREIGN

184

176

ZHANG YI HAYDEN FLINN

Linklaters*

FOREIGN

179

MARC HARVEY

Baker McKenzie

FOREIGN

169

184

MILTON CHENG

DLA Piper Hong Kong

Foreign

140

143

TERRY O' MALLEY

Allen & Overy

FOREIGN

114

VICKI LIU

Herbert Smith Freehills

FOREIGN

112

JULIAN COPEMAN

Stephenson Harwood

FOREIGN

VOON KEAT LAI

Reed Smith Richards Butler

FOREIGN

ROGER PARKER

Woo Kwan Lee & Lo*

LOCAL

WILLIAM C.Y. KWAN

Norton Rose Fulbright

FOREIGN

PHILLIP JOHN

Li & Partners

LOCAL

ROBIN LI

Hogan Lovells

FOREIGN

OWEN CHAN

Latham & Watkins

FOREIGN

SIMON POWELL

Eversheds

FOREIGN

STEPHEN KITTS

Robertsons

LOCAL

MICHAEL LINTERN-SMITH

Holman Fenwick Willan

FOREIGN

Henry Fung

Simmons & Simmons*

FOREIGN

PAUL LI

Clyde & Co

FOREIGN

SIMON MCCONNELL

Jones Day

FOREIGN

JOELLE LAU

Wilkinson & Grist

LOCAL

RAYMOND CHAN

Skadden, Arps, Slate , Meagher & Flom

FOREIGN

JONATHAN STONE

Tanner De Witt

Local

IAN DE WITT

TOTAL

2540

2456

DATA PROVIDED BY COMPANIES. SURVEY PERIOD: SEPTEMBER - OCTOBER 2016 *DATA RETAINED FROM 2015 REPORT

HONG KONG BUSINESS | MARCH 2017 25

RANKING: INSURANCE FIRMS Company (Group) of China (PICC). Lee also says the region has seen the growth in multi-channel distribution for insurance products. Traditionally, these products were primarily distributed by insurance agents. However, there has been a rapid growth in bancassurance penetration, where the distributors of insurance products are banks.

Insurance firms are going beyond offering digital platforms for client engagement

HK rides InsurTech wave amidst ageing population

FWD Hong Kong, for instance, has committed to invest HK$500m in the development of proprietary InsurTech solutions.

hen the banking industry started embracing the fintech revolution, the insurance industry thought twice about going all out for InsurTech. Product diversity enables the banking industry to reach out to almost all age levels, but the insurance industry’s traditional business models are proving it more challenging to hop on the digital bandwagon. After all, there’s an age-old stereotype that insurance, especially life, is for the elderly. However, with the growing number of insurance products and the increasing wealth of the Hong Kong population, insurance has become a primary option for professionals, young or old. The city has one of the most developed insurance industries in the region and has for years attracted the world’s top insurance companies. HKTDC Research economist Kenix Lee 26 HONG KONG BUSINESS | MARCH 2017

As for InsurTech, insurance companies have been exploring the varied distribution channels that are available in the digital dimension.

cites Hong Kong as amongst those with the most developed insurance markets, with the per capita insurance premium standing at high levels. Mainland connection Hong Kong’s connection to China is a welcome factor, as global insurers and reinsurers are particularly attracted to China and the many opportunities for insurance in the mainland. HKTDC Research reports that the Chinese mainland recorded a year-on-year growth of 32.18% in premiums income to about US$32.3b from 1Q16 to 3Q16, with long-term insurance business and general insurance business growing by 37% and 7.8% over the year respectively. Major mainland insurers which have been listed in Hong Kong include China Life Insurance (largest commercial insurance group in mainland China), Ping An Insurance of China, and The People’s Insurance

InsurTech’s role As for InsurTech, insurance companies have been exploring the varied distribution channels that are available in the digital dimension. FWD Hong Kong believes that InsurTech will be the buzzword for 2017 and has committed to invest HK$500m in the development of proprietary InsurTech solutions, more than five times the investment in this area over the past three years. After launching iFWD, its digital commerce platform, the company has become the market leader in direct sales of life insurance products in Hong Kong as of 3Q16. Beyond offering digital platforms for customer engagement and sales, insurance companies have been exploring mobile services, the Internet of Things (IoT) as well as big data analytics. For mobile services, insurance companies are looking at integrating their services into social media like Facebook and Instagram. Several of these companies have already gone out of the box and introduced mobile applications customers can use to access their policies, pay their premiums, and engage with customer relations. AIA International takes the lead in Hong Kong Business’ 50 Largest Insurance Companies with a gross premium of HK$71,368,836,000 from the previous gross premium of HK$64,422,448,000. From 3rd place, Prudential (HK) Life went up to 2nd place with HK$68,609,458,000 in gross premiums after accumulating only HK$49,027,667,000 in 2015. Last year’s 1st placer, HSBC Life, went down to 3rd spot with gross premiums of HK$61,919,115,000 from HK$66,166,888,000.

RANKING: INSURANCE FIRMS 2016 Overall Ranking

Classification

Insurance Company

2015 Overall Ranking

Gross Premium ($’000) 2015

Gross Premium ($’000) 2014

1 2

Life or Long Term Business

AIA International

71,368,836

64,422,448

Life or Long Term Business

Prudential (HK) Life

68,609,458

49,027,667

Life or Long Term Business

HSBC Life

61,919,115

66,166,888

Life or Long Term Business

China Life

48,132,519

42,174,910

Life or Long Term Business

BOC Life

38,548,887

26,667,064

Life or Long Term Business

Manulife (Int’l)

27,452,354

25,081,198

Life or Long Term Business

AXA China (Bermuda)

25,583,693

23,711,588

Life or Long Term Business

Hang Seng Insurance

18,187,190

16,530,700

Life or Long Term Business

FWD Life

17,742,866

15,523,904

Life or Long Term Business

Transamerica Life (Bermuda)

13,735,093

10,052,955

Life or Long Term Business

Sun Life Hong Kong

10,421,816

9,793,696

Life or Long Term Business

MassMutual Asia

8,479,034

7,750,650

Life or Long Term Business

Ageas (FTLife)

6,475,162

7,173,117

Life or Long Term Business

AXA China (HK)

5,293,031

5,494,056

Life or Long Term Business

Hong Kong Life

4,166,907

2,230,360

General - Direct and Reinsurance Inward Business

AXA General

3,797,649

3,650,920

Life or Long Term Business

Chubb Life (Ace Life)

3,484,158

3,347,229

Life or Long Term Business

Generali Worldwide

3,446,374

4,228,546

Life or Long Term Business

MetLife

3,320,354

2,288,712

General - Direct and Reinsurance Inward Business

CTPI(HK)

3,280,194

2,043,633

Life or Long Term Business

Old Mutual International

3,099,167

3,468,132

Life or Long Term Business

Zurich International

2,917,423

4,036,936

General - Direct and Reinsurance Inward Business

Bupa

2,606,624

2,351,697

Life or Long Term Business

BEA Life

2,549,986

2,243,342

General - Direct and Reinsurance Inward Business

Zurich Insurance

2,411,909

2,656,973

Life or Long Term Business

Friends Provident Int’l

2,218,001

3,051,885

Life or Long Term Business

Dah Sing Life

2,170,756

2,014,681

Life or Long Term Business

Aviva

2,066,258

2,191,235

General - Direct and Reinsurance Inward Business

BOC Group Insurance

2,020,326

1,842,610

General - Direct and Reinsurance Inward Business

QBE HKSI

1,715,919

1,763,152

General - Direct and Reinsurance Inward Business

AIG Insurance HK

1,637,569

1,551,169

Life or Long Term Business

Standard Life Asia

1,609,590

3,342,607

General - Direct and Reinsurance Inward Business

Blue Cross

1,242,231

1,129,945

General - Direct and Reinsurance Inward Business

Chubb Insurance (Ace)

1,216,117

1,089,261

General - Direct and Reinsurance Inward Business

AXA China (HK)

1,184,549

1,161,252

General - Direct and Reinsurance Inward Business

MSIG Insurance

1,171,357

1,133,110

General - Direct and Reinsurance Inward Business

Asia Insurance

1,149,278

1,254,681

Life or Long Term Business

CIGNA Worldwide Life

1,116,606

1,112,373

Life or Long Term Business

AIA (HK)

1,105,257

1,041,450

General - Direct and Reinsurance Inward Business

CNOOC Insurance

1,081,942

1,452,387

General - Direct and Reinsurance Inward Business

Generali

847,358

667,238

General - Direct and Reinsurance Inward Business

AGCS SE

804,620

705,885

General - Direct and Reinsurance Inward Business

Allied World

800,234

Life or Long Term Business

AXA Wealth Mgt (HK)

791,391

924,650

General - Direct and Reinsurance Inward Business

Lloyd’s

761,944

793,761

General - Direct and Reinsurance Inward Business

Prudential (HK) General

700,160

619,922

General - Direct and Reinsurance Inward Business

Liberty Int’l

691,676

649,042

General - Direct and Reinsurance Inward Business

Wing Lung

684,369

737,090

General - Direct and Reinsurance Inward Business

AIA International

658,689

Life or Long Term Business

Principal

632,710

DATA COMPILED FROM THE OFFICE OF THE COMMISSIONER OF INSURANCE: NOVEMBER 11, 2016

HONG KONG BUSINESS | MARCH 2017 27

Legal briefing

More firms forecast to face SFC cases Dispute resolution, securities regulation, and capital markets work are seen as thriving areas.

tiffer competition as well as legislation and regulatory changes are expected to shake up the Hong Kong legal industry this year. The Securities and Futures Commission is also likely to bring more cases against listed companies for failing to disclose pricesensitive information in a timely manner. Partners from different law firms share their thoughts on what 2017 presents. They cite amendments and how these will impact cases, as well as what areas of legal service law practitioners foresee thriving. More disputes cases Dispute resolution is expected to continue to thrive as a practice area in 2017, says Alfred Wu, partner, Norton Rose Fulbright Hong Kong. “Contentious financial services regulatory work will continue to be active as the SFC and HKMA are ramping up their enforcement efforts,” explains Wu. “Contentious construction work will be strong as many major infrastructure projects are nearing completion.” He also notes that the amendment of the Arbitration Ordinance to allow third-party funding will be a matter of major interest in 2017, particularly in the dispute resolution side. “A similar legislative change in Singapore has just taken place. The go signal for third-party funding is seen as a necessity to maintain Hong Kong’s position as an arbitration hub in the region,” says Wu. Alex Kaung, partner, Reed Smith Richards Butler Hong Kong, notes, “On the disputes side, we have seen an increase in the number of big money probate disputes and matrimonial cases in recent years and consider that

“Hong Kong is a highly competitive environment for law firms and this, coupled with uneven activity in the transactional markets, will continue to generate pressure for international firms operating here. this trend will also continue.” Regulatory changes Simon McConnell, managing partner, Hong Kong Clyde & Co, cites regulatory changes affecting the insurance sector. These include the revised GN10 on new corporate governance standard for authorised insurers and the GN16 taking effect on 1 January 2017 with respect to new and existing policies of current products. The new GN10 sets out the minimum standard of corporate governance that the Office of the Commissioner of Insurance expects of insurers authorised to carry on business in and from Hong Kong, including the composition, role, and responsibilities of 28 HONG KONG BUSINESS | MARCH 2017

Alex Kaung

Alfred Wu

Hayden Flinn

Simon McConnell

the board; internal controls; and compliance with laws and regulations. Further, McConnell notes that the Insurance Companies (Amendment) Ordinance 2015 continues to phase in changes in the regulatory regime of insurers and insurance intermediaries. “We also believe that the development of the Risk-based Capital Framework for the Insurance Industry in Hong Kong will continue to draw attention and discussions in 2017,” he says. Meanwhile Hayden Flinn, partner and co-chief executive, King & Wood Mallesons Hong Kong, says the regulation of cross-border flow of funds will be key this year. “China needs to achieve the right balance of crossborder capital flow and overseas investment to prevent financial risks. The yuan depreciation we witnessed in 2016, and its value through 2017 will impact how authorities manage capital flows,” he points out. Other growth areas Kaung says 2016 saw the first case brought by the Securities and Futures Commission before the Market Misconduct Tribunal for a Part XIVA (of the Securities and Futures Ordinance) offence and has resulted in a win for the SFC. “Our firm has acted in dozens of SFC investigations for possible breaches of Part XIVA since the inception of the new provisions, and we would expect the SFC to bring more cases in 2017 under Part XIVA against listed companies and/or their directors for failing to disclose price-sensitive information in a timely manner.” In terms of legal services that are projected to thrive, Kaung says securities regulation and professional negligence have been growth areas for a number of years and there is no reason why this trend should not continue. Flinn, on the other hand, believes equity capital markets work should continue with an emphasis on IPOs in Hong Kong. He also expects to see ongoing growth in debt capital markets with the increasing appetite for capital from Chinese entities. Flinn adds, “Hong Kong continues to be a China pathway, though more recently the path has been in relation to outbound. This role is critical for Hong Kong and Hong Kong needs to continue to adapt to remain relevant.” He says the impact of significant changes to global political environments and economic markets remains unknown and may present law firms with challenges or opportunities. Meanwhile, Kaung says, “Hong Kong is a highly competitive environment for law firms and this, coupled with uneven activity in the transactional markets, will continue to generate pressure for international firms operating in Hong Kong in the short term.” However, he notes that in the medium to long term, a bit of a shakeout and consolidation amongst the international firms should be seen, with those who are committed to remaining and succeeding in Hong Kong prevailing in the long term.

CMO Briefing

Tailoring tech-savvy marketing to consumers How will technology and big data shape marketing in 2017?

igital marketing will focus on leveraging technology and data to help marketers execute on highly targetted campaigns. Three marketing professionals give their thoughts on digital marketing and how big data analytics is affecting initiatives. Ofri Cohen, managing director of Emarsys Hong Kong, says AI marketing is on the rise, amongst other upcoming trends in 2017. “Together with big data and machine learning, AI will both revolutionise and optimise marketing through highly targetted, personalised consumer experiences,” he says. AI solutions can take large amounts of consumer and market data, segment and analyse at a level beyond human capacity, and present findings back to marketers that enable intelligent campaigns and execution. “With artificial intelligence solutions on their side, marketers can focus on high-impact strategy, content, and execution,” notes Cohen. Using technology and context wisely He says the rise of big data analytics definitely presents an excellent opportunity for marketers to do a better job if the technology is used wisely. “As markets are all eyeing on finding the best tool/approach to create personalised consumer experience, that’s where the artificial intelligence and machine learning come into play,” Cohen says. With the rising necessity of big data collection, advanced AI technologies can gather all of the data necessary to create personalised experiences for customers at each phase of their lifecycle. “Digging into that data even further, AI solutions can help create better insights and visibility into interactions and engagement, leading to better and more effective strategies.” Contextual marketing will also continue to hog headlines in 2017, according to Nicholas Kontopoulos,

30 HONG KONG BUSINESS | MARCH 2017

The ability to analyse, contextualise, and act on live insights gathered in real time has become key to data-driven marketing.

global vice president of Fast Growth Markets, Audience Engagement Marketing, SAP Hybris. In fact, he says “context” should be present at every step of the customer journey. “Dynamic customer profiling enables every customer interaction to be intelligent and delightful, whether machine-driven or human-assisted,” notes Kontopoulos. “With this, marketers are uniquely positioned in this digital age, to lead and orchestrate the customer experience strategies of their companies.” He says that executives who are unable to adapt their businesses’ ability to meet the needs of today’s dynamic customers are in danger of quickly becoming irrelevant. “If a business is not able to adapt in real-time, they will never crack the code — and the code today is all about relevance,” says Kontopoulos. “There is no point for a system to take a look at a database extract sitting in a data warehouse, without a view of who the customer is and what they are doing today. If you can’t get a combination of these things in the moment, you are immediately irrelevant — whatever you offer is out of date.” Kontopoulos notes that the ability to analyse, contextualise, and, more importantly, act on live insights gathered in real time has become key to data-driven marketing strategies today. He cites a study by Forrester and SAP Hybris that says most customers (74%) are somewhat or very comfortable with companies using data about them to provide personalised experiences. “Customers want to be heard and they want personalised marketing messages geared specifically towards their tastes and preferences, as opposed to irrelevant cookie-cutter marketing collaterals,” he says. Customer engagement Geraldine Wong, CMO of SEEK Asia (the parent company of JobStreet.com and jobsDB), says that as consumer activity continues to move toward digital, marketers need to evolve to adapt to that trend. Examples of recent digital trends gaining popularity are short-lived content on social media, which provides an expiration date for social content such as Snapchat and Instagram Story. Wong also cites virtual and augmented reality-related efforts. She identifies as an upcoming trend interactive content marketing, which provides relevant and personalised content, tailored specifically to consumers. It can include assessments, polls, surveys, infographics, and contests. In terms of big data analytics impacting marketing, Wong says it can affect customer engagement. “Big data can deliver insights into not just who your customers are, but where they are, what they want, how they want to be contacted, and when,” she says. “Big data is revolutionising companies to attain greater customer responsiveness and gain greater customer insights to plan more relationship-driven strategies by using analytics and data mining.” Wong notes big data can also affect customer retention and loyalty. “Big data can help you discover what influences customer loyalty and what keeps them coming back again and again.”

interior design architecture 連續十一年榮獲Hong Kong Business頒發

傑出室內設計獎2006–2016 Outstanding Interior Design Award 2006–2016

20年設計經驗及專業資格 20年公司商譽及誠信表現

誠信．準時．不超支屢獲名人客戶多次推薦本公司 (註1) 連續30個工程準時完工及精準預算 (註2) 20 years of professional experience 20 years of credible reputation

Integrity．Punctuality．Budget control Prestigious clients recommend us on multiple occasions (*1) 30 projects have been completed with precise budget continuously within the provided timeline (*2)

．

九龍塘．牛津道註 1 : 請參考本公司網頁 - 名人推薦 *1: For more details please refer to our website - clients references 註 2 : 請參考本公司網頁 - 工程準時完工記錄 *2: For more details please refer to our website - projects record

分

西九龍．君臨天下

ANALYSIS: ASIA’S demographics Population dynamics is a critical factor in determining potential economic growth. A favourable proportion of working people over non-working ones means more income generation, higher tax collection, higher savings, lower cost of labour (and hence competitiveness), and more societal and fiscal affordability with respect to pension and healthcare costs. All of these trends can reverse as the population ages. Of course, a youthful population is not a guarantee for high growth, nor is ageing destined to confine an economy to low growth. A poorly educated workforce and inadequate infrastructure can diminish the demographic dividend whilst productivity enhancement through innovation and investment can keep growth going even in an ageing society.

Many of Asia’s fast growing economies are slowing as they have begun to age

Half of Asia is set to enjoy a demographic dividend

The fact that some parts of Asia are ageing and some parts will likely remain largely youthful offer intriguing recalibrations of growth.

long with global output growth, Asia as a region has slowed in the past decade. Whilst the 2008/09 global financial crisis and the subsequent rise in trade protectionism have played major roles in subtracting from economic activity, a broader, structural factor is at play. Many of Asia’s dynamic, fast growing economies of the past decades are slowing as they have begun to age, with the share of the economically inactive population rising as a share of those in the labour force. For economies like Singapore, South Korea, or Japan, this is taking place at a time when they have already reached the highincome cohort, affording them with the wherewithal to deal with the associated headwinds. But for the likes of China and Thailand, the onset of ageing has coincided with reaching only middle-income status. For a variety

32 HONG KONG BUSINESS | MARCH 2017

Asia remains home to 6 for every 10 of the world’s workforce.

of reasons, ageing before getting rich can be particularly challenging. Demographic dynamics Although economies representing 1.8b Asians are past their demographic peak, another group of countries, representing an even larger population (around 2.1b – emerging economies of India, Indonesia, and the Philippines, as well as the frontier markets of Bangladesh, Cambodia, Laos, Myanmar, and Pakistan) remain blessed by favourable demographic dynamics. Led by India and Indonesia, and followed by Bangladesh, Myanmar, Pakistan, and the Philippines, these economies offer considerable potential in the form of a demographic tailwind. Indeed, the fact that some parts of Asia are ageing and some parts will likely remain largely youthful offer intriguing recalibrations of growth and relocation of production in the coming decades, in our view.

Human assets Asia has impressive financial savings, sizable FX reserves, and vibrant markets, but its biggest asset is, in fact, its people. According to the United Nations, the region is home to 60% of the world’s population. Going forward, Asia will therefore continue to account for the bulk of global growth and demand. The region’s large population also ensures abundant labour supply, providing firms relative ease to expand capacity within the region. Whilst the African continent is fast catching up, Asia remains home to 6 for every 10 of the world’s workforce. Medium-variant projections of the United Nations, which assume that fertility behaviour evolves in line with historical trends, indicate that Asia’s working age population will grow by 317m, roughly in line with Africa’s, to 3.3b by 2030, whereas the rest of the world’s workforce is projected to remain stable. With continued labour force growth, increased labour competition could give way to technological advancements and innovations, breathing vitality to many of Asia’s economies. From “Asia’s young and old” by Deutsche Bank Research

High Flyers 2016 Outstanding Enterprises and Business Leaders

On its 13th year, Hong Kong Business High Flyers Awards honoured innovative firms that have shown how a strong focus on customer service and adherence to social responsibility make a business successful. â&#x20AC;&#x153;We are honoured to award these companies which have shown utmost commitment and excellence despite tepid operating environment,â&#x20AC;? said Tim Charlton, publisher of Hong Kong Business. The awarding ceremony was held on 17 January 2017 at the Azure Restaurant Slash Bar at Hotel LKF in Hong Kong.

List of Honorees Outstanding Enterprise Award Professional & Reliable Mobile Solution & Messaging Services Wealth Management & Financial Advisory Airlines International School Innovative F&B Concepts Life Insurance Premium Chocolatier Outstanding Insurance Company Luxury Hotel Innovative Insurance Company Automobile Insurance Brokers & Investment Leading Hospitality & Hotel Management Retail Banking Leisure Entertainment & Gaming Leading Data Centre Solutions MBA Law Firm Fixed Network, Broadband & Cloud Services - Telecommunications Interior Designer

34 HONG KONG BUSINESS | MARCH 2017

HSBC Insurance (Asia) Limited Able Mobile Limited Athena Best Financial Group British Airways Canadian International School of Hong Kong Elite Concepts FTLife Insurance Company Limited GODIVA Chocolatier (Asia) Ltd. Hang Seng Insurance Company Limited InterContinental Grand Stanford Hong Kong MassMutual Asia Ltd. Mercedes-Benz Hong Kong Limited Platinum Financial Services Limited Rhombus Group Standard Chartered Bank (Hong Kong) Limited Suncity Group Towngas Telecommunications Co. Ltd. Faculty of Business, The Hong Kong Polytechnic University TMA Wharf T&T Zchron Design

HONG KONG BUSINESS 2016 HIGH FLYERS AWARDs

Candy Yuen receiving the 2016 Grand Award-Outstanding Enterprise Award for HSBC Insurance (Asia) Limited High Flyers Trophies

Gina Lei of Suncity Group

Yik Hin Hung of Faculty of Business, The Hong Kong Polytechnic University

High Flyers Annual Issue

Platinum Financial Services Limited Team

Winners of High Flyers Awards 2016 HONG KONG BUSINESS | MARCH 2017 35

HONG KONG BUSINESS 2016 HIGH FLYERS AWARDs

Sandy Li of Able Mobile Limited

Networking Cocktail

Eric Mayer with the TMA Team

Libra Chan of Hang Seng Insurance Company Limited

Networking Opportunities 36 HONG KONG BUSINESS | MARCH 2017

Helen Kelly of Canadian International School of Hong Kong

Danny Tse and Priscilla Wong of Athena Best Financial Group

Pamela Put and Matthew Luk of British Airways

HONG KONG BUSINESS 2016 HIGH FLYERS AWARDs

Peggy Cheng of InterContinental Grand Standford

Libra Chan with the Hang Seng Insurance Team

K P Tay of MassMutual Asia Ltd.

Oliver Wurtz of Mercedes-Benz Hong Kong Limited

Hong Kong Business magazine and other Charlton Media Group titles

Mark Kirkham of Platinum Financial Services Limited

Ernest Fung of FTLife Insurance Company Limited

Stephen Man of Standard Chartered Bank (Hong Kong) Limited

Wayne Mak of Rhombus Group

Danny Tse \with the Athena Best Financial Team HONG KONG BUSINESS | MARCH 2017 37

HONG KONG BUSINESS 2016 HIGH FLYERS AWARDs

Yik Hin Hung and Wai Ming-Mak of Faculty of Business, The Hong Kong Polytechnic University

Jessica Chan and the Towngas Telecommunications Team

Networking Opportunities

Registration

Minna Ko of Elite Concepts

HKB High Flyers Awards Team 38 HONG KONG BUSINESS | MARCH 2017

Jessica Chan of Towngas TelecommunicationsCo. Ltd.

Full House Attendance during the Awards Night

Samantha Lee of Wharf T&T

HONG KONG BUSINESS 2016 HIGH FLYERS AWARDs

Jeanne Lee of Towngas Telecommunications Co. Ltd.

Peter Larko, Oliver Wurtz, Samson Leung with Tim Charlton, Publisher of Hong Kong Business

Eric Mayer with the TMA Team

Matthew Leung of Zchron Design

Associate Publisher Louis Shek with Sandy Li of Able Mobile Limited

Jessica Chan of Towngas Telecommunications

Kenneth Chu and Keith Leung of Towngas Telecommunications

High Flyers Awards 2016 Winners HONG KONG BUSINESS | MARCH 2017 39

analysis: CHINA’S ECONOMY

Corporates’ tax and non-tax burden has remained largely constant

Easing China’s corporate sector burden

Tax payments consistently represent about 5-6% of total assets of all industrial sector firms, which means that as profits growth declines, the tax burden rises rather than falls.

t all started with the 2008-09 Global Financial Crisis and the sharp slowdown in external demand in its aftermath. Despite policies, which helped to limit the fallout in subsequent years, global demand never recovered to pre-crisis levels. Manufacturers in China, mostly private businesses, saw the worst of the economic impact. From an aggregate demand perspective, fiscal stimulus, in the form of infrastructure investment, made up for some lost demand. However, whilst this has supported GDP growth, the degree of private sector participation in infrastructure remains limited. As a result, private investment has continued to decline over the past four years. In addition, despite declining profitability, corporates’ tax and non-tax burden has remained largely constant. The top chart (next page) provides an estimation of tax burdens in the industrial sector. It shows that tax payments ate up about 40 HONG KONG BUSINESS | MARCH 2017

The combination of declining investment opportunities and a higher cost of doing business has eroded confidence over the past four years.

three-quarters of total profits in the industrial sector in 2015. In fact, tax payments consistently represent about 5-6% of total assets of all industrial sector firms, which means that as profits growth declines, the tax burden (relative to profits) rises rather than falls. Apart from a regressive tax burden, corporates’ non-tax burden, in the form of various fees, is also large and inflexible. In an earlier report, we had estimated that the payments for social security alone represent 35-60% of an employee’s salary. The combination of declining investment opportunities and a higher cost of doing business has eroded confidence over the past four years. As a result, more companies started to look overseas. Whilst there has always been some demand for overseas investment, it is unlikely to have increased so dramatically since 2012. Meanwhile, other types of outflows (which are neither direct nor portfolio investment) have also

picked up. This suggests that the recent acceleration in outflows is probably more driven by cyclical factors. Macro imbalance fears overplayed Understanding the motivations of the corporate sector is a critical first step in forming a policy response. However, first we want to discuss a view popular in some circles that says China’s problem is not cyclical but rather rooted in ‘macro imbalances’, such as high credit growth, therefore anything short of a sharp credit squeeze or a one-off devaluation will be insufficient. We disagree. Whilst China does have imbalances, we are sceptical that these are behind the recent changes in business behaviour. Take one view, which says that China’s M2 growth is too high and creating too much liquidity, presumably vis-à-vis the US, so a sharp currency (or monetary) adjustment is needed. Faster M2 growth, given the

ANALYSIS: CHINA’S ECONOMY above theory, should lead to faster depreciation and more outflows. This has never actually happened in history. China’s M2 growth has remained above 10% throughout the past decade and spiked in 200809, but the currency had always appreciated alongside sustained inflows. In fact, outflows have picked up only after M2 growth had fallen to all-time lows in recent years. We can imagine that some fervent believers argue that we are going through a belated adjustment. But why now? Surely a factor that has never predicted the past cannot all of a sudden be so important. It can only be a spurious relationship. A more plausible view We have more sympathy with the current account argument, although we are doubtful that it is a key reason. The size of the current account has been a key argument behind the RMB’s appreciation before 2014, as it came down from10% of GDP in pre-GFC years to 2% of GDP in 2014. Since then, however, the size of the current account has stopped declining (and even increased over the past two years due to falling commodity prices), whilst outflows have picked up. In sum, the so called ‘macro imbalance’ arguments are quite stretched, in our view. That is not to say that M2 growth or the current account are not important in an economic sense. We just don’t think they are the key reasons behind the recent change in corporate behaviour. So, if the root cause of weak domestic investment and surging overseas investment is not some irremediable ‘macro imbalance’ but more cyclical in nature, what then are the policy options?

Given that since early 2016 there has been a gradual tightening of capital flow regulations, this is the first option that often comes to mind. The recent curbs range from closing the ‘loopholes’ around existing rules (such as residents’ abuse of the USD50,000 conversion rule) to reining in ‘hot money outflow’ (such as tightening cross-border investment and lending rules) and to increased banking sector supervisions (such as increased reporting requirements, etc.). Such tightening measures may have some effectiveness in the short run; however, given they do not address the underlying issue, which is a lack of confidence in the domestic economy, they are not permanent solutions. Moreover, if capital controls are seen as too heavy-handed, they could further destabilise the outlook on the domestic economy because of the efficiency loss from more regulations. Companies and investors, who otherwise would want to invest in the domestic economy, may also become dis-incentivised, if they become worried about getting ‘trapped’. Reliance on monetary policy An even less desirable option is monetary tightening. Fortunately, despite a near constant flow of false alarms in the market, the People’s Bank of China (PBoC) has by and large proved fairly stability-minded as far as monetary policy is concerned. After a string of rate cuts and reserve requirement ratio cuts, the PBoC has refrained from further easing monetary policy in 2016. However, it has kept credit conditions broadly accommodative. Having yet to fully transition to an interest rate-based monetary policy, the PBoC still has

Monetary tightening, at the time when the real economy still requires accommodation, will likely derail the recovery.

large sway over bank lending growth, which has been very accommodative over the past year. And, to the extent that the PBoC has wanted to tighten regulations in certain markets, it has been quite clear that regulatory tightening is done to prevent excessive risk-taking and is not at odds with its monetary stance. And, indeed, given the nature of the outflows, rate hikes will very likely be counter-productive. Despite cyclical stabilisation, the recovery in both activity and inflation remains fragile at the current juncture. The PBoC’s rate cuts have generally been trailing falling returns in the real economy. The latter has not shown signs of bottoming. In fact, it probably will not until we see a rebound in private sector business investment, which will only happen when business confidence and the future outlook turn sustainably better. Monetary tightening, at the time when the real economy still requires accommodation, will likely derail the recovery. It will also significantly worsen the debt burdens before companies can see their profits increase. From “China Inside Out” by HSBC Global Research

Even as the cost of doing business has increased

Sources: CEIC, HSBC

Stimulus policies have not benefitted the private sector

Declining confidence in the domestic economy

Sources: CEIC, HSBC

HONG KONG BUSINESS | MARCH 2017 41

analysis: ASEAN ECONOMIC COMMUNITY

The region needs to maintain its competitiveness in key supply chains such as electronics

ASEAN Perspectives: The AEC one year on

The ASEAN Economic Community officially entered into force on December 31, 2015, but the accord was long in the making and with little to change overnight it’s best to keep expectations tempered for now.

oughly one year ago, ASEAN leaders announced the foundation of the ASEAN Economic Community. As we wrote last November 2015, very little changed overnight. After all, preparation had been underway for years and the AEC effectively built on previous integration in goods and services trade. Moreover, the more ambitious elements of the AEC, such as reduction of non-tariff services barriers and the free flow of skilled labour, have yet to be fully achieved. Indeed, ASEAN leaders recognised the shortcomings of AEC in 2015, and released a new blueprint to guide integration through 2025, which could be seen as an attempt to extend the deadline for the more ambitious aspects. Given the imperfect implementation thus far, one may ask if leaders have made a renewed commitment to AEC this past year. It appears this was not quite the case. Truth be told, 2016 was a busy year 42 HONG KONG BUSINESS | MARCH 2017

The AEC came to fruition in the midst of the most profound global trade downturn since the Global Financial Crisis.

for domestic politics across ASEAN. Vietnam saw a leadership transition in January, the Philippines elected a new president in May, Malaysia’s Sarawak state voted for its regional legislature (also in May), where the ruling Barisan Nasional won a resounding victory that strengthened the hand of PM Najib; President Jokowi announced a cabinet reshuffle in July, and Thailand reflected on the reign of highly revered King Bhumibol in October. Political impact The busy political calendar will continue into 2017: Jakarta will have gubernatorial elections in February and general elections in Thailand and Malaysia are a possibility later in the year (PM Prayut pledged elections by 2017 in Thailand and in Malaysia they must be held by 2018). At the same time, global political events in 2016 have impacted ASEAN. The election of Donald Trump

in the US seems to have ended any prospect of TPP ratification – much to the dismay of member nations in Asia – whilst there are broader risks to trade from a protectionist stance in the US. RCEP negotiations are well underway, partly due to the determination of Chinese leadership, but ASEAN will be disadvantaged without a renewed commitment to internal integration. One potential upside for AEC in 2017 is that the Philippines will take over as ASEAN chair in 2017 and policy indications suggest that President Duterte may accelerate integration, particularly due to the fact that the Philippines benefits handsomely from services liberalisation given its surplus workforce and large BPO sector. In 2015 we stressed the point that the onset of the AEC was unlikely to immediately provide a fillip to intraASEAN trade or production. Indeed, the AEC came to fruition in the midst of the most profound global trade

ANALYSIS: ASEAN ECONOMIC COMMUNITY downturn since the Global Financial Crisis. Intra-ASEAN trade growth actually contracted at a similar rate (-3.5% yoy) as total exports (-3.9%) in the first nine months of the year since the implementation of AEC. However, if we turn the dial back further to January 2015, the data shows that intra-ASEAN trade contracted 10.9% yoy compared to total trade contraction of 6.2% This boils down to two phenomena. The first is low oil commodity prices: there is a significant amount of intra-ASEAN trade in refined petroleum and petrochemicals – mostly involving Singapore – where export values plummeted. The other factor is more worrying, and has to do with the fact that the intra-ASEAN electronics supply chain seems to be losing competitiveness to China. The country has clearly gained market share in electronics exports at the expense of ASEAN, even after controlling for cross-supply chain exposure. Measuring ASEAN’s loss of competitiveness to China is no simple matter – after all, the two are deeply inter-linked in a broader Asia supply chain where Chinese value-add is often concentrated towards the latter stages of production and thus has a higher total export value. The Chinese government has long-identified semiconductor production as a strategic industry with a total investment target of US$161b through 2025. This is aimed at reducing China’s large trade deficit in semiconductors (which is roughly the same size as its oil deficit), and presents a direct threat to semiconductor design, production, and testing operations in Singapore, Malaysia, Thailand, and the

Philippines – mostly by way of EU, US, and Korean-based companies. It may take time for China to build up the necessary capacity in semiconductors to directly threaten ASEAN manufacturers, but this is not just a semiconductor story. After all, China has gained market share across the electronics and electrical machinery spectrum, according to UNCTAD data. ASEAN’s electronics competitiveness is a complicated subject that warrants its own report, but we mention it now because it perfectly embodies the necessity of AEC. The current level of trade integration has been largely frozen since the implementation of the ASEAN Trade in Goods Agreement, whereby most goods tariffs were removed – but is still less than European Union levels due to high exemption lists. Implementation and impediments For ASEAN to maintain its competitiveness in key supply chains such as electronics, much more needs to be done to reduce non-tariff barriers and improve services liberalisation. On the labour front, ASEAN has already implemented region-wide MRAs (mutual recognition agreements) to incentivise the flow of skilled labour, a key pillar of the AEC. However, actual implementation appears limited. Moreover, soft impediments such as onerous language or relicensing requirements impede the effective flow of skilled labour. The truth of the matter is that individual ASEAN economies have significant labour market mismatches stemming from underinvestment in education (although not

The other factor is more worrying, and has to do with the fact that the intra-ASEAN electronics supply chain seems to be losing competitiveness to China.

everywhere) and weak emphasis on science and technology education in others, particularly in Indonesia and Thailand. As such, accelerating the implementation of the MRAs to facilitate the intraASEAN flow of skilled labour will allow firms to operate more efficient supply chains and better take advantage of competitive advantages. For example, JETRO surveys and the ILO’s survey on the AEC show that foreign firms often complain about the lack of skilled labour such as technicians and engineers necessary for certain operations. The AEC is not important simply for complicated supply chains. Subregions such as the Singapore–Johor– Riau corridor and Greater Mekong Delta are dependent on cross-border services activity. For example, relatively simple services such as waste management and wholesale storage can be effectively outsourced to areas where land and labour are more abundant (a particularly salient example for Singapore, where the government is arduously working to boost labour productivity). From “ASEAN Perspectives” by HSBC Global Research

Intra-ASEAN trade has underperformed total trade

Sources: CEIC, HSBC

Labour force distribution by sector and unemployment rate

China is gaining electronics market share

Sources: ILO, HSBC

Sources: CEIC, HSBC

HONG KONG BUSINESS | MARCH 2017 43

EVENT COVERAGE: FUJI XEROX directly-managed business bases in Myanmar (April 2013) and Cambodia (October 2015). In Myanmar, the company reported a fourfold increase in sales from 2013 to 2016, proving that it has succeeded in being a pioneer in these markets. But with more businesses engaging in a digital transformation and launching paperless initiatives, companies such as Fuji Xerox need to keep up with the changing customer preferences. This is why Fuji Xerox has been expanding beyond its printer/copier business and developing its Solutions & Services business since 2008. “Paper usage might be decreasing but it will never disappear,” said Masashi Honda, senior vice president of Fuji Xerox, adding that there will always be a demand for paper media despite the increasing importance of digital. Fuji Xerox Suzuka Center

Fuji Xerox products, solutions backed by “Genko-Itchi” President Hiroshi Kurihara revealed Fuji Xerox’s three-pronged strength as a company in a recently-held media tour in Tokyo, Japan.

rue to the Japanese culture of passion, precision, and excellence, Fuji Xerox strives to deliver products, solutions, and services founded on a “unity of words and deeds,” or “Genko-Itchi,” as they call it in Japanese. Founded in 1962, Fuji Xerox was established as a joint venture between Rank Xerox Limited and Fuji Photo Film Co., Ltd. With a capital JPY20b (US$176m) and sales revenue of JPY1,183.4b (US$10.4b), Fuji Xerox is one of the major companies in the field of document services and communications. Speaking before the press at the Fuji Xerox Media Tour held in November 2016, president and representative director Hiroshi Kurihara revealed Fuji Xerox’s threepronged strength as a company. First is the company’s ability to carry out business processes. Second is their knowledge of unstructured 44 HONG KONG BUSINESS | MARCH 2017

Hiroshi Kurihara

Katsuhiko Yanagawa

Masashi Honda

data, or data that are exchanged in day-to-day work in miscellaneous forms such as conversations, voice memos, or emails. “Fuji Xerox has been conducting research and development initiatives in the field of natural language processing and knowledge processing. Through these researches, we are developing a technology that converts unstructured data to easy-to-handle data. We are confident to establish a unique position in the market in terms of big data,” said Kurihara. Lastly, Fuji Xerox excels in its ability to gain in-depth knowledge of customer thru direct sales operations. According to Katsuhiko Yanagawa, director and executive vice president at Fuji Xerox, the company is the first to establish direct sales operations in emerging economies in Southeast Asia ahead of its competitors. The company set up a sales subsidiary in Vietnam in May 2010, as well as

State-of-the-art Suzuka Center About four hours away from the hustle and bustle of Tokyo lies the Fuji Xerox Suzuka Center in Suzuka-shi, Mie. Established in 2010, it is one of the four manufacturing sites that the company operates in Japan and employs a total workforce of 1,621 as of January 2016. “We incorporate a resource recycling production system, where we not only collect used products and parts but also assemble parts and products using reusable items, contributing to the establishment of an environmentally sustainable society,” said Masaharu Furukawa, director of Suzuka Center. According to Fuji Xerox, its Integrated Recycling System is composed of three concepts: the central concept is the ‘closedloop system,’ in which postconsumer products are effectively reused as resources; the ‘inverse manufacturing,’ which aims to create products with little environmental impact under the premise that their parts are to be reused; and lastly, the ‘zero emission,’ in which parts that cannot be reused are separated, recycled, and used again as new materials. By Roxanne Primo Uy

OPINION

tim hamlett

The Patten problem: What will history make of us?

hat has got into our beloved Lord Patten? He seems to be annoying almost everyone. The pro-Beijing people are angry because he said nice things about democracy. The independence enthusiasts are angry because he did not say nice things about independence. The democracy seekers are not too happy either. Lord Patten’s remark that self-determination is equivalent to independence not only echoes the Beijing camp’s line, an unfortunate coincidence, but also has unhelpful implications for those who merely want an autonomous democratic region. Saying that self-determination and independence are undistinguishable only makes sense if you believe that, given the choice, most people will want independence. But in that case, from the point of view of our imperial masters, democracy is just as bad. Why allow a bunch of malcontents, who really want independence, to rule themselves in minor matters? Some writers have been quite unkind about Lord Patten. Only the purveyors of egg tarts have no complaints. You have to wonder why he bothers. Other former governors and chief executives keep a low profile. Lord Wilson appears occasionally in his capacity of Chancellor of Aberdeen University at social events for graduates of that august institution. As a result he is the only exgovernor I have ever danced with. Mr Tung Chee-hwa has floated a think tank. But other people do the talking for it. Donald Tsang is… busy. Patten problem So there is a Patten problem. Before we explore this, let me declare a non-interest. Chris Patten and I attended the same university at the same time and studied the same subject. As far as I know, we never met. It was a large university. Whilst he was the Governor of Hong Kong we never met either. We were on a couple of occasions in the same room, for the presentation of the Hong Kong News Awards. It was a very large room. Mr Patten, as he then was, had the refreshing habit of fraternising with real reporters, rather than following the example of predecessors whose encounters with the media consisted of formal dinners with proprietors and chief editors. But I was not one of the fraternisees, which was okay by me. It is possible, if you are a pure reporter, to have sources who are friends and friends who are sources. If you are writing comments, though, this does not work. Sooner or later you arrive at “how could you write that about me?” We belong in the press box, not the boardroom. Having been quite critical of his predecessors, I felt a certain obligation to be quite critical of Mr Patten. But in the big things he did pretty much what I thought was as much as you could hope for under the circumstances. Those circumstances were that, however 46 HONG KONG BUSINESS | MARCH 2017

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

much Lord Patten’s affection for Hong Kong or dedication to the interests of its people, his appointment was as the local representative of the British government. And this imposed some limits. In particular the condition of British politics imposed one overriding constraint on the disposal of Hong Kong. Nobody could say exactly what success would look like. But they knew what failure would look like: several million Hong Kongers turning up at Heathrow carrying passports giving them the right of abode in Britain. This was not because there was any great hostility to Hong Kongers, or to Chinese people, who were unthreateningly dispersed by their penchant for the restaurant business. But “Asian immigration” had been given a bad name by an influx of Pakistani peasants whose integration presented, and indeed still presents, difficulties. A large increase would sink any government which presided over it. No leaving the territory So Britain’s fundamental Hong Kong policy was that, whatever happened, Hong Kong people should stay where they were. Even the modest scheme for giving selected Hong Kongers full UK passports was explicitly and repeatedly justified as being intended to encourage the holders of such passports to stay in Hong Kong, not to move to Britain. Indeed, even those idealists who advocated a generous distribution of passports argued that few of the resulting new Brits would be likely to move to the soggy island from which their travel documents came. This presented a new problem for British colonial policy. All previous colonies had

Stuck in Hong Kong

been handed over to their own inhabitants. Last governors took a pride in their adroit reconciliation of local forces to British ideas of democracy and the rule of law. One of the professional last governors actually called his biography “A start in freedom.” As the years went by it did not go unnoticed that the freshly installed democratic institutions did not always last very long. A certain cynicism crept in, some of which surfaced in parliamentary debates about the future of Hong Kong. Still, there was no precedent for handing five million people over to a Communist dictator. The answer to this problem was the Joint Declaration, which made rather generous promises about the degree of autonomy and democracy to be enjoyed in post-handover Hong Kong. The two governments involved discovered a shared interest. Britain did not want the population to leave because many of them would have wound up in London. Beijing did not want the population to leave because an empty Hong Kong would have been less valuable than a populated one. So there was a joint effort, not entirely successful, to convince hapless Hong Kongers that the future would be even better than the past, and that the murderous regime from which many of them had fled at great personal cost was now a reformed character. No doubt the negotiators involved on both sides managed to convince themselves, as well as each other, that this was in our best interests. In good faith This was the diplomatic framework within which the last governor had to work. As an honest man, and a democrat, Patten did his best to make it as difficult as possible for the Chinese government to go back on its word. It was not in his power to make it impossible. In order to like and respect the person he saw in the mirror every morning, Patten had to believe that there was a chance, if everyone concerned played their cards right, that Hong Kong people would succeed in plucking the flower democracy from the dungheap of Stalinist despotism. Unlikely though that might be. Lord Patten’s continued interest is quite understandable if you see it in this light. If things go one way, he will be seen as a modern Moses who led his children to within sight of the land of milk, honey, and autonomy. If things go another way, he will be seen as a contemporary version of the death camp guard who announces to the inmates, as they strip for the last time, “leave your clothes here and we will go to the next room for a nice warm shower.”

His Lordship has a stake in our struggle, and this no doubt explains his eagerness to offer unsolicited advice. Goethe wrote that “The noble soul can accomplish all/If it is wise and swift.” Lord Patten no doubt wishes to augment the supplies of wisdom and swiftness. The trouble is he has been away for nearly 20 years. Since he left, we have seen the passage of many moons, and a few booksellers. The idea that there is a “democracy debate” with a regime whose local minions want people with inconvenient opinions to be “hunted down like rats” is stretching things a bit. Recently a former radio host was convicted on seven counts of trying to rig the 2015 District Council elections by bribing people to run as bogus localists. He was offering sums totalling $800,000 for this service. Where did that cash come from? A new sort of democracy Look at it another way. In my constituency we had one candidate disqualified before the poll (petition pending), one disqualified after the oath taking (possible appeal pending), and one now the subject of a government application for disqualification. All these efforts were made to fix the elections to a hopelessly rigged legislature. Every day we see something more like democracy with mainland characteristics. Hong Kong is pioneering a new sort of democracy: democracy designed by people who wish it to be as undemocratic as possible. Lord Patten now expresses confidence that Hong Kong will see democracy in 2047. This sort of prediction is dangerous. No doubt he believes this to be true, just as Neville Chamberlain believed in 1938 that he had secured “peace in our time”, President Coolidge believed in 1928 that the prospects for the US economy “have never been better”, and William Pitt believed in 1792 that ”from the situation of Europe we might… expect 15 years of peace.” Political prophesy is not an exact science, especially when an earnest desire for one particular outcome clouds the view. We overestimate the predictability of history. It does not flow, it lurches, as Taleb puts it. Lord Patten’s good wishes are sincere and his advice wellintentioned. But Goethe also wrote that “None are more hopelessly enslaved than those who falsely believe they are free.” HONG KONG BUSINESS | MARCH 2017 47

OPINION

Hemlock

HK prepares for ‘20 Years of Joyous Yippee Fun’ celebrations

uly 1, 2017 will be the 20th anniversary of the handover of Hong Kong from the UK to China. At the behest of Chief Secretary Carrie Lam (allegedly, etc.), Beijing will give the city a reunification gift in the form of antiques too humdrum for the Kuomintang/ Red Guards/Communist Party to grab/destroy/keep, to appear in a Hong Kong Palace Museum. By groveling for such an act of patriotic generosity, Carrie hopes to get her apparently deepest, if inexplicable, wish: to succeed discredited CY Leung as Chief Executive. Her role in ‘facilitating’ today’s outof-nowhere Lok Ma Chau polluted-swamp Shenzhencooperation Techie Flimflam Zone-Hub looks like a similar credentials-proving performance. But what would the Hong Kong people like from Beijing on this special occasion? The answer, Ming vases aside, is surely: better local governance. At the time of the handover in 1997, Hong Kong was clearly the most prosperous, energetic, and progressive place in Chinese-speaking (if not most of) Asia. Today, Taiwan has leaped ahead on democracy and social reformism, Singapore is statistically wealthier and (rightly or wrongly) increasingly confident about a more liberal future course, and mainland cities are at least in some respects far better planned and more livable. After decades of Mao, the KMT, and Headmaster Harry Lee, Sinic Asia Ex-Hong Kong inevitably had some catching-up to do, so it shouldn’t be too surprising that Hong Kong is now relatively less advanced socially or economically, or in pop-culture and soft-power mojo. But most Hongkongers have a sense that their city has seriously under-performed in absolute terms since 1997. Who’s to blame? Some supporters of the local establishment might point out that people’s expectations have risen, and/ or that globalisation has increased inequality and dissatisfaction elsewhere too. Others (including some candid pro-CCP loyalists) might concede that governance has lagged – but it is the fault of the city’s pro-democracy and opposition forces for hindering the administration or spreading chaos. Many, if not most, local people would put the blame squarely on the city’s post-1997 leaders and – more to the point – the Chinese government that appointed them and presumably approve their crony-pampering policies. It shouldn’t have been too difficult to appoint officials who would at least match the British colonial regime. But Beijing installed, and keeps installing, 48 HONG KONG BUSINESS | MARCH 2017

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

administrations that fail to meet basic expectations of Celebrating the handover’s competence and fairness. 20th anniversary Specific major (and overlapping) failures since the handover: overt favouring of tycoons/vested interests; deliberate reduction in affordable housing supply; unmanageable influxes of mainland tourists/ shoppers and unskilled immigrants; expenditure on infrastructure white-elephants instead of social welfare/ quality of life. This has led to an inevitable popular backlash: rising demand for democracy and political reform; growing alienation from mainland ways and culture; increased awareness of local identity. Beijing’s Communist United Front strategists’ typically subtle responses: shrill demands for greater national consciousness, patriotism, schooling; dark warnings about supposed threats to national security; greater aversion to political reform. Which has led to a fiercer popular backlash, especially amongst the younger/educated population: street demonstrations; outright hostility to the Communist regime; even an independence/localist movement. Beijing’s re-doubled freaking-out reaction: undisguised interference in Hong Kong’s minielections, university governance and media; blatant downgrading of the role of local courts; intimidation of critics and even abduction of local book publishers. How does this cycle end? The obvious solution is for China to stop putting idiots or scoundrels in charge.