Hong Kong Business (June to July 2015)

Display to 31 July 2015 HK$40

2015

sALARY SURVEY

+

the impact of

el niÑo on asia

a bitter chasm

among landlords venture capital: the

future of startups

economic war turns sour

arresting the great

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

investment slowdown

HONG KONG

FROM THE EDITOR

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

In this issue, we bring you our annual Salary Survey where we present the latest trends in Hong Kong’s hiring and employment market. Our market checks revealed that though China’s economic slowdown hampered employment in 2014, jobseekers will find 2015 a more active signing year with more firms looking to increase headcount.

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

ADVERTISING CONTACTS Louis Shek +852 6099 9768 louis@hongkongbusiness.hk

Experts warn employers, however, that applicants have now become more discerning and more certain about what they want. Implementing a streamlined application process to snare key hires before others do is one of the keys to win the war for talent.

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We also looked into Hong Kong’s venture capital scene and found out that while venture capital is becoming more popular as a source of funding for startups, Hong Kong still lags in terms of VC development. We talked to several VC firms in Hong Kong and they noted that the city has fallen behind other Asian countries such as Singapore, Indonesia, and Japan.

Meanwhile, the economy is set for a rough 2015 as our regular economic report reveals that the slowdown in the first three months of the year has dented the prospects for the rest of the year. With GDP growth slowing to just 2.1%, is Hong Kong entering a prolonged period of stagnant growth?

Enjoy the issue!

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

Interest rate strategy

CNH: Will Qianhai jeopardize Hong Kong’s position?

DBS Group Research

6 Sep 2013

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

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

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

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

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

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

Manufacturing 25%

Service (rhs)

85%

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

5% 0%

65% 1980

1984

1988

1992

1996

2000

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

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

HONG KONG BUSINESS | JULY 2015 1

CONTENTS

arresting the great 34 ANALYSIS investment slowdown

CoVER STORY

HK recruitment market gets 24 more competitive than ever

ANALYSIS 38 regional the impact of el niÑo on asia

FIRST

OPINION

FIRST

06 The death of Hong Kong’s

14 The top 5 countries where most

retail industry

07 A bitter chasm among landlords 08 HK’s economic headwinds

agencies scramble to turn over their assets

12 Hong Kong’s towering

16 Taking web development training

to get nastier

10 Why developers, real estate

ambitions pay off

of Hong Kong’s tourists are from ‘beyond skin deep’

44 Ian Perkin: 300 million ‘visits’…

and counting

46 Tim Hamlett: The “reform” in

your pocket

48 Hemlock: HK delays white elephant,

REGULAR

wrecks global reputation

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

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

For the latest business news from Hong Kong visit the website

www.hongkongbusiness.hk

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

retail

Hong Kong’s retail sector predicted to grow a wee 1% this year According to a research note from Hang Seng Bank, it expects to see a 1% expansion in the retail sector this year. Although the Mainland government has announced new limits on cross-border visits, multipleentry permit holders are likely to lift their spending per visit to partly compensate for the more limited number of visits. It is also important to not lose sight of the still-robust growth in overnight tourism.

HR & EDUCATION

6 out of 10 Hong Kong workers pocketed 4.7% wage hike The latest jobsDB Job Seeker Salary Report 2015 reveals that 65% of the respondents received a pay rise of 4.7% on average. Over 40% of the employees indicated that they planned to switch jobs, of which 80% expect a pay rise.

BUILDING & ENGINEERING

Hong Kong billed as Asian country with the highest natural disaster risk ARCADIS, a global natural and built asset design and consultancy firm, revealed Hong Kong (3rd place), Wuhan (4th), Tokyo (9th) and Manila (10th) all rank in the global top ten according to their inaugural Sustainable Cities Index.

The natural disaster ranking was developed by the Center for Economics and Business Research (Cebr), and included 50 of the world’s leading cities.

economy

Would a stronger Hong Kong dollar pull down growth?

According to Hang Seng Bank, the impact on the Hong Kong economy will be noticeable but not overwhelming. A 10% rise in the real Hong Kong dollar exchange rate will, on average, suppress service exports by about 4.4 pp.

ECONOMY

What could happen to HK markets if the 2007 bubble repeats itself?

According to Credit Suisse, comparing the markets of HK, Shanghai and Shenzhen (including the Shenzhen SME and ChiNext board) today vs end-2007, the report draws some observations.

The good news is that P/Es of both China and HK (particularly the big cap stocks) are still much cheaper now versus those in 2007. The bad news is that P/Es of small caps in China are at bubble valuations.

COMMERCIAL PROPERTY

Hong Kong CBD office market unexpectedly sizzles The 4th annual Barclays Asia Financials and Property Conference recently concluded, and one of the key messages is that the Hong Kong CBD office market is really picking up steam and is likely to surprise on the upside.

FIRST Lynch Hong Kong, the restriction on multiple-entry permits will cause as much as a 230bps hit to retail sales growth. Accordingly, Chow has revised their retail forecast growth from -3.5% year-over-year to -5.8%.

The figure comes with a disclaimer though, as visitors are predicted to spend more during their limited time in Hong Kong to offset the fewer trips they will be able to make. Additionally, the effect will likely be gradual as individual permits expire. Domestic consumption is also expected to grow as the stock market and economy pick up again. Chow estimates that 38.3% of 2015 retail figures will be from tourist spending, and 61.7% from Hong Kong residents.

yuppies resigning

If you are an employee in your early 20s and you are looking to leave work due to lack of work life balance and disinterest in your job, you’re not alone. The Randstad Award 2015 survey revealed that 29% of those under 25 are more likely to leave due to these reasons compared to their older colleagues. The survey also found out that 24% of employees in Hong Kong intend to leave their jobs within the next 12 months, citing low compensation (38%), limited career growth opportunities (28%) and a lack of recognition (26%).

Peter Yu, Director of Randstad Hong Kong, said the findings reflect the challenging landscape faced by employers in Hong Kong.

“Not only do employers need to deal with the tight labour crunch creating a climate where workers are threatening to leave, but the diverse needs of the multigenerational workforce mean that it’s more important than ever for companies to invest in their employer brands. As the war for talent continues, all organisations need to look at their full employee value proposition and offer benefits that appeal to every generation of workers. Otherwise, they will find their employees looking to move to companies which offer the benefits that suit their needs,” said Yu. Most attractive employer Meanwhile, when asked which company is the most attractive employer for them, most of the respondents voted for Cathay Pacific. “As the de facto international flag carrier of Hong Kong, Cathay Pacific is wellknown for its career progression opportunities. Almost seven in ten Hong Kong employees expressed a desire to work for Cathay Pacific. This included both men and women across all age groups.”

6 HONG KONG BUSINESS | JULY 2015

How hard will retail sales be hit?

The death of Hong Kong’s retail industry

W

ith Shenzhen’s multipleentry visas to Hong Kong indefinitely shelved, China has essentially sentenced the country’s retail industry to death.

The Hong Kong government says the restriction on that category of visitors could slash the number of arrivals by 4.6 million per year. Coupled with changes in local and international tourism structures, retail stores will be struggling to meet their sales quotas. Completing this perfect storm is the shift in tourists’ consumption behaviour. Is it time for sellers to close up shop?

Before the visa cap, the number of tourists flocking to Hong Kong drew the ire of the region, sparking protests due to the resulting shortage of critical Hong Kong supplies such as infant formula and household goods. The worst-struck towns were Tuen Mun, Sheung Shui, and Fanling in Northern Hong Kong. Official figures state that multiple-entry permits were used 14 million times last year, but only 1.7 million people actually crossed the border. This equates to an average of 8 to 9 visits per year for Shenzhen residents.

Gloomy retail forecasts According to Marcella Chow, emerging Asia economist at Merrill

The restriction on multipleentry permits will cause as much as a 230bps hit to retail sales growth.

Tourists headed elsewhere However, Simon Lo, executive director of Colliers International Hong Kong, notes that the country’s retail sector will suffer more from structural changes than the decrease in tourist activity. Lo argues that the Mainland’s anti-corruption campaign on luxury goods, changes in consumer habits, as well as the shift of Chinese tourists to Europe, South Korea, and Japan, are more important factors to watch out for.

As more currencies weaken against the Chinese yuan and US dollar, residents will find it more tempting to travel to other places. This will spell further disaster for Hong Kong retailers, who have become dependent on Mainland buyers. “The headwinds hampering Hong Kong’s retail sales stem from structural changes in mainland-consumer behaviour. If these trends continue, they will continue to cast long shadows across the Hong Kong retail sector,” fears Lo.

Hong Kong retail sales by shoppers’ category

Source: Census and Statistics Department; Hong Kong Tourism Board

FIRST Central rents versus vacancy

Source: JLL, Colliers, Barclays Research

Rents in Central offices to strengthen

A bitter chasm among landlords

A

mong Hong Kong landlords, a bitter chasm is growing: retail landlords are suffering from the effects of reduced tourist spending, even as office landlords lick their lips over an expected rise in demand. Retail landlords are getting the short end of the stick as Hong Kong enters a perplexing vortex of slower retail and stronger housing and stock market sentiment. In the first two months of 2015, Hong Kong’s retail sales have dropped 2% year-on-year.

“Whether it is because of the recent change in multiple-entry visa arrangements for Shenzhen, or the

continued impact of the strong US dollar, Hong Kong’s retail market appears to be facing headwinds,” says Paul Louie, analyst at Barclays Bank in Hong Kong.

Retail landlords are feeling the pinch as slower tourist receipts force retailers to scale back on branch networks, negatively affecting retail rent prices. But in addition to their slower tourism woes, retail landlords are also not benefiting from the wealth effects of rising home prices and stock investments.

Louie suggests that this is because of local wealth leakage, where Hong Kong consumers are choosing to

Since Central vacancy stands at only 3.2%, landlords like Hongkong Land and Champion are expected to regain their bargaining power.

spend their newfound housing and stock market gains in foreign countries, such as Japan and Korea. “Just as tourists have found destinations with weaker currencies more attractive, locals may also be opting to spend more of their windfall gains overseas,” says Louie.

In contrast, office landlords, particularly those in Central, should see their rents and negotiating power strengthen. Louie notes an expected rise in office demand among financial services firms due to the flurry of activity in the stock market. Since Central vacancy stands at only 3.2%, landlords like Hongkong Land and Champion are expected to regain their bargaining power.

Louie says Champion REIT appears to be the most exposed, with banking and financial services firms making up 57% of Citibank Plaza’s tenants, with Hongkong Land at 39% and Swire Properties at 36%.

The Chartist: why Hong Kong is vital to china’s one belt, one road initiative According to Financial Secretary John Tsang, Hong Kong is well-positioned to help fund the projects under the “One Belt, One Road” program. How is this possible? Taimur Baig, chief economist at Deutsche Bank, says that with over USD2tr of global assets under management and an RMB liquidity pool of more than CNY1tr (as of April 2015), Hong Kong can surely play a vital role.

“Among the countries and regions in the ‘Belt and Road’ map, 60% are middleincome entities that are now going through the crucial stage of industrialization (much higher than the 49% global ratio). Asia alone, according to the Asian Development Bank’s estimate, needs approximately USD8tr in infrastructure — an average investment of USD750bn per year,” adds Baig.

Offshore RMB deposits in major centers

Asia’s infrastructure invt. needs, 2010–2020

Source: Deutsche Bank, HKA, CBC Taiwan, AMCM, BOK, Europlace, London Municipal Gov’t, Media reports; Paris data refer to Aug 2013, London end 2013.

Source: Asian Development Bank Deutsche Bank

HONG KONG BUSINESS | JULY 2015 7

FIRST

HK’s economic headwinds to get nastier

Survey

THE RICH GET RICHER

I

f you think Hong Kong’s economic performance will improve anytime soon after quite a depressing first half of the year, you are wrong. Several analysts have forecasted a challenging 2015 for the city, but these headwinds could be underestimated even if we factor in a very gradual tightening cycle, according to UBS economist Silvia Liu. First, rates will be rising into a secular downturn. Growth in HK has been weak and decoupled from the US in the current cycle, in contrast to the last rate hike episode during 200406 when growth in HK was robust (real GDP growth averaged 7.7%) and in sync with that of the US. “Growth is structurally weak in HK, reflecting a lack of a new growth engine; the secular slowdown in global growth, Chinese growth in particular; and extreme property price level at home, which are in our view starting to impinge on the domestic economy,” says Liu. Second, rates will be rising at the peak of a credit cycle. “Private sector debt, at over 200% of GDP today, is well above 1997’s 150%. Given high debt stock, even a gradual uptick in interest rates will cause the debt service burden to increase meaningfully,” she adds.

Rates to rise into a secular downturn

HSBC economist John Zhu also has a negative forecast for the economy, saying that the risks for Hong Kong’s economy in the rest of 2015 are to the downside which is mainly due to weaker external demand.

“The deepening slowdown in Mainland China is likely to mean import and export trade services - the largest sector of Hong Kong’s economy - will not see much support in the coming quarters. Indeed, the most recent HSBC Hong Kong PMI surveys have suggested orders from the Mainland have been contracted at a faster pace than overall new orders,” says Zhu.

Private sector debt, at over 200% of GDP today, is well above 1997’s 150%.

mobile app watch

Crammed wardrobes are finally resolved with PAKT For people wanting to preserve garments with sentimental value like wedding gowns and vintage items, this app is for you. PAKT is billed as the storage solution for every over-filled wardrobe. It is an off-site clothing management app that turns every clothing from “one you stuff into one you scroll – opening doors to a world full of space.”

Founder Barbara Yu Larsson has long wanted a reliable clothing management service but nothing like it existed in HK so she created the solution herself. “We envisage a platform that will allow us to add additional features including pressing, dry-cleaning and repairs, and in the future, personal stylists and butlers too,” said Barbara.

App driven, membership in PAKT provides personalized service, including wardrobe collection, individual garment tracking, and a range of options that promises to suit everyone.

8 HONG KONG BUSINESS | JULY 2015

Hong Kong’s affluent are dead set on advancing their career and reaching their key financial security goal which is to increase personal income.

The 2015 Visa Affluent Survey studied the priorities, spending habits, and economic optimism of affluent consumers aged 18 through 55 in Asia Pacific.

The survey revealed that the average age of the affluent in Hong Kong is 35, with an annual household income of US$115,450 (around HK$990,510). With the lowest marriage rate among all markets surveyed (57%), Hong Kong’s affluent are for the most part young, self-motivated, hardworking and focused on their careers and finances. Increasing personal income remains a key financial security goal (52%), followed by maximizing savings (48%) and planning for retirement (37%). While the vast majority set aside a monthly average of HK$6,600 per month for discretionary spending (84%), including nights out (89%), family holidays (79%) and fine dining (77%), they maintain that as much as 45% of their income currently goes into savings.

Work-life balance Visa adds that in light of these priorities, the struggles of Hong Kong’s affluent to ‘switch off’ during personal time and maintain a healthy work-life balance is not surprising.

“The Study indicated that the majority of those surveyed work over the weekend an average of 6-8 hours per month (60%), with an even greater proportion handling work-related tasks during holidays (70%) and checking email during personal time with family (79%).”

FIRST

Why developers, real estate agencies scramble to turn over their assets

H

ong Kong’s property market is both sizzling and fizzling. Whether by accident or design, property developers should be quick to go all in and ride the plus sides while limiting risky investments on the downs. Paul Louie, an Asia ex-Japan real estate analyst at Barclays Bank Hong Kong, highlights three things that realtors and landlords should keep an eye on this year: the office market is surprisingly gungho; residential real estate is topsy-turvy; and asset turnover is this year’s best strategy.

The country’s CBD office market is surprisingly upbeat, with property consultants reporting that they were caught off-guard by the myriad of deals completed since April. Even though legal firms and retailers are cutting down on office sizes, the market is predicted to sustain itself through other means. The biggest event in this segment was the signing of major leases in Champion REIT’s Citibank Plaza, bringing down its vacancy level from 22% to 9.5% and removing a key leasing deficit. The figure could go to as low as 7% as negotiations continue with other clients. Property owners are expected to benefit from the CBD scene’s renewed activity as tenants lose leverage in renegotiating their contracts for lower rent.

Developers are also seeing interest from mainland China companies. If discussions

come to fruition in the second half of 2015, the office market will continue to shoot upward. The trend will likely carry on until 2017-2018, when the completion of Sunning Plaza and Somerset House will provide an increased supply of vacancies.

Meanwhile, residential real estate is heaven and hell. The luxury segment has been consistently strong as the stock market rallies and LTV ratios tip in favour of highend demands. However, the general market seems to be struggling. People are currently torn between investing in stocks and paying down payments on small properties such as car parks, shop spaces, and small flats.

Experts have also noted that while HK’s economic indicators were subpar, the housing market remains hinged upon liquidity.

The disconnect between fundamentals and market performance is driving consensus that fundamentals are now useless in predicting market trends.

Through all these, developers and estate agencies will remain focused on their asset turnover strategies. Henderson Land predicts that developments in the New Territories will be uniform and disposable, and they’ll attack with a fast asset turnover strategy. However, they won’t be as quick to sell projects near city centres, saying they’re optimistic about the state of the urban

K. Wah’s Corinthia by the Sea

market. Kerry Properties will target HKD12 billion profit this year as they continue tying their sales target with their capex/opex goals.

The company’s main source of revenue this year will be the Tuen Mun project, and next year, the Homantin.

Finally, K. Wah have reported that their Twin Peaks venture in Tseung Kwan O performed well beyond expectations, selling 362 out of 372 units. The impressive outing will further raise the bar for their next flagship, Corinthia by the Sea.

retail WATCH

Le Slip Francais opens its flagship store in HK

This iconic French underwear brand founded by Guillaume Gibault opened its flagship store at 16 Upper Station Street in the Sheung Wan neighborhood. Fresh from an overwhelming response from the consumers when they opened their retail operations at PMQ with a pop-up shop, the HK team decided to take a permanent space to make the brand closer to the locals.

According to Juliette Le Manchec, Le Slip Francais’ APAC regional manager, the Tai Ping Shan Street area in Sheung Wan was their first choice since the neighborhood feels quite similar to Paris. “The location is already well exposed, but we expect this neighborhood to grow even trendier in the next coming months and even years,” said Juliette. The team targets several collaborations with famous brands and will open a new retail location by Q4 of 2015.

10 HONG KONG BUSINESS | JULY 2015

Wide selection of French underwear

Creative in-store displays

Guillaume Gibault (c) Régis Duvignau, Reuters

The store’s facade

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FIRST NUMBERS

APAC SALARIES INSIGHTS

Constrained CBDs prefer skyscrapers

Hong Kong’s towering ambitions pay off

H

ong Kong may be struggling with space to support its seven million residents with only 426 square miles of land, but the city has been trying to maximise whatever space is available by building more skyscrapers. One look at Hong Kong’s skyline and one can easily see that the city prefers tall and narrow buildings over short and wide ones, all thanks to the limited space.

As property consultancy firm Knight Frank puts it, skyscrapers are the ideal solution for space constrained CBDs, particularly in an era when cities are repopulating, as towers are able to maximise the potential space that can be delivered on a site.

Skyscraper city Knight Frank recently named Hong Kong as the ‘world’s leading skyscraper city.’ Its latest skyscraper index has been expanded to take into account additional measures of a city’s significance as a centre of high rise business and living. The index now assigns scores to each city based on a range of indicators, including skyscraper office rents and yields, the spread offered by investment yields compared to national bonds, the number of high rises built, and growth prospects for the city.

“The previous index had Hong Kong in the number one slot with a huge lead. Interestingly, despite

12 HONG KONG BUSINESS | JULY 2015

widening the criteria assessed, Hong Kong is still top of the table, confirming that on a range of measures it is the world’s leading skyscraper city,” says James Roberts, chief economist at Knight Frank. Hong Kong has the highest skyscraper office rents in the world at $250 per sq. ft per year. New York follows with rents standing at $150 per sq. ft per year.

“The resounding message from our study of the global skyscrapers market is that they are associated with exclusivity, whether it be for commercial or residential use. This can be more of a psychological perception than reality, as it tends to be the upper floors, above the skyline that command the premium office rents – the lower floors tend to let on standard prime rents. The premium for views can vary from 15-20% in the City of London and Hong Kong island, to nearly double average prime rents in Midtown Manhattan,” notes Roberts.

Hong Kong vs New York However, he notes that Hong Kong’s lead over the competition has narrowed. In particular, stronger rental growth for tower space has buoyed New York, where skyscrapers are proving popular with the city’s fast expanding digital and creative firms.

In 2014 alone, four new towers were built in New York, including the iconic One World Trade Center.

Hong Kong has the highest skyscraper office rents in the world at $250 per sq. ft per year.

Source: Towers Watson 2014/2015 Global 50 Remuneration Planning Report

FIRST visitors, compared with 491,078 last year.

2 United States of America - 110,438 visitors Due to the long distance, there are still no direct flights from the US to Hong Kong. Despite this, 110,438 tourists visited the city during the month of March - an increase of 3.1%, compared with March 2014.

Overall, during the span of three months (from January to March) an increase of 3.8% was seen with 274,485 US tourists, up from 264,396 last year.

Jetsetters all over the world

Here are the top 5 countries where most of Hong Kong’s tourists are from

G

one are the days when travelling abroad was only for the wealthy.

The growing middle class in Asia have become more willing and capable to splurge on travel adventures, especially now that all things related to travel are cheaper and more accessible to everyone.

The number of foreign tourists is continuously increasing, in both developing and well-developed countries around the world.

Travelling is becoming a more widely accessible leisure activity, with cheap deal flights from airline companies and flight-search-focused startups growing in popularity. Even applying for a visa has become easier – making it possible for anyone to be a jetsetter.

Many people travel to experience the delights of a certain city - exciting adventures, meeting the locals, and enjoying the authentic food and culture.

As a widely known tourist destination with lots of attractions and activities to offer individuals who are seeking the best vacation spots, Hong Kong is one of Asia’s most visited cities according to the 2014 figures from the Tourism Commission, Commerce and Economic Development Bureau of the Hong Kong Special Administrative Region.

The number of visitors to Hong Kong from around the world reached 60.8 million, representing an increase of 12% over 2013.

To celebrate Hong Kong’s booming

14 HONG KONG BUSINESS | JULY 2015

tourism industry, Hong Kong Business lists the top five countries from which tourists visit Hong Kong. HKB obtained data from Discover Hong Kong, the official organization overseeing the tourism sector of the city, to break down which countries the 4,405,298 visitors (as of March 2015) came from.

Data from Discover Hong Kong grouped countries under three distinct categories for more accuracy: Short Haul Markets, which include Taiwan, Japan, South Korea, Indonesia, Malaysia, Philippines, Singapore, Thailand and others*; Long Haul Markets, which include USA, Canada, UK, France, Germany, Australia and others; and New Markets, which include India, GCC Markets, Russia, Netherlands and Vietnam.

1 Taiwan - 154,032 visitors With five airlines flying directly from Taipei to Hong Kong International Airport, Taiwanese tourists can visit HK with an average flight time of 1 hour and 40 minutes to cover the distance of 508 miles. According to Skyscanner, there are 306 flights a week from Taipei to Hong Kong International Airport.

As of March 2015, 154,032 visitors from Taiwan have visited this major port and global financial centre - a slight decrease from the March 2014 figures of 156,305.

Overall, the January-March 2015 figures represent a decrease of 5.1%, with 465,861

3 Japan - 102,772 visitors Depending on which city in Japan you are flying from, travelling to Hong Kong takes around 3 hours and 56 minutes to cover 1,717 miles or 2, 763 kilometres. Flying from Japan to Hong Kong costs between HK$1,514 and HK$2,419.

Data from Discover Hong Kong shows that tourists from Japan decreased by 4.6% during the month of March 2015. Based on last year’s number, HK received 107,726 tourists during the same timeframe last year. A decrease of 9.5% was seen in the period from January to March 2015 - from 274,364 last year to 248,198 this year.

4 South Korea - 98,909 visitors 1,246 miles or 2,005 kilometres, with an approximate travel time of 2 hours and 42 minutes, is all you need to get to Hong Kong from South Korea.

With 98,909 South Koreans visiting Hong Kong in just a month, this means an increase of 3.7% in visitors – from 95,394 during the same period last year to 98,909 this year. Collectively from January to March 2015, HK has received 365,211 Koreans so far, compared with 333,480 last year - an increase of 9.5%.

United Kingdom - 62,048 visitors Despite the time difference and distance of 5,944 miles, 62,048 visitors flew all the way from the UK to visit Hong Kong in the month of March. Compared with last year’s 60,301 visitors, there has been a slight increase of 2.9%. Generally, however, there’s been a visible decrease of 1% within the first three months, with 140,705 compared with 142,123 tourists last year.

5

*The Short Haul Markets category does not include Mainland China

startups

Taking web development training ‘beyond skin deep’

D

espite the accessibility of digital and mobile technologies nowadays, Christopher Geary still struggles to successfully implement technology in his business. After realizing that setting up another agency was not the best solution, he and Nickey Khemchandani, a self-taught, multi-lingual web developer, created an accessible system of education which aims not only to improve technological capabilities, but to give people the ability to develop professional skills through short, medium or long-term learning journeys.

BSD Code and Design Academy

is aimed at providing a collaborative environment that inspires passion for technology, ignites creativity, and gives people the tools they need to impact the world around them.

The platform BSD Code and Design Academy teaches students in schools aged 7-19, entrepreneurs, aspiring web developers, marketing agency staff, refugees (for free with Fargo Foundation), and corporates coding, design, digital marketing and tech project management – regardless of background or skill level. Its programmes range from bite-sized workshops to 10-week full time comprehensive programmes in Hong Kong, Bangkok, Phuket, Chiang Mai and Bali.

BSD stands for Beyond Skin Deep.

Chris believes that if someone wants innovate in a certain field, they cannot have only a basic, surface-level interest, but must have a passion for it and really let it get under their skin.

“We teach in a practical, hands-on way, encouraging people to question more and putting emphasis on a supportive community,” says Chris.

BSD currently has approximately HK$1.7m of funding from the founders and an Angel investor.

Connect with A-list academic assistance in one click tool for every student. It started as a tuition centre in 2011 and earned around HKD1.5M in 2 years. Despite this success, the founders felt that they were not helping most students to enjoy a decent quality of education.

Therefore, they decided to quit the tuition centre, and started to transform Appedu into an e-learning startup in 2013.

“We want to leverage technology Connecting students to top tier tutors in a snap, Appedu’s Snapask aims to be to make learning accessible to all the leading e-learning startup in Hong and eliminate barriers that prevent Kong. Appedu’s core product Snapask marginalized students from receiving is a mobile app that allows students to quality education, and this leads to our solution, Snapask,” Timothy says. ask questions about anything in one Appedu is in the Cyberport Hong click. Snapask claims to connect the Kong Incubation Program, which students to the most eligible teacher provided the company’s seed funding. to provide a real-time one-to-one They have also managed to get online class. other funding from several private According to Timothy Yu, CEO angels and HKU funds, and have of Appedu, the company provides around US$400,000. They have now the most customized, efficient and hassle-free, yet minimal-cost learning expanded to Shanghai and Taipei.

16 HONG KONG BUSINESS | JULY 2015

Boxful: No more cramped spaces

When Hong Kong was dubbed a “very crowded place”, many startups thought of providing additional living space for households. Entering the integrated logistic service, Boxful aims to revolutionize the traditional storage model by allowing their customers to visualize and manage all their physical items at the tip of their fingers, without ever leaving their home. Founded by former investment banker Norman Cheung, 32, Boxful claims to be the largest on-demand storage service provider dedicated to convenient, affordable and secure self-storage for homes and offices in Hong Kong. For as little as HK$49 per box – the cost of a cup of coffee – users can place their physical belongings in secure storage that is easily accessible through Boxful’s intuitive mobile and online platform.

“We provide free door-to-door pick-up and retrieval services as fast as the next day. Customers can also keep track of their items and boxes by taking photos and uploading the images onto our online system. Very simply: Boxful is cloud storage for your physical items,” says Norman.

Unlike other self-storage companies, Boxful restricts any third-party access to their warehouse - this allows the company to save money on visual decoration and reinvest more money into their logistics and security infrastructure. As a result, Boxful offers a free door-to-door valet service (including pick up and delivery).

Boxful being a logistics company, Norman said they don’t take risks especially when it comes to their customers’ valuable possessions. He reveals that, “Shortly after launch, we found ourselves in a situation where our trucks could not meet the demand of our customers. The founders and the team had to take on the delivery responsibility, including spending the entire weekend running around town delivering and picking up boxes. We found this an extremely rewarding experience, because it allowed us to understand better the needs of our customers and gain insight in how we can further optimize our operations. The founding team still does delivery as much as possible,” says Norman.

Boxful was initially funded by its founders. Around the time of the company’s launch, they closed a seeding round of US$1.5m from a group of Greater China investors, including Antony Leung (former financial secretary of Hong Kong) and influential family offices and corporates in the region.

FINANCIAL INSIGHT: venture capital

VCs play a large role in boosting startups

Hong Kong venture capital funds: The future of startups?

Popular among local and global startups, VCs seem to be today’s preferred choice of capital in Hong Kong.

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hen Australian entrepreneur Rosh Govindaraj decided to jump-start her sustainable lifestyle brand and embark on two sourcing trips to Indonesia and India, her personal leap of faith did not go unnoticed by Farook Jamal, managing director at Mark Masons Investments, a Hong Kongbased venture capital (VC) fund.

“I was impressed by her story and reached out to her to see how we can help in building brand awareness with our background in building fashion brands,” says Jamal. Since then, Govindaraj has gone on to establish Issara – described in her LinkedIn profile as “a direct-to-consumer purveyor of premium, responsibly-handcrafted leather goods” – last August.

As an alternative source – as opposed to debt or equity markets

18 HONG KONG BUSINESS | JULY 2015

Hong Kong is still in the early stages of growing its ecosystem to support startups, so VCs have been more active in other Asian countries.

– of much-needed capital, VCs play a large role in boosting new startups in a competitive business environment.

Roland Yau, investment director at CoCoon, recognizes this role all too well. Like Jamal, he has also dealt with a startup retail firm (which he declined to name) with a unique, “out-of-this-world” idea that had initially been met with skepticism by investors.

“As I continued discussing with the team, I delved deep into the team’s thinking, their execution strategy, and saw how they worked tirelessly to get market validation for their idea,” he recalls. Eventually, Singaporean companies, excited by the retail firm’s distinct idea, approached them, eager to partner for possible collaborations.

“They came back to HK with a

spring in their step and newfound hope. There is no valuation for that kind of hope,” says Yau. According to experts, innovative entrepreneurs such as Govindaraj and the retail team Yau previously met are transforming the local business landscape and fuelling the rise of VCs in HK, all of whom are on the lookout for the next big thing to bankroll.

“HK has not been, and is not, lacking in investment opportunities,” Yau argues. “I think this applies in all stages of investments from VC to private equity.”

Melissa Guzy, managing partner at Arbor Ventures and a member of the HKVCA (HK Venture Capital and Private Equity Association) Venture Committee, agrees. “The startup activity in HK has increased over the last year, along with more companies being able to access initial capital.

There is definitely more attention being placed on startups in HK and there are some very capable entrepreneurs,” she says.

As of September last year, the HKVCA boasted a remarkable membership of nearly 300 global, regional, and local professional

FINANCIAL INSIGHT: venture capital firms, which “represent the full gamut of private capital market participants in Hong Kong, Greater China, the Asia Pacific region, and other parts of the world,” according to the HKVCA 2013-2014 annual report.

Among industries, the information technology and financial services sectors seem to be a favourite among VCs, given these sectors’ robust growth potential and the vigorous backing they receive from both the public and private sectors.

“Over the past year, there has been a continual increase in support toward the technology startup scene in HK, including support from co-work spaces, large corporations who host innovation conferences and networking events, and the government,” Yau says. “This support helps lower the barrier of entry for HK entrepreneurs, which in turn provides more investment options for venture capitalists,” he adds.

Similarly, the financial services industry offers exciting opportunities for VCs, says Simon Squibb, chief executive officer and founder of NEST Investments.

“In the past six to 12 months, we’ve certainly seen growth in some key sectors in HK. In particular, the financial services sector, traditionally seen as one of HK’s core strengths, has received a lot of attention in encouraging startups and FinTech (financial technology)-friendly regulation and support,” Squibb says.

HK VCs lagging in Asia?

Compared with counterparts in the region, however, HK still lags in terms of VC development.

“HK has fallen behind many other countries in Asia including Singapore, Indonesia, and Japan,” Guzy notes. Jamal is more optimistic, however, given the relative youth of HK’s startup industry.

“Hong Kong is still in the early stages of growing its ecosystem to support startups, so VCs have been more active in other Asian countries. However, there seems to be a trend with more VCs now

establishing themselves in HK and playing an active role in participating in both the growth stage and larger rounds.

“This will attract other established players to enter the scene and it will provide more funding options for emerging and existing startups,” he predicts.

A challenging road ahead In the meantime, challenges still abound for HK’s VC industry. For instance, with HK being a major regional financial hub, startups face the threat of VCs opting out in the face of the wide array of investment options to choose from.

“It is easy for any HK investor to assess the risk and internal rate of return of investing into a tech startup, and decide they are better off spending their money on another class of assets,” Yau says.

“HK is not lacking in funds for tech startups,” Yau notes,“but the challenge is for startups to receive those funds on terms that are fair and reasonable to the startup.”

To remedy this, VCs must find way to properly engage startups and ensure networking events do not turn out to be mere soirees.

“There are more tech events than before, but still limited [opportunities] for entrepreneurs to get in front of VCs and angels (angel investors). Startups with the potential to get funded are overlooked on pitch nights and demo days because of the way they are structured,” laments Jamal.“We need to adopt a different approach to these events, and I am talking to some VCs about some ideas that can generate a more productive outcome for entrepreneurs/ accelerators/investors,” he adds.

The future of VCs Overall, the outlook on VCs in HK is positive, driven by the city’s long-time status as a regional financial centre, which has cultivated a business environment in which startups and VCs can thrive.

“The outlook is promising because HK has all the components of an innovation hub. Our

Melissa Guzy

Farook Jamal

Roland Yau

Simon Squibb

history and geographical location has exposed us to culture, people, and issues that are beyond our borders, and we grew up knowing more about the world, understanding trade, and caring about global issues,” Yau says. “The HK tech startup scene will continue to find its niche over the next few years, and when it does, the city will be as competitive as any other innovation hub in Asia,” he adds.

In the next three to five years, expect HK VCs to continue to grab the spotlight as more local and global startups reap success and seek new capital to fund growth initiatives.

“I believe that a large success story by an HK startup would be a catalyst and energize more entrepreneurs to start companies. Additionally, more and more US and European startups are considering HK as their HQ (headquarters) for global expansion,” Guzy notes.

VCs are also seen to evolve in terms of scale, in order to unlock values and exploit other investment advantages. “Valuations in all sectors are becoming a concern. The VC model is undergoing a lot of changes and we will see an emergence of ‘micro VCs’ that will be participating in all states of the investment cycle, enabling them to capture greater value than at present,” predicts Jamal.

Meanwhile, HK’s connection to China, the world’s economic powerhouse, may also prove useful – even invaluable – as VCs pursue opportunities in certain growth sectors such as FinTech, smart cities, and the Internet of Things, according to Squibb.

Typical investment range for venture capitalists

Source: Roland Yau of CoCoon

HONG KONG BUSINESS | JULY 2015 19

economic INSIGHT: consumption & exports

Weak consumption is squeezing export demand

HK’s economic war goes sour Hong Kong is set for a difficult 2015 as consumption and exports pose risks to overall recovery.

I

f Hong Kong’s lacklustre performance in the early part of 2015 offers any indication of what the future holds, the city may be in for a rough year as its economy struggles to recover from a slowdown in exports and weak demand.

“The slowdown in GDP (gross domestic product) growth to just 2.1% has led to new discussions over whether the city has moved into a prolonged period of stagnant growth,” says Ryan Lam, senior economist at Hang Seng Bank.

The economic slowdown in the first three months of the year has dented Hong Kong’s economic prospects for 2015: “Reflecting the soft start to 2015 and the weaker-than-expected tourism flows, we have trimmed our full-year GDP growth forecast for 2015 from 2.6% to 2.4%,” he adds.

According to Lam, the culprit behind Hong Kong’s sluggish first quarter performance is the city’s private consumption levels, which have declined significantly. Private con-

20 HONG KONG BUSINESS | JULY 2015

Reflecting the soft start to 2015 and the weakerthan-expected tourism flows, we have trimmed our full-year GDP growth forecast for 2015 from 2.6% to 2.4%.

sumption expenditure only reached 3.5%, compared with 4.1% in the previous quarter, Hong Kong Monetary Authority (HKMA) data show.

This marks the second consecutive quarter of slower growth for Hong Kong. “It has long been our view that private consumption growth is set to normalize, as the supportive factors that boosted spending growth in the past are unlikely to drive growth as much in the years to come. Our analysis suggests a rise in real interest rates

due to lower inflation, and a pullback in consumer confidence, were holding back private consumption,” Lam explains. Indeed inflation, measured by the composite consumer price index (CPI), moderated to 2.8% from 4.5% in the previous quarter, according to HKMA. Monthly retail sales were also tepid – contracting by 2.9% last April versus 14.9% growth in March and in the process “casting uncertainty on the economic recovery,” according to Audrey Shi, economist at Deutsche Bank Research.

“Over the past few quarters, the performance of retail sales has been generally disappointing,” Lam notes.

“Mainland travellers have long been the dominant driver of Hong Kong’s retail growth, but this is no longer the case. While the outlook for visitation growth is positive, a squeeze on visitors’ spending power lies just beneath the surface.”

With Hong Kong being an exportoriented economy, much attention has also been placed on the city’s balance of trade. For the first quarter, Hong Kong recorded a trade deficit of HKD 39,164 million, a decline from HKD 46,206 million in the previous quarter.

But the improvement in Hong Kong’s balance of trade “was driven more by sharper fall in import growth than accelerating exports,” Lam cautions, noting that exports were more or less flat, at 0.2% versus 0.4% year on year, which is “consistent with weak trade data in Korea and Taiwan.”

A surging United States dollar, coupled with the recent port strikes on the US West Coast that held up cargo shipments for months, definitely also played a role in stifling Hong Kong’s first quarter exports, says Lam.

Underlying assumptions for Chinese tourist spending

Source: CEIC, Hang Seng Bank

economic INSIGHT: consumption & exports Imports, on the other hand, slipped to 0.5% in the first quarter versus 1.1% in the fourth quarter last year.

The exports challenge Meanwhile, Hong Kong’s service exports will continue to post poor results as weak consumption, along with other factors, is expected to squeeze demand. In this scenario, China’s economic slowdown and stricter travel rules are seen as potential hurdles to further progress.

“The risks for Hong Kong’s economy in the rest of 2015 are to the downside. This is mainly due to a weaker external demand environment.

The deepening slowdown in mainland China is likely to mean import and export trade services – the largest sector of Hong Kong’s economy – will not see much support in the coming quarters,” warns John Zhu, economist at HSBC Global Research, adding that recent HSBC Hong Kong Purchasing Managers Index surveys signal orders from China may have contracted faster than overall new orders.

Consumption, a critical component of Hong Kong’s economy, will continue to face unique challenges, but may no longer be as significant as exports as it becomes more difficult for some Chinese nationals to visit the city, Lam notes.

“With recent changes in multipleentry visa arrangements for Shenzhen residents and the impact of the strengthening Hong Kong dollar, domestic service providers appear to be facing stiff headwinds. It is also currently hard to imagine that private consumption in upcoming quarters will be as strong as it was before 2011, although recent equities gains will provide a buffer for consumption,”

Lam says. “That said, our view is that growth contributions from consumption are likely to be of secondary importance in the near future, with investment activity and exports of goods taking centre stage.”

A brighter second half ahead Thankfully, despite a bleak forecast for the rest of the year, the second semester should prove more positive for Hong Kong’s economy. “We remain relatively sanguine over the outlook for the Hong Kong economy, although we do not foresee a breakout in growth, as economic headwinds are likely to persist into the second half,” Lam says.

Overall, Shi is more optimistic than her industry peers, describing Hong Kong’s economy as resilient enough to recover and even play a part in China’s One Belt, One Road economic development strategy that focuses on synergies with neighbouring economies.

“We believe the economy, with its favourable geographic location, developed RMB (renminbi) offshore business, and professional expertise in services, would play a pivotal role in China’s ‘One Belt, One Road’ initiatives,” Shi says. For instance, the city is connected with over 50% of the global population with direct flights from Hong Kong Airport within five hours.

Such connectivity, appended with the upcoming high-speed rail to the mainland, cannot be easily replicated in other cities, adds Shi. Slowing inflation, for one, could prop up demand at home, according to Zhu. “Domestic demand could be helped by the decline in inflation, with headline CPI inflation likely to fall over the course of 2015 as a number of base effects fall out of the year-on-year

The risks for Hong Kong’s economy in the rest of 2015 are to the downside. This is mainly due to a weaker external demand environment.

calculations (eg removal of electricity subsidies last year).” He adds that the labour market has also been relatively robust, with the headline rate of unemployment unchanged at 3.3%, below the historical average, for the past nine months.

The benefits of a weaker US dollar In addition, Hong Kong’s trade environment is expected to recover as the US dollar’s rally cools.

“Financial markets have turned less bullish on the US dollar as the outlook for the US has become less favourable.

We are expecting a confluence of factors – improving demand from the US as well as a more stable US dollar – to boost the city’s trade flows over the coming months,” says Lam. “If we are interpreting the data correctly, a positive turnaround in trade activity is likely to occur over the coming months,” he adds.

As a regional hub, Hong Kong would also have to step up its game in the face of more competitive Asian economies, which are building up their own economic strengths.

“Potential rivals include mainland cities such as Beijing (political and economic), Shanghai (finance), Guangzhou (trade), and Shenzhen (trade, finance, and innovation); Asian cities such as Taipei, Seoul, and Singapore; and global centres such as London and Paris. The soaring growth in RMB deposits in these hubs and their active involvement in the AIIB (Asian Infrastructure Investment Bank), regardless of the pressure from the US, are the best proof,” Shi says.

“The ultimate outcome rests with the authorities’ resolve and Hong Kong’s strategy to compete with neighbouring hubs,” she adds.

Investment helped offset weakness in consumption

Exports will be the main driver of growth

Source: Census & Statistics Department

HONG KONG BUSINESS | JULY 2015 21

Analysis: hong kong banks

Loan growth will slow further in 2015

Hong Kong banks at an inflection point After six years of strong credit growth and near-zero credit costs, things are about to change this year as economic growth slows, US interest rates rise, and China interest rates fall.

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e expect loan growth for the Hong Kong banks to moderate in 2015, after six years of rapid growth, due to slower economic growth and monetary easing in China as well as lower commodity prices which especially affects trade finance. Over the past five years, system loans have grown by a 17% CAGR (2009-2014) and we forecast this to slow to ~7% in FY1516E. Hong Kong’s loan growth has been historically inversely correlated with China’s loan growth. Hong Kong has been a source of cheap funding for China-related corporates since the Global Financial Crisis in 2008. System loans for use outside of Hong Kong and trade finance have respectively grown by 29% and 25% CAGRs over the past five years (20092014).

With more monetary easing in China to come in 2015, we believe loan growth in Hong Kong could slow further. Hong Kong system loan growth has already moderated 22 HONG KONG BUSINESS | JULY 2015

in 2H14, rising by only 3% h/h, the slowest pace in five years.

The PBOC cut benchmark interest rates on 22 November 2014 and cut the reserve requirement ratio (RRR) on 4 February 2015. Our China economist, Jian Chang, expects twomore interest rate cuts and two more RRR cuts to come this year.

She forecasts China real GDP growth to slow to 7.0% in 2015, down from 7.3% in 2014.

Moreover, borrowing offshore for Chinese-related corporates is now more expensive as Barclays expects the RMB to depreciate against the USD/HKD. We think this is evident already from the sharp slowdown of system trade finance in Hong Kong, which declined by 10% m/m in December 2014. Forward exchange rates currently imply a 2% expected depreciation of the RMB relative to the USD over the next 12 months.

We currently forecast a 10% contraction in trade finance loans in 2015. In the event of liquidity tightness caused

“A key risk for the banking system is if expectations for higher US interest rates lead to large and sudden liquidity outflows.”

by potential interest rate hikes in 2H15, we see further downside risk to growth as banks manage liquidity by allowing these short-term trade loans to roll off the books.

Sudden liquidity outflow a key risk Over the past six years, the Hong Kong banking system has benefited from significant fund inflows since QE. Rapid growth in system deposits (9% CAGR) supported an even faster rise in loan growth (14% CAGR).

The system loan-to-deposit ratio rose from 50% in 2009 to 72% in 2014. A key risk for the banking system is if expectations for higher US interest rates lead to large and sudden liquidity outflows (i.e. contraction of system deposit base).

In Arthur Yuen’s (the deputy chief executive of the HKMA) speech in January 2015, he said this is one of the areas that the HKMA is monitoring closely because “as rates rise, there will be an impact on global capital flow and this can influence

Analysis: hong kong banks “Hong Kong banks have benefited from near-zero credit costs for the past six years in the low interest rate environment.”

First US rate hike expected in June 2015

liquidity at banks quite quickly.”

Loan balances could contract quite sharply, especially trade finance loans which are shorter in duration (three to six months’ trade cycle), as banks manage liquidity risk. Funding cost could rise quickly as deposit competition intensifies. After the initial squeeze on liquidity and margins, we expect banks to reprice up loans to protect margins, while deposit and loan demand and supply would rebalance over time.

Asset quality to deteriorate Hong Kong banks have benefited from near-zero credit costs for the past six years in the low interest rate environment. The system NPL ratio is at a record low. However, greater exposure to China-related loans combined with slowing economic growth in China could result in asset quality deterioration for the Hong Kong banks going forward. System-wide,

loans for use outside of Hong Kong (which we believe is predominantly China-related lending) rose by a 26% CAGR between 2008 and 2014 and now accounts for more than 30% of total loans.

The Hong Kong banks are exposed to China-related loans via lending to China-related corporates, mainland banking subsidiaries and also indirectly via investment in Chinese banks. All four of the local Hong Kong banks in our coverage universe showed a deterioration in asset quality in their China portfolios, with NPL ratios rising h/h in 1H14. Arthur Yuen, the deputy chief executive of the HKMA, also recently warned that that there were some instances of defaults in 4Q14, a sign that asset quality is coming under pressure, in his speech in January 2015.

While the asset quality of the Hong Kong loan portfolios remains solid so far, we see a rising risk of

Loan growth – entering a period of slower growth

Source: Company data, Barclays Research estimates

deterioration if US interest rates rise, as borrowing costs will increase for corporates and households. The HKMA is increasingly concerned about the rapid rise in consumer debt fuelled by low interest rates and abundant liquidity. Going forward, we remain cautious on asset quality, reflecting a potential slowdown in Hong Kong and China’s economy, and the eventual rise in benchmark interest rates in the medium term. We have factored in a gradual increase in credit cost and NPL ratio for the Hong Kong banks in FY14E-16E. Margin to improve in 2H15 Hong Kong interest rates have historically tracked the US closely due to the HKD/USD peg although variances may occur at times due to local factors and stresses. Our Barclays Research economics team expects the first US rate hike to occur in June 2015, with the Fed funds rate gradually rising to 0.75-1% by end-2015 and 2.5-2.75% by end-2016.

The Hong Kong banking system benefited from significant fund inflows after the Global Financial Crisis and quantitative easing. Abundant liquidity in the system combined with low interest rates resulted in Hong Kong banks’ average net interest margin declining from 2% in 1Q08 to 1.4% currently. We expect margins to improve in 2H15 assuming our economists’ expectations for US interest rates rise plays out. A rising rate environment is typically positive for banks, albeit with a short time lag (usually about three months) as the loan-to-deposit spread expands and as excess funds generatehigher returns for banks with surplus liquidity.

By Sharnie Wong, analyst at Barclays

China interest rates: 7-day repo and 3-month SHIBOR

Source: Bloomberg, Barclays Research

HONG KONG BUSINESS | JULY 2015 23

SALARY SURVEY 2015

Both employers and job seekers put their best foot forward

HK recruitment market gets more competitive than ever

China’s economic slowdown may have hampered employment last year, but 2015 is predicted to be an active signing year.

H

ong Kong’s top professionals are being headhunted by hiring managers who will stop at nothing to get them to join their companies. Salaries with a lot of zeroes, better work environments, and clear paths towards career advancement are just some of the perks companies are offering as they look to bolster their ranks for this year’s economic boom.

Both companies and employees were bolder last year, according to Matthew Bennett, managing director, Greater China at Robert Walters. New positions were opening up everywhere, only to be quickly filled by individuals ready and raring to climb up the corporate ladder. While China’s economic slowdown last year hampered employment in trade- and retail-related 24 HONG KONG BUSINESS | JULY 2015

The opening of the ShanghaiHong Kong Stock Connect, as well as the rapid growth of enterprises in China and Asia Pacific, suddenly spurred the need for people who can deal with the rigours of international acumen.

industries, most others, including secretarial, accounting, banking, finance, human resources, law, and information technology, saw a very active signing year.

The trend will likely continue this year, with 51% of Hong Kong companies anticipating an increase in headcount, and 43% expecting the corporate hierarchy to remain as it is despite employee turnover.

Employers are demanding more and more from those looking to join their fold, with the prerequisite years of experience the easiest to achieve in their criteria. Not only do professionals need technical skills that stand head and shoulders above the sea of résumés, they’re also expected to have international experience, team and communication skills, commercially-inclined minds, and language proficiency in Mandarin,

Cantonese, and English.

“Technical skills are a given,” says Andy Bentote, senior managing director, Hong Kong and Southern China at Michael Page.

“It’s the soft skills that make all the difference – communication and presentation skills, commercial acumen, lateral thinking, and adaptability.”

The opening of the ShanghaiHong Kong Stock Connect, as well as the rapid growth of enterprises in China and Asia Pacific, suddenly spurred the need for people who can deal with the rigours of international acumen. This of course requires candidates who can effectively speak the languages of partner offices based abroad. The entry of multinational corporations into the local scene also calls for strategic individuals who can think globally.

As companies continue to automate key processes such as number-crunching, individuals who can lead value-added services, such as business analysis, strategic planning, and management, are pinging wildly on the radar of recruiters.

In order to entice applicants, Bennett recommends that companies streamline and hasten the overall application process in order to snare key hires before they are snatched by the competition. Businesses are also going digital to headhunt talent, utilizing websites such as JobsDB, LinkedIn, and Classified Post, to quickly get in touch with these individuals.

Bentote suggests other key factors that entice employees into switching teams. According to the Michael Page 2015 Greater China Salary and Employment Outlook, 40% revealed that employees left for improved salary, 22% wanted to experience closely related fields, 15% cited personal reasons, 11% sought senior positions, 9% wanted work/life balance, 1% craved better training programs, and 1% mentioned overseas careers.

Companies are now at each

SALARY SURVEY 2015 other’s throats, each attempting to trump the other’s offer with more attractive compensation packages. However, finding a cost-effective proposal is easier said than done given the nature of Hong Kong’s job seekers.

Compared with mainland China, those based in Hong Kong have more appreciation for long term career roadmaps. Businesses need to be careful, though, as giving significant favour to external hires may lead to turmoil among internal staff.

“As the Hong Kong recruitment market becomes more competitive, we expect to see widespread demand for top-tier professionals and specialists. We [also] expect the ‘war for talent’ to intensify – particularly among small to medium-sized businesses looking to recover, recruit, and grow,” notes Bennett.

Textbook supply and demand “There is always a shortage of talent, both in Hong Kong and on the mainland,” says Bentote.

“That’s true whether you’re talking about niche roles or leadership positions.” True enough, the hot employment market is further drying up the already shallow talent pool, and rare-breed employees are smartly leveraging their status. While those who stayed with their companies gained as much as an 8% increase

in salary, job movers were able to squeeze up to 30% increments to their paychecks last year.

This year, 65% of Hong Kong hiring managers expect a 1-5% increase in remuneration; 22% predict a 6-10% growth; 9% estimate no raises; 2% anticipate an 11-15% development; and 2% of respondents forecast greater than 16% inflation. The actual figures are of course much higher in the lucrative fields of banking and finance. Bonuses are also popular in Hong Kong, with 85% of all companies surveyed by Michael Page in the Greater China report providing bonuses within the next 12 months. Of these firms, 36% will be awarding 6-10% bonuses; 22% giving 11-15% in bonuses; 16% giving 16-20% rewards; and 6% will be giving more than 40% in incentives.

Though businesses are for the most part generous with monetary compensation, employees are more than willing to jump ship if they feel that their services are worth more than what they are getting. Compared with previous years, though, professionals are placing added importance on nonmonetary factors such as career development and personal growth.

Michael Page’s survey reveals that a clear career path was a top concern for 41% of Hong Kongbased workers, while international career opportunities, company

performance, training and mentoring, company culture, work recognition, and work/life balance were deemed paramount by 22%, 15%, 11%, 9%, 1%, and 1% of respondents, respectively.

Andy Bentote

Pallavi Anand

Matthew Bennett

Tempered optimism Pallavi Anand, managing director, Hong Kong at Robert Half International, says that, while a majority of businesses expect significant growth this year, 99% acknowledged that getting the right people to fuel development will be difficult. Because of the factors above, most business leaders are also concerned about other firms poaching their top employees.

Even though pickings are slim, Hong Kong businesses are actually more attractive to foreign applicants compared with the rest of Greater China, according to Bentote. The metropolis offers a relatively centralized location, better infrastructure, and a much lower tax rate. However, experts are still uncertain about how Hong Kong’s recent political fallout will affect the hiring market. Despite this, the long-term view is very positive. “In today’s competitive market, awareness of current salary and hiring trends, coupled with a healthy dose of flexibility could be the key that ensures a win-win for both companies and candidates,” says Anand.

EXPERT OPINION: hong kong offers higher expat packages than singapore Whether it is comprehensive healthcare benefits, or a guaranteed schooling place, expats in Hong Kong will often take into account the overall package when assessing a new opportunity. Housing allowances and tax ‘equalization’ are not so prevalent as they were, but most Hong Kong companies will be open to tax-reduction methods.

Compared to Singapore the expat benefits in Hong Kong remain equitable. More often than not, especially for multi-

national companies, Singapore and Hong Kong will need to compete for a similar pool of senior talent, so the differences cannot be too marked, or it would disadvantage one location.

Compared to the rest of the APAC region the expat benefits in Hong Kong are generally a little better. Whilst there is no longer a need to pay in lieu of the ‘hardship’ of working in HK, the rising housing prices necessitate greater payouts in HK over cheaper APAC locations, such as Beijing, Taipei or Kuala Lumpur.

Richie Holliday, COO APAC, Morgan McKinley

Hong Kong has the fifth highest expatriate packages in the region after Japan, Australia, India and China. The value of a typical total expat pay package for middle managers in Hong Kong is around HK$2.1mn per year on average.

Hong Kong can be expensive for companies to relocate their staff into – largely due to the cost of providing certain benefits such as housing and education.

Remove those and it falls from 5th to just 15th in the regional ranking thanks to low tax rates.

However, Hong Kong is still one of the more attractive locations in the region and this is a big plus in terms of motivating employees to come here. There are ways in which companies can contain costs. We see many revising housing allowances down or using an approach based around local salaries topped up with additional benefits rather than using the employee’s salary at home as a starting point. This has contributed to the value of the total package falling slightly on average since last year.

Lee Quane, regional director – Asia, ECA International

HONG KONG BUSINESS | JULY 2015 25

SALARY SURVEY 2015 FINANCE & ACCOUNTING Role

Experience

Salary HK$’000

Commerce & Industry Assistant Accountant (PQ / Qualified)

2-5 years

220-280

Internal Auditor (Regional / Local)

3-5 years

360-420

Accountant (PQ / Qualified)

3-5 years

280-400

Financial Analyst / Business Analyst

3-8 years

300-400

Treasury Analyst (Regional/Local)

3-8 years

420-550

Tax Analyst (Regional/ Local)

3-8 years

420-550

Assistant Audit Manager (Regional/ Local)

5-8 years

420-600

Senior Accountant (Qualified)

5-10 years

360-480

Senior Financial Analyst

5-10 years

400-540

Country Finance Manager

8+ years

600-720

Audit Manager (Regional/ Local)

8-15 years

600-900

Treasury Manager (Regional/ Local)

8-15 years

600-900

Tax Manager (Regional/ Local)

8-15 years

600-1,000

Regional Finance Manager

10+ years

600-800

Financial Planning and Analysis Manager

10+ years

650-800

Plant Controller, China

12+ years

800-1,100

Country Financial Controller

12+ years

800-1,100

Regional Business Unit Controller

12+ years

840-1,200

Head of Financial Planning and Analysis

12+ years

1,000-1,300

Head of Mergers & Acquisitions

12+ years

1,300-2,000

Audit Director (Regional/ Local)

15+ years

900-1,800

Country Financial Director

15+ years

1,000-1,400

Regional Financial Controller

15+ years

1,100-1,400

Group Financial Controller (Listed Group)

15+ years

1,200-1,800

Treasury Director (Regional/ Local)

15 years +

1,200-1,800

Tax Director (Regional/ Local)

15 years +

1,200-1,800

Chief Financial Officer (Established Company)

18+ years

1,500-3,000

Investor Relations Analyst

3-6 years

450-550

Investor Relations Manager

6-10 years

600-900

Investor Relations Director

10 years +

900-1,500

Business Development Manager

10+ years

700-1,000

Business Development Director

15+ years

1,000+

Business Development / Investor Relations

Source: 2015 Greater China Salary & Employment Outlook 26 HONG KONG BUSINESS | JULY 2015

SALARY SURVEY 2015 FINANCE & ACCOUNTING (cont.)

Role

Experience

Financial Control - Investment Banking

2015 Bonus

2015 Salary HK$'000

Low (%)

Medium (%)

High (%)

Analyst

1-3 years

300-500

0

10

25

Associate / Assistant Vice President

3-6 years

500-750

0

10

30

Vice President

6-10 years

750-1,000

0

10

30

Senior Vice President / Director

10+ years

1,000-1,500

5

15

50

Country Chief Financial Officer

12+ years

1,500+

5

20

50

Regional Chief Financial Officer

15+ years

2,000+

5

25

60

Analyst

1-3 years

300-500

0

10

25

Associate / Assistant Vice President

3-6 years

500-750

0

10

30

Vice President

6-10 years

750-1,100

5

10

30

Executive Director

10+ years

1,100-1,500

5

15

50

Head

15+ years

1,500+

5

20

60

Analyst

1-3 years

320-450

0

10

25

Associate / Assistant Vice President

3-6 years

450-750

0

10

30

Vice President

6-10 years

750-1,000

5

10

30

Executive Director

10+ years

1,000-1,500

5

15

50

Head

15+ years

1,500+

5

20

60

Analyst

1-3 years

300-500

0

10

25

Associate / Assistant Vice President

3-6 years

500-950

0

10

30

Vice President

6-10 years

950-1,300

5

10

30

Executive Director

10+ years

1,300-1,600

5

15

50

Head Valuations Analyst Associate / Assistant Vice President Vice President Executive Director Head

15+ years

1,600+

10

20

60

1-3 years

350-500

0

10

25

3-6 years

500-950

0

10

30

6-10 years

950-1,300

5

10

30

10+ years

1,300-1,600

5

15

50

15+ years

1,600+

10

20

60

Management Reporting / FP&A

Regulatory Finance

Product Control

Please note: 1. Market rates are becoming much less homogeneous; while we have taken great care, these salary ranges can only be approximate guides. Since there are often specific circumstances relating to individual companies, please call us for additional information.

2. These figures are generally the total remuneration (ie. cash), excluding bonus / incentive schemes.

3. Variable and incentive schemes are becoming more common through the different levels of management and are not included in these figures.

Source: 2015 Greater China Salary & Employment Outlook HONG KONG BUSINESS | JULY 2015 27

SALARY SURVEY 2015 FINANCE & ACCOUNTING (cont.)

Role

Tax Analyst Associate / Assistant Vice President Vice President Executive Director Head Project Accounting Analyst Associate / Assistant Vice President Vice President Executive Director Head Fund Accounting Analyst Associate / Assistant Vice President Manager / Vice President Senior Vice President / Director Head Financial Control Investment Management Analyst Assistant Manager Manager Senior Manager Director Country Chief Financial Officer Regional Chief Financial Officer

Experience

1-3 years

HK$'000 300-500

0

10

25

3-6 years

550-800

0

10

30

6-10 years 10+ years 15+ years

800-1,100 5 1,100-1,600 5 1,600+ 5

10 15 20

30 50 60

1-3 years

250-450

0

10

25

3-6 years

450-700

0

10

30

6-10 years 10+ years 15+ years

700-1,100 5 1,100-1,400 5 1,400+ 5

10 15 20

30 50 60

1-3 years

180-300

0

10

25

3-5 years

300-500

0

10

30

5-7 years

500-800

5

10

30

7-10 years

800-1,100

5

15

50

10+ years

1,100+

5

15

50

1-3 years

250-400

0

10

30

3-5 years 5-7 years 7-10 years 10+ years 12+ years

400-650 650-900 900-1,300 1,300+ 1,500+

0 0 0 0 5

10 10 15 20 20

30 50 50 60 60

15+ years

1,800+

5

20

60

Source: 2015 Greater China Salary & Employment Outlook 28 HONG KONG BUSINESS | JULY 2015

2015 Bonus

2015 Salary Low (%)

Medium (%)

High (%)

SALARY SURVEY 2015 FINANCE & ACCOUNTING (cont.)

Role

Experience

HK$'000 180-300 300-500 500-750 750-900 900-1,400 1,400+ 1,700+

0 0 0 0 5 5 5

10 10 10 10 15 20 20

30 30 30 35 35 40 50

320-500

10

20

40

500-900

10

20

40

950-1,400 10 1,400-2,000 15 2,200+ 20

20 25 30

40 50 50

320-450

0

15

30

450-700

0

15

40

700-1,100 5 1,100-1,600 5 1,600+ 5

15 15 15

50 50 60

1-3 years 3-5 years 5-7 years 7-10 years 10+ years

150-350 350-600 600-1,000 1,000-1,400 1,400+

5 5 5 5 5

10 10 10 10 10

25 25 30 30 40

1-3 years

320-500

10

20

40

3-6 years

500-900

10

20

40

6-10 years 10+ years

900-1,400 10 1,400-2,000 15

20 25

40 50

15+ years

2,000+

30

50

Financial Control – Insurance Analyst Assistant Manager Manager Senior Manager Financial Controller Country Chief Financial Officer

1-3 years 3-5 years 5-7 years 7-10 years 10+ years 12+ years Regional Chief Financial Officer 15+ years Investment Banking Analyst 1-3 years Associate / Assistant Vice 3-6 years President Vice President 6-10 years Executive Director 10+ years Head 15+ years Investment Management Analyst 1-3 years Associate / Assistant Vice 3-5 years President Vice President 5-7 years Executive Director 7-10 years Head 10+ years Insurance Assistant Assistant Manager Manager Senior Manager Director / Head of Compliance AML Analyst Associate / Assistant Vice President Vice President Executive Director Managing Director / Head of Compliance

2015 Bonus

2015 Salary Low (%)

20

Medium (%)

High (%)

HONG KONG BUSINESS | JULY 2015 29

legal briefing

Drone users, you are not clear for takeoff Find out what experts think of the new guidance note addressing the issue of invasion of privacy.

I

f you think you’re safe in the confines of your high-rise home and office, think again. As you’re reading this now, there may be a covert, nondescript flying device recording all your activities from leagues away. It’s a scary reality, one that Hong Kong’s Privacy Commissioner for Personal Data is trying to curb as they update the existing guidelines for surveillance machines.

“Aspects of our private domain that we assumed sacrosanct and never thought to worry about 10-15 years ago are suddenly being thrust into the open marketplace. Data is so freely exchangeable that it is no longer a question of how, but simply when and by whom,” says Urszula McCormack, a partner at King & Wood Mallesons.

These unmanned aerial systems – when not being used for mischievous purposes – are actually quite handy. Colloquially referred to as drones, they’re small, portable, and mobile, able to provide plenty of advantages such as photography and videography of anything from urban environments to wild terrain.

These benefits have led to a surge in the drone’s popularity. Last year, drones garnered a global revenue of USD84 million, with 250,000 units tak-

“Those using drones for surveying must carefully assess whether using a drone is necessary or whether there are alternative means of achieving the same objectives.” ing to the air. The trend is likely to continue, with the Consumers Electronics Association predicting that the year 2018 will see 1 million flying unit sales amounting to worldwide revenue of more than USD300 million.

Gabriela Kennedy, a partner at Mayer Brown, says that Hong Kong is currently the largest drone hub, with over 90% of the world’s drones being shipped out through Hong Kong. “The recreational use of drones in Hong Kong is also becoming commonplace, with an estimate of over 5,000 drone users,” she adds.

What safety measures are currently in place?

McCormack comments that as with most advents in technology, regulation follows innovation. “There’s a need for a critical approach to using new technologies, transparency in policy and procedure, and regular reviews.” Due to their popularity, the Civil Aviation Department has required all commercial drone flights to apply for a flight permit at least 28 days before the scheduled takeoff. On the 30 HONG KONG BUSINESS | JULY 2015

Simon Deane

Gabriela Kennedy

Urszula McCormack

Mark Parsons

other hand, hobbyists can take to the skies as long as their drone weighs less than 7kg without fuel. Under such circumstances, it would be classified as a “flying model aircraft”, exempt from CAD permits.

Regardless of classification, the CAD enforces drone guidelines that will protect the public from accidents. Drones cannot fly within five kilometres of an aerodrome, over 300 feet above ground, or in poor visibility conditions of less than five kilometres.

Drones are also limited to daytime flights. Meanwhile, pilots should provide flying qualifications, though the CAD would not be issuing a separate licence in lieu of their case-to-case application review policy.

“Hong Kong’s urban density and unique geographical features make safety a key concern,” says Mark Parsons, a partner at Hogan Lovells Hong Kong.

Indeed, it wouldn’t be hard for a malfunctioning or misguided drone – no matter the weight class – to wreak havoc, whether on a passenger plane preparing for takeoff, or a random pedestrian crossing the street.

How does regulation protect citizens’ rightful expectation of privacy?

The advantages brought about by the use of drones also open up the issue of invasion of privacy. Like crime-deterring CCTV systems, drones fitted with cameras tend to capture individuals minding their own business. For this reason, the Privacy Commissioner for Personal Data has issued an updated guidance note regulating surveillance drones. Parsons says that the commissioner’s guidance is the first major regulation for the use of unmanned aircraft systems, arriving just in time to properly lead the growing drone user base.

Under the updated guidelines compliant with the Personal Data (Privacy) Ordinance, those using drones for surveying must carefully assess whether using a drone is necessary; whether there are alternative means of achieving the same objectives; and whether or not data is properly protected from unauthorized access. Drone operators must also conduct privacy impact assessments of potential flight paths; determine what to do with any irrelevant data captured; and alert the public in the immediate flight area that they are being filmed.

Simon Deane, a partner at Deacons, notes the new guidelines will be helpful in focusing drone users’ attention on personal data privacy – without it, many users may not have been immediately aware that drone or CCTV surveillance cameras may result in an invasion of individual privacy rights. “I think the effect of the note will depend upon how well the Privacy Commissioner can publicize it and educate drone users about restrictions imposed by law on using drones for surveillance,” says Deane.

CMO Briefing

The power of multi channel marketing

Industry experts reveal why engaging a customer in multiple touchpoints is critical to marketing success.

W

hen The Economist Group worked with NEC on a major promotional campaign recently, they knew that to truly get the word out to the millions of consumers, prospects and partners in Asia, they could no longer rely on a single channel. Instead, they seeded content through a wide range of print, digital, and online activities. They engaged audiences by using interactive applications and online benchmarking tools, and widened their reach by tapping into social channels.

This multichannel marketing strategy proved highly effective: The NEC campaign attracted 150 pieces of coverage in international and regional media – including major networks like CNN and CNBC – and garnered 3 million online impressions.

“Consumers and professionals are bombarded with hundreds, if not thousands, of marketing messages on a daily basis. Research has shown that almost two-thirds of people need to hear something three to five times before they believe it,”says Barrett Bingley, associate director – content solutions at The Economist Group. “In an age of information overload, taking a multichannel approach to your marketing means simply that you’re increasing the chances of landing your story and messages with your target audience.”

Why is multichannel marketing a must?

Marketers ascribe the success of multichannel marketing to its ability to form a strong impression on audiences through a range of coordinated messages. “As a brand, you need to be in touch numerous times with a target customer to build trust and to eventually trigger a conversion. Being present on multiple channels with a synchronized brand story,

32 HONG KONG BUSINESS | JULY 2015

It could take as many as 20 to 30 touchpoints with a target customer to achieve a conversion.

and pushing the same messages to your target audience, helps create these touchpoints,” says Raphael Cohen, co-founder and CSO at HotelQuickly. He estimates that it could take as many as 20 to 30 touchpoints with a target customer to achieve a conversion, which makes a multichannel marketing approach critical – the alternative could mean a forgettable campaign.

Chua Cheng Xun, ZALORA Hong Kong’s managing director, says a customer had learnt about their pop-up store concept from multiple platforms within two weeks – ranging from a friend’s Facebook mention to online web banners to print advertisements and in magazines and newspapers. She visited the pop-up store after receiving a ZALORA flyer while out shopping at Causeway Bay. “This for me is an example of why building a presence across multiple channels and engaging customers in different ways is critical to building awareness for our brand.” Lawrence Chia, chairman of Pico Group, says customers can conveniently analyze information and make purchase decisions along dozens of different avenues – by reading a blog post on their tablets, checking for deals in their inboxes, visiting a store to speak to someone in person, and many more.“The key to optimizing these experiences is to maximize the touchpoints – and hence increase convenience – for customers,” he adds.

How can brands create a seamless experience across different channels?

To ensure a successful multichannel marketing strategy, marketers recommend creating a seamless, consistent experience across all possible touchpoints. This should not be mistaken for providing an identical experience via each channel, but rather involves tweaking the message for each channel to suit its distinct audience, while retaining a cohesive feel when viewed collectively.

“Each communication channel’s users have different behaviours, so in order to effectively engage with them, brands have to know how to diversify their message accordingly,” says Juliette Le Manchec, Asia Pacific regional manager at Le Slip Français.

She adds that brands have to be clear not only in their messaging, but also their philosophy, product quality and service. Brands must also protect their channels from any disruptions, or they risk eroding the seamless experience across channels and blunting the amplified impact of multichannel marketing.

A recent F5 survey found that 20% of consumers would switch to an alternative brand if a website or service does not work within five seconds, according to Kuna Nallappan, solution marketing director for Asia-Pacific at F5. He warns that retailers need to keep their business services consistently available in seasonal rushes, while fending off security threats such as point-of-sale and distributed denial-ofservice attacks, possibly through the use of a multilayered dynamic security architecture.

Canadian International School of Hong Kong

le rs b i ns ade nce o p Le lle s e nd ce R x a p E elo zens mic v e iti de D To al C Aca ob ugh l G ro Th

ANALYSIS: asian investment

People save less and consume more when incomes go up

Arresting the great investment slowdown DBS Group Research says some of the slowdown owes to falling savings rates that typically accompany rising incomes. But investment has slowed far more than higher incomes alone can explain.

A

sia’s investment growth has slowed to a crawl. After averaging 15% per year for decades, real investment growth in the Asia-10 has slowed from an 11odd percent pace in 2008, to 6.5%, on average, in 2009/10, 5% in 2012, 4% in 2013 and below 3% in 2014.

The drop isn’t just about China, where any would say a slowdown is overdue. These figures are simple averages of the Asia-10, so tiny Singapore counts just as much as the massive mainland.

Savings and investment have been key to the growth equation in Asia since 1950 as indeed they are everywhere. Higher incomes tomorrow can only come from sacrificed consumption today. With few exceptions, the more you save, the faster you grow. So far, Asia’s GDP growth hasn’t suffered much. In simple average terms (again to avoid heavily biasing the picture with China), growth has run between 4.5%-4.75% for the past four years.

34 HONG KONG BUSINESS | JULY 2015

Hong Kong, Korea and Taiwan – Asia’s three highest income countries after Singapore – have experienced the most marked slowing in investment.

But it won’t stay there if investment doesn’t stabilize soon. Output, incomes and employment will all take a hit. How do you arrest Asia’s great investment slowdown? How do you turn it around?

Alas, a big part of the answer is, you don’t. As discussed below, much of the great investment slowdown is ‘structural’ – owing to the steady rise in incomes over the past few decades. To this extent (but no further), slower investment is good news, not bad.

It’s no surprise then that Hong Kong, Korea and Taiwan – Asia’s three highest income countries after Singapore – have experienced the most marked slowing in investment.

China and India, at the lower end of the income spectrum, haven’t experienced much if any slowdown in trend investment growth. Most would agree this makes sense for India, where per-capita income is Asia’s lowest at USD1,700. But even after years of fast growth, China’s

income remains low by Asian standards at $7,600 and, from this perspective, the recent ‘slowdown’ could prove to be more cyclical than structural. In the event, it hasn’t been especially large to begin with.

Why does investment slow when incomes go up?

The main reason is people save less/ consume more. And at the end of the day saving and investment are one and the same. It doesn’t start out that way of course. At very low incomes, the opposite is true. At very low incomes most economies are agrarian based and most of what gets produced, by necessity, gets consumed. But if you can scrimp and save a bit, the surplus can be invested in better seeds or capital equipment – productivity and incomes jump sharply. This allows more saving and more investment.

A virtuous circle ensues.

But as incomes continue to rise, two things happen. The returns

ANALYSIS: asian investment from more machinery or fertilizer, say, grow smaller. The second ‘tractor’ doesn’t bring the same bang as the first; the third even less, and so on. All countries find it increasingly difficult to lift productivity the higher it already is. This is the technical, supply-side of the equation: returns to saving fall.

The second thing that happens is on the softer, demand side: people themselves change. As incomes go up, most want to enjoy the fruits of their labor. Another dollar in the bank becomes less attractive than a new dress, a night on the town, a trip to Spain. Falling returns from saving and a rising preference for consumption join hands and bring a reduction in savings as a proportion of income. Less savings means less investment.

U-shaped savings rates are seen virtually everywhere, eventually.

Hong Kong’s saving rate peaked when incomes hit US$20,000 in today’s prices. Malaysia’s saving rate turned south when incomes reached a much lower $8000 per person – thankfully the rate itself remains a very high 35% of GDP. The same occurred in Thailand.

Over-investment, poor investment The experiences of China and Singapore are interesting and instructive.

China is often accused of ‘overinvesting’ – it saves too much and consumes too little, or so it is said.

Saving and investment close to 50% of GDP can only lead to the kind of debt trouble that China seems to be in today. A greater consumption share in GDP ‘is needed’.

But is it really? Singapore saves and invests just as much as China – and it’s done so for 30 years – but nobody accuses Singapore of macro mismanagement. On the contrary, Singapore rightfully receives kudos all the time for its growth record.

What gives? Why is Singapore a hero; China a reprobate?

Whatever it is, it has nothing to do with ‘over-investment’. Fifty percent of GDP is fifty percent of GDP whether it’s China’s or Singapore’s.

China may have invested poorly, as most countries do from time to time.

But that’s different. Even China’s in-

famous ‘ghost towns’ – built but not yet occupied cities – are, at worst, an example of poor investment, not over-investment. Any technocrat could have used the money spent on the ghost town to build something more immediately beneficial to society and have been praised for his efforts. Which isn’t to say that ‘immediately beneficial’ is the most important criteria to judge investments by.

Four quick points: First, roads always go nowhere when you build them. It’s what happens later that counts. Second, over-investment from a national / macro perspective isn’t a well-defined term; it’s nigh impossible to induce. If poor investment is the worry, call it poor investment. Third, a high consumption share in GDP is not something to strive for, as if having one provides some sort of macro benefit, like ‘sustainability’. Singapore has sustained a saving / investment ratio of 50% of GDP for decades and has little to show for it but one of the highest incomes in the world. Consumption, saving and investment shares in GDP are choices, not exam grades.

Finally, judging by relative income levels, Singapore’s experience and China’s vast undeveloped inland areas, it could well take another 50 years before China’s investment rate starts to fall. And the country could well be better off for it than were it to pursue greater consumption today.

Arresting the slide in investment For most Asian countries, including China and Singapore, the issue isn’t how to guard against ‘overinvestment’, it’s how do you arrest its slide of the past few years? Asia-10 growth in real fixed capital formation has fallen below 3% per year and that simply won’t sustain the kind of GDP growth needed to raise incomes and employ growing populations.

Enter China’s new Asian Infrastructure Investment Bank (AIIB) – might that turn the tide? Unfortunately no, and not because Japan and the US remain petulantly reluctant to join. The AIIB aims to raise $100bn for regional investment projects, which simply isn’t a large amount

Asia 10 – real investment growth

Source: DBS Group Research

of money. In 2014, Asia-10 gross fixed capital formation amounted to US$6,700bn. If the AIIB raised and then dispersed all $100bn of its funds over the next three years – a highly unlikely event – it could finance an additional 0.4% of Asia-10 investment over and above what is already likely to occur on that time frame. That’s better than nothing but not by much.

A swing to modest 2%-3% of GDP deficits could lift investment in the region by 8-9 percentage points of GDP.

A brighter future Asia’s incomes continue to rise and slower investment is a natural part of that process. But investment growth has slowed to below 3% per year and that won’t sustain the GDP growth that Asia is accustomed to and needs to keep incomes rising and populations employed. Current account surpluses are standing in the way of greater domestic investment in all Asian countries save for Indonesia and India. A swing to modest 2%3% of GDP deficits could lift investment in the region by 8-9 percentage points of GDP – a huge amount.

But mindsets have to change for this to occur. Officials, ratings agencies and fund managers all need to let go of 1997. Everybody wins when capital abundant investors lend to capital scare borrowers.

Everyone loses when the opposite occurs, as it is today. Periodic crises shouldn’t mean you throw the baby out with the bath water. Until the much-needed mindset shift occurs, no amount of funding from an AIIB or other institution will succeed in lifting domestic investment in the region. Some say you can’t squeeze blood from a turnip. It’s just as hard to shovel water into a fire hydrant. By David Carbon, DBS Group Research HONG KONG BUSINESS | JULY 2015 35

regional economy briefing: india

Weak international demand for India’s top exports, including rice

How weak exports are threatening the looming Indian current account surplus Will tumbling oil prices be enough to sustain India’s drive toward an account surplus?

I

f other Asian countries took a closer look at the Indian economy today in comparison to a year ago, they would see a country poised for substantial economic growth, determined to close the gap between its savings and its investments. But can India manage to achieve a current account surplus its first after many years in the red? To be sure, India continues to enjoy its reputation as one of the region’s up-and-coming economies amid the underwhelming economic performance of its neighbours. Deutsche Bank Research, which monitors the economic vulnerabilities of 10 Asian countries using 20 indicators, has noted this particular resilience.

“Since our last update in October, 6 out of the 10 Asian economies under surveillance have seen their vulnerability assessments worsen, while India is the only economy that has undergone a substantive 36 HONG KONG BUSINESS | JULY 2015

Edward Teather

Pranjul Bhandari

improvement,” says Taimur Baig, chief economist at Deutsche Bank.

One such positive indicator of India’s growing economic muscle has been its balance of payments; specifically its current account deficit.

On 17 March, the Ministry of Finance announced that, thanks to the recent decline in oil prices, it has managed to ease its current account deficit to 1.6% of its gross domestic product (GDP) for the October to December period last year – a marked improvement from the 2% recorded in the previous quarter.

What drove India’s narrower current account deficit?

“The improvement in the current account deficit was a positive surprise thanks partly to stronger-thanexpected services exports, which is likely to be linked to buoyant demand from the United States, (a key market for India’s services trade),”

says Pranjul Bhandari, chief India economist at HSBC Global Research.

On the other hand, Radhika Rao, analyst at DBS Group Research, notes that the narrower account gap “underpinned the balance of payments position and underscored that India’s external balances are no longer a flashpoint.”

Typically, a country’s current account indicates its status as either a global lender or a global borrower.

“Countries with current account deficits have to borrow abroad to finance domestic spending. Countries with current account surpluses lend funds (savings),” explains Edward Teather, economist at UBS Global Research.

In India’s case, running a current account deficit isn’t exactly new.

“Historically, India has tended to record current account deficits,” notes Teather. Data from the World Bank shows that in the past 10 years, India’s

regional economy briefing: india current account has been firmly in the red, with little attempt to cross over to surplus region until now.

“As gold imports normalize and oil imports fall further, we expect the current account to post a surplus in the ongoing January-March quarter, after 32 consecutive quarters in deficit,” Bhandari says.

Gold imports rose by nearly 50% to $1981.53 million last February versus $1331.86 million in the same month last year, according to data from the Ministry of Commerce and Industry.

On the other hand, oil imports for February 2015 amounted to $6101.23 million, 55.49% lower than $13706.89 million in February last year, as the price of crude oil fell sharply through most of 2014.

How will India’s current account look in the year ahead?

In the meantime, analysts are upbeat that the continued tapering of India’s current account deficit will be sustained for the rest of the year.

“Incorporating the latest data and our forecast for January-March 2015, we think the current account deficit for fiscal year 2015 will be about $20 billion (1.0% of GDP) vs $32.4 billion in fiscal year 2014 (1.7% of GDP),” Baig says.

Bhandari and Teather are more optimistic: India’s current account deficit this year, they say, may narrow to even less than 1% of the country’s GDP. “Looking further ahead, despite higher non-oil-imports (especially in capital goods, as domestic demand begins to inch up), lower remittances from the Middle East, and sluggish outlook on exports (due to weak global growth outlook and a strengthening rupee), we believe the power of lower oil imports will be sufficient to halve the current account deficit to 0.6% of GDP in 2015/16 from 1.1% in the previous year,” Bhandari says. Teather cites “lower oil price[s] which [are] still feeding through as of the February trade numbers,” among other reasons, as the drivers behind a likely 0.5% current account deficit this year.

Did India’s trade deficit have any impact on its current account?

Interestingly, Bhandari notes the

tapering of India’s current account deficit comes even as the economy posted a slightly higher trade deficit on the back of weak exports and robust demand for gold imports, as the government recently relaxed certain curbs on imports.

Indeed, the Ministry of Commerce and Industry recently reported that from April 2014 to February 2015, India’s trade deficit climbed to an estimated $125220.94 million, from $124844.53 million in the same period the previous year. The figure is definitely higher but not so high that it renders a current account surplus impossible. “Given the latest benign trade deficit figures, it is likely that India’s current account balance will turn into a surplus in the JanuaryMarch 2015 quarter,” Deutsche Bank’s Baig affirms.

How will falling exports affect India’s current account deficit?

However, challenges may hinder India in its quest to narrow its current account deficit in the form of shrinking exports, which in turn may signal a decline in the country’s manufacturing sector, despite the country’s overall economic uptick.

“The main spoiler to this merry outlook would be a sustained decline in exports given falling commodity prices, sluggish global growth, and a strengthening rupee,” Baig warns.

Indian exports for February dropped to $21.55 billion versus $25.35 billion a year ago, according to the data released by the Ministry of Commerce and Industry on 13 March. Accordingly, the rupee has been aggressively appreciating, trading within R60 territory in the past six months, and effectively pushing back against the US dollar.

In addition, global growth forecasts this year have not been so optimistic.

Most international lenders have forecast the world economy to grow by mere single digits this year, with the International Monetary Fund and the World Bank making the most dismal forecasts at 3.5% and 3.0%, respectively.

This translates into possible weak international demand for India’s top exports, which include refined petroleum, automobiles, and rice.

India’s current account balance heading for a surplus

Source: UBS, Haver, CEIC, CSO, RBI

Monetary policy framework gets govt nod

Source: DBS Group Research

Taimur Baig

Radhika Rao

Excluding exports, how will a current account surplus affect the Indian economy?

Firstly, a surplus will likely boost overall investor confidence, given that the RBI (Reserve Bank of India) is also likely to maintain its strategy of building up its foreign exchange reserves as part of its monetary policy. “With the balance of payments surplus growing amidst strong inflows, we expect the RBI to continue building its war-chest of foreign exchange reserves,” says HSBC’s Bhandari.

Latest RBI data show that as of March 6 2015, the RBI’s foreign exchange reserves amount to $337793.1 million, a variation of $42344.4 million over last year.

Secondly, analysts say that with a current account surplus on the horizon, a highly anticipated rate cut by the central bank may not be too far behind.

A rate cut should prove beneficial, given that such a move is generally considered a catalyst for economic expansion, as personal and corporate borrowing activities take place left and right.

HONG KONG BUSINESS | JULY 2015 37

REGIONAL analysis: EL NIñO IN ASIA

Lack of rainfall signals widespread crop damage

The impact of El Niño on Asia in 2015

US, Australian and Japanese meteorological agencies warn that a full El Niño effect is developing around the Pacific Rim, which raises the risk of sharply higher food prices in 2H15.

O

ver the past year, weather forecasters and analysts alike cried wolf several times when it seemed El Niño was about to return. For example, in June 2014, official forecasters in the US warned about warming waters in the Pacific, implying that an El Niño effect was forming. A few weeks later, however, it became clear that the temperature increase was not enough to trigger to the full effect. Asia was thus spared a spike in food prices last year.

Once again, agencies in the US, Australia and Japan warn of warming water temperatures, with their caution carrying a higher degree of conviction than last year.

Investors had better listen: while it may be easy to shrug off the risk of a food price spike amid widespread CPI disinflation, in the past the weather phenomenon has proved highly disruptive. This is even more the case when a rise in food prices is coupled with an increasing oil price.

At particular risk from an inflation perspective are India, Indonesia and the Philippines. However, we note that this is not a “positive” inflation shock, with rising prices likely to depress demand, especially among consumers. Read on for data on the latest on El Niño and our views on specific markets. Let’s hope that this is another false alarm.

A relatively complicated matter In a nutshell, El Niño occurs when warm water heats up around the Equatorial Pacific in conjunction with 38 HONG KONG BUSINESS | JULY 2015

“There is a 90% chance El Niño will continue through the summer and an 80% chance it lasts through 2015.”

a change in trade winds. Meteorological agencies tend to declare El Niño conditions when the criteria such as above-average sea-surface temperatures are met for three consecutive months, and an “episode” when the conditions persist for seven consecutive months. As of 14 May 2015, the NOAA (National Oceanic and Atmospheric Administration) stated that there is a 90% chance El Niño will continue through the summer and an 80% chance it lasts through 2015.

The direct – and most important – impact for Asia is that most of Equatorial Asia (ASEAN) and Australia will receive less rain, cutting into agriculture output and yields.

In extreme cases, the lack of rainfall may cause widespread crop damage and turn Indonesian land-clearing forest fires into massive conflagrations, with smog clouds choking citizens of Singapore and Kuala Lumpur.

As for India, the impact channel is via the seasonal – and crucial – monsoon season that lasts between June and September. The rains are now forecast by the India Meteorological Department (IMD) to be slightly below average, but the monsoon is expected to arrive slightly early, with substantial rains at the outset. However, early forecasts are typically unpredictable and, in the past, El Niño has had a strong impact on the monsoon cycle – indeed, some of the worst monsoon seasons of the past 20 years coincided with El Niño. If the monsoon is worse than feared, this will severely constrain the RBI’s ability to ease policy over the

REGIONAL analysis: EL NIñO IN ASIA medium term, seeing that its CPI targets would be at risk (that said, we still expect the central bank to cut by 25bp in June given the current growth and inflation dynamic – what is at risk is any additional easing). More on India and monsoons in a bit.

As history shows, the impact on Southeast Asia is severe, chiefly because drought-like conditions impact some of the region’s most important crops, such as palm oil, rubber, rice, soybean and coffee. There is also the effect from outside the immediate ASEAN region. For example, wheat production in Australia would likely take a hit from El Niño while fishmeal prices would see a spike due to disruptions to the fishing industry off the South American coast. Meanwhile, supply-side constraints and “self-sufficiency” agricultural policies (above all in Indonesia and the Philippines) can exacerbate the impact of even a mild increase in food inflation, especially given the high weighting of food in CPI baskets, and a sizeable amount of food imports (as a percentage of total).

In recent memory, the worst occurrence of El Niño was in 1997-98. The health-related impact of the fires in Sumatra is estimated to have had large human and economic costs. As for inflation – estimating the direct impact of El Niño on prices is difficult, precisely because it coincided with the Asian Financial Crisis and the rapid depreciation of most ASEAN currencies. Accordingly, it is difficult to adjust for the impact on inflation from the rapid weakness of the currency.

“Even in the event that a full El Niño impact materializes and lasts into next year, it is hard to conjure up too alarming of a picture.”

What about this time around?

Let’s start with the positive. Even in the event that a full El Niño impact materializes and lasts into next year, it is hard to conjure up too alarming of a picture. The reason is that Asia has perhaps never seen such benign food prices (especially outside of recessions). Sure, you might say that disinflation is a broad theme that applies to most sectors of the economy. However, for food CPI it goes a step further. Global agriculture commodity supply buffers are immense. The US grain harvests over the past years have been relatively strong while output from other wheatproducing areas such as Canada, Russia and Ukraine were also ample.

It’s not just grain: pork, beef, fish prices are all at cyclical lows (although the price of pork has lately ticked up in China, a trend that bears watching over the coming months given the importance of pork for the local Emerging Asia: El Niño tends to correspond to a pick-up in food CPI prices (% y-o-y)

NB: simple regional average Source: CEIC, HSBC

cuisine). Over the past decade, the commodity super cycle and strong EM consumer demand for “finer foods” resulted in farmers around the world rushing to increase their output to take advantage of the higher prices. However, due to consecutive years of substantial harvests and a cyclical lull in demand, prices have declined notably.

A bit more locally, food “defences” in Asia are robust, especially rice stocks. Obviously, this is in part thanks to the Thai government policy under former Prime Minister Yingluck Shinawatra, which saw the government purchase massive amounts of rice at above-market prices (with the current administration having signalled its desire to sell off the excess inventory). It’s not just Thailand, though.

Vietnam has increased both its yields and its stocks while favourable monsoons over several consecutive years have enabled India to build up substantial reserves, helping to bring rice price inflation to near-record lows.

Supply constraints On the other end, the Indonesian and Philippine governments have prioritized rice self-sufficiency policies, which have resulted in a broad reluctance to increase imports (in spite of the low prices). This has led to relatively low domestic stockpiles that arguably leave the countries vulnerable. With high transportation costs in these archipelago nations and supply bottlenecks due to limited infrastructure, even if the governments decide to import grain stocks from surplus countries such as Vietnam or Thailand, there is a considerable lag during which prices can spike. India is another country with significant supply issues.

However, in the latter case, the Modi administration has sought to improve “food chain management”. For example, the Modi administration has eased export and import restrictions on food items – historically a sensitive issue in India. Essentially, if there is a surplus of food supply, authorities can expeditiously export the crop to avoid the risks of rotting. However, when there are signs of impending drought or undersupply, the government can enable quicker imports. Of course, without the imperative improvements in infrastructure, the benefit will be limited, but at least the government is addressing the issue.

So, what to make of all this?

If there won’t be a return of 1997-8, what will be the impact? Well, we believe that even a slight pick-up in food inflation can be significant. Asia headline CPI will be vulnerable to any sequential momentum starting in 3Q15, when the low base effect from last year’s decline in oil prices is likely to result in y-o-y figures surprising on the upside.

Moreover, consider that Brent crude oil is approaching USD69 at the time of writing, which will feed through to inflationary pressures especially in Indonesia, Malaysia and India, where fuel subsidies have been either abolished or liberalized in the low-oil price environment of the past year. In fact, rising fuel prices can also push food costs higher, with fertilizer and transportation becoming more expensive.

This means that El Niño disruptions could feed directly into some of the calculus central banks will take into conHONG KONG BUSINESS | JULY 2015 39

REGIONAL analysis: EL NIñO IN ASIA sideration for policy. We think the most tangible impacts will occur in the three countries most susceptible to food price shocks – India, the Philippines and Indonesia.

India and Indonesia El Niño directly impacts India’s monsoon season. Essentially, the changed wind patterns from Equatorial Asia to the Indian Ocean lead to a weaker monsoon in the Indian Ocean. The monsoon is crucial for India’s summer crop (Kharif), and weak monsoons exacerbate inflationary pressure given the country’s relatively poor agricultural infrastructure and supply bottlenecks (although the historically tight relationship between food prices and monsoon rains has weakened slightly as of late).

In India, the monsoon impact is pervasive and has a direct impact on rural income, where the majority of the population resides. Accordingly, it has a direct impact on growth and GDP levels. Yet the most tangible impact is through inflation. Seasonality in Indian inflation shows an increase in sequential momentum every summer, regardless of the type of monsoon. In the case a monsoon materializes, inflation readings tend to drift higher or spike in severe cases until December.

Over the years, the Indian CPI (or WPI) basket has shifted from grains towards fruits, vegetables and meats as rural incomes have risen. Accordingly, price shocks of these perishables have a greater impact on inflation (not to mention that grain stocks are already substantial, implying that there shouldn’t be much of a price impact to begin with). Essentially, a weak monsoon will result in overall inflation just barely meeting the 6% target by January 2016 while a significant disruption would overshoot it by a wider margin.

BI easing is ostensibly closely linked to expectations of meeting the year-end inflation target of 3-5%. We think this will likely be front-loaded in 2Q – likely before any El Niño impact is felt, if it does materialize. However, complications via higher food inflation could prompt the central bank to reverse policy – or, worse, may see the government face pressure to undo some fuel subsidy reforms from last year.

According to our calculations, the impact of a moderate El Niño on agricultural prices could make this target hard to achieve, especially when we factor in the supply-side issues we talk about above. In fact, in both the “moderate” and “strong” El Niño events, inflation is above the BI

Typhoon Haiyan wreaked damage to food supply chains

A weak monsoon [in India] will result in overall inflation just barely meeting the 6% target

by January 2016.

The intensity of the monsoon will have a direct bearing on the RBI’s monetary policy considerations

Source: CEIC, HSBC

40 HONG KONG BUSINESS | JULY 2015

target. This could limit BI’s flexibility, and the central bank would likely need to focus squarely on inflation risks – especially as higher energy prices feed through to consumers following the reduction of subsidies by Jokowi.

The Philippines and China The Philippines is no stranger to food price disruptions due to natural considerations. In this season alone, the country has already been hit by a few. Moreover, the Philippines had to deal with the sizeable impact of Typhoon Haiyan well into 2014, due to widespread damage to food supply chains.

The Bangko Sentral Pilipinas is accustomed to dealing with food inflation shocks, and accordingly does not tend to act on the back of single food shocks, instead preferring to take a medium-term picture. That said, a significant El Niño would put headline CPI well over the 2-4% inflation target by 2016, ostensibly putting the BSP in a difficult position that could force it to hike rates sooner than expected.

We now expect two rate hikes in 1Q and 2Q16, but food inflation risks could bring this into late 2015.

China doesn’t necessarily fit into a conversation on El Niño, as it is largely spared the weather-related impacts and the domestic food market is seldom impacted by international prices. That said, in terms of broader risks to food inflation, China is an interesting case. China followers will note that the main reason the April inflation print edged up to 1.5% y-o-y in spite of broad disinflation was a spike in food inflation, specifically on the back of pork and vegetable prices (8.3% and 7.2% y-o-y, respectively).

It seems that an inflationary cycle in pork and vegetables is on an upswing. While it may be strange that Chinese pork prices are rising while globally prices are at multiyear lows, it remains a fact that China’s agriculture is relatively impervious to outside influences. By Frederic Neumann, co-head of Asian economic research, HSBC Global Research

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regional analysis: Deflationary Pressures

Economic growth has been slipping in the region

Asia still in heated debate on deflationary pressures and central banks’ response Morgan Stanley says the lower real rates and improvements in capital allocation are needed for growth.

I

n our view, the key macro debate in the Asia ex Japan region will remain that of deflationary pressures and whether central banks will be able to respond to these deflationary pressures by cutting policy rates and bringing real rates in the region down. The deflationary pressures have resulted in slowing corporate revenue and nominal GDP growth and higher real interest rates, creating pressures on corporate balance sheets, the most levered entity in the region.

Consequently, corporates have had to cut back on capex and also on wage growth, leading to a slowdown in domestic demand. More importantly, high real rates are serving as a deterrent for the private sector to invest, which is therefore holding back the region from its much needed transition towards a new productive and sustainable growth cycle.

Over the past 4-6 months, the 42 HONG KONG BUSINESS | JULY 2015

“Headline CPI inflation has also begun to slip into deflation in Singapore, Taiwan and Thailand and has remained at low levels in China, Korea and Malaysia.”

further slippage of economic growth in the region has led to intensification of deflationary pressures. Indeed, producer prices, which have been in deflation for many economies in the region, have widened in early 2015.

Moreover, both commodity and non-commodity segments of the producer price index have slipped further into deflation, suggesting a loss of corporate pricing power. At the time of writing this note, 9 out of 10 economies in the AXJ region have producer prices in deflation, with Indonesia the only exception.

In addition, headline CPI inflation has also begun to slip into deflation in Singapore, Taiwan and Thailand and has remained at low levels in China, Korea and Malaysia. Taking these developments into account, we believe the GDP deflator slipped into deflationary territory in many economies in the region in 1Q15.

While central banks in the region

have cut policy rates, these rate cuts have not been fully transmitted to market-oriented interest rates due to a combination of elevated levels of loan to deposit ratios, concerns over asset quality in the banking system and capital outflows adversely impacting domestic liquidity conditions. Moreover, the central banks’ policy actions are still more of a reactive nature rather than being pre-emptive.

Against this backdrop, real interest rates in the region have risen to a 13-year high, curtailing domestic demand growth. We are concerned that the intensification of deflationary pressures and a relatively slow response from central banks will feed into a loop of higher real rates and weaker domestic demand. The key to watch for is therefore whether central banks in the region will step up the pace of monetary easing and take real rates lower. While our base case

regional analysis: Deflationary Pressures assumption is that central banks will indeed be able to manage real rates lower, the risks appear to be tilted towards the potential outcome of this response being slow, in our view.

GDP growth outlook: Stable in 2015, modest uptick in 2016 GDP growth in the region is expected to remain stable at 6.5% in 2015, vs 6.5% in 2014. While the growth recovery in developed markets should lend some support to external demand for the region, this improvement will likely be offset by continued deceleration in growth in China and sluggish domestic demand amid the challenges from weakening demographics, elevated debt, and intensification of deflationary pressures.

The weaker incoming activity data in terms of growth deceleration in retail sales, capex-related activities, and non-commodity exports over the past three months suggest the region’s growth momentum may have slipped further in 1Q15 due to sluggish domestic and external demand.

While we do expect a slight pickup in growth in the quarters ahead, the growth recovery is unlikely to be vigorous, in our view, given the slow domestic demand growth outlook and only a slight pickup in external demand.

Growth slowdown in China should pose as a drag for the region We expect China’s growth slowdown to be a key drag on the region’s growth, given its importance as a source of end demand for the region.

Over the past 12 months, there has been significant deceleration in economic activity in China, as MSCHEX (our China economics team’s proprietary growth indicator) and non-oil import growth trends have slipped in recent months to closer to 2009 lows. High levels of debt, excess capacity, weak productivity and a sluggish property market have led to slower investment, while slower wage growth continues to weigh on consumption growth.

Moreover, the disinflationary trend has pushed nominal GDP growth lower and real rates higher, increasing the challenge for policy makers to manage both debt and growth

dynamics. While we expect policy makers to adopt more monetary, fiscal and property easing measures later this year, GDP growth should still decelerate to a 25year low of 7.0% in 2015-16, from 7.4% in 2014.

We expect this weakness in growth to transmit to economies with close trading ties with China (Hong Kong and Korea) and also weigh on growth in Australia, Indonesia and Malaysia due to their status as commodity exporters.

Inflation outlook: Prevalence of disinflationary trends in the region Weak domestic demand, persistent overcapacity issues, and weaker commodity prices have led to entrenched deflationary pressures in the region.

As it stands, 9 out of 10 economies in the AXJ region have producer prices in deflation. In recent months, deflationary pressures have also transmitted to consumer prices, with 6 economies in the AXJ region having CPI inflation below 2% and the region’s aggregate GDP deflator estimated to have dipped into deflation in 1Q15.

We expect the deflationary pressures to persist in the region through 2015, given the excess capacity, sluggish domestic demand growth outlook and the absence of supply-side pressures (reflected by weak commodity prices). In our view, CPI inflation in the region will decelerate to 2.4% in 2015 as compared to 3.4% in 2014, with the deceleration widespread across all economies in the region. China’s CPI inflation is expected to decelerate further from the post-credit crisis low of 2.0% in 2014 to 1.3% in 2015 on the back of persistent overcapacity issues and anemic domestic demand growth. In Singapore and Thailand, we expect CPI inflation to remain in deflation this year and average -0.2% and -0.3%, respectively, compared to 1.0% and 1.9% in 2014. In Taiwan, we expect the current CPI deflation to be transitory and expect CPI to average 0.5% in 2015, though still lower than 1.2% last year.

In India, CPI inflation has been decelerating towards the central bank’s inflation target, and we expect this deceleration to continue due to a

“CPI inflation in the region will decelerate to 2.4% in 2015 as compared to 3.4% in 2014, with the deceleration widespread across all economies in the region.”

combination of supportive domestic (moderation in rural wages, slowdown in government spending, positive real rates, moderation in property prices) and global factors (lower global commodity prices). We forecast a sustainably lower inflation path and expect inflation to decelerate to 4.75% by end-2015, lower than the consensus estimate of 5.75%.

Will central banks act fast enough to ward off deflationary pressures?

The onset and subsequent intensification of deflationary pressures have led to elevated real rates in the region, which poses additional stress on the region’s domestic demand in the context of the high debt-to-GDP ratio. In response to these deflationary pressures, 6 out of 11 economies in the region (Australia, China, India, Indonesia, Korea, and Thailand) have cut nominal interest rates so far this year, while the Monetary Authority of Singapore has eased monetary policy by reducing the appreciation slope of the S$NEER. However, tight liquidity conditions have meant that these rate cuts have only been partly transmitted to market-orientated rates.

Moreover, the pace of policy rate cuts continues to lag the pace of disinflation, keeping real rates elevated.

Given our forecast of continuing deflationary pressures, we expect further rate cuts this year. We see further reductions of 75-100 bps in India by the end of Mar-16, 50-75bps in Indonesia, 50bps in Australia, China, and Malaysia, and 25bps in Korea and Thailand. These rate cuts should help bring the region’s real policy rates down to 2.2% by end-2015, from 3.0% in end 2014. By Chetan Ahya, analyst, Morgan Stanley

Corporate sector has been the most levered entity in the AXJ region

Source: CEIC, Haver, Morgan Stanley Research. *Morgan Stanley Research estimates for China’s and India’s 2014 debt to GDP data, and actual data for other economies

HONG KONG BUSINESS | JULY 2015 43

ECONOMICs

Ian Perkin

300 million ‘visits’… and counting

H

ong Kong may rank 13th in the World Economic Forum’s recently released Global Tourism Competitiveness Index 2015 (see table), but it still remains the primary destination of choice for Mainland Chinese travellers.

This year alone will see perhaps 50 million Mainland visitor arrivals in Hong Kong (itself a record), taking the total over two decades to more than 300 million.

Many, of course, are repeat visitors and so-called ‘day trippers’ (with no overnight stay), but all the same, the importance of the Mainland source market is impressive and vital to the local industry.

The staggering numbers give an indication of the huge impact Mainland arrivals have had on the local economy in the past quarter century, injecting billions of dollars into travel and tourism, as well as the retail sector.

They also help explain the protests in some districts of Hong Kong, particularly those close to border, over Mainland shopping habits and the sheer numbers of Mainland visitors to be catered for.

There is also no sign of an easing of the influx of Mainland arrivals, despite some restrictions on visitors from Shenzhen, with another huge increase in visitor numbers on this year’s May Day (1 May) holiday weekend.

Visitors from the Mainland began to increase when travel restrictions were eased in the run-up to the return of sovereignty in 1997, gradually increasing for a few years afterwards.

But arrivals really began to take-off after 2003 when the IVS (individual visitor scheme) was introduced. By far the largest number of visitor arrivals has been in the 11 years since then.

At the same time, visitor numbers from everywhere else in the world have shown only modest growth.

Last year, Mainland arrivals accounted for four out of every five visits to Hong Kong, and over the past 20 years the mainland share of arrivals has accounted for just under 50% of total arrivals.

It is now clear that the small number of Hong Kong residents protesting the shopping habits of Mainland visitors in the SAR will simply have to get over it.

Three years ago this column addressed the state of the tourism industry in Hong Kong and warned that local businesses and residents might come to regret complaining about the surge of Mainland visitors to the SAR. It also made the related point that some authorities on the Mainland were concerned about the willingness of Mainlanders to spend their hard earned cash in the SAR rather than at home (all the more so since the crackdown on corruption and conspicuous consumption on the Mainland itself).

It highlighted the fact that the huge growth in the number of Mainland visitors had provided a massive net boost to the local economy (that is the substantial revenues less the costs of providing for them).

The travel and tourism in total accounts for close to 5% of Hong 44 HONG KONG BUSINESS | JULY 2015

IAN PERKIN Independent Economic Consultant perkin888@hotmail.com Most tourism-ready economies (2015) Economy

Global Ranking 2015

Global Ranking 2013

Global Ranking 2011

Spain

1

4

8

France

2

7

3

Germany

3

2

2

United States

4

6

6

United Kingdom

5

5

7

Switzerland

6

1

1

Australia

7

11

13

Italy

8

26

27

Japan

9

14

22

Canada

10

8

9

Singapore

11

10

10

Austria

12

3

4

Hong Kong

13

17

15

Source: HK Government, HK Tourism

Kong’s GDP and more than 250,000 jobs.

The World Economic Forum (WEF) Travel and Tourism Competitiveness Report – the sixth in this series of publications – also helps explain why the Hong Kong SAR remains popular as a destination.

While some officials in the Hong Kong industry expressed disappointment that the SAR ranked only 13th in global terms, this was in fact a further improvement on previous surveys.

Back in 2013, when the last biennial survey was produced, Hong Kong ranked 17th, and in 2011 it held 15th position.

The WEF’s Competitiveness Report and Index covers 141 countries and measures “the set of factors and policies that enable the sustainable development of the travel and tourism (T&T) sector, which in turn, contributes to the development and competitiveness of a country.”

In this context, it is apparent that Hong Kong remains extremely competitive in travel and tourism, not only in a global sense, but also in terms of cross-border travel between the Mainland and Hong Kong.

What is clear is that Hong Kong – like most big cities around the world – is now a ‘domestic’ travel and tourism destination, in that by far the greatest number of visitors are sourced from its sovereign country.

In the years before the return of sovereignty in 1997, Hong Kong was, in fact, a tourism ‘outlier’, with the border to China effectively closed leaving it reliant on visitors from around Asia and across the globe.

Hong Kong residents protesting the influx of Mainland visitors should consider this – and the economic health of Hong Kong – before they complain further.

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OPINION

tim hamlett

The “reform” in your pocket tim hamlett Former Editor of Sunday Standard and Associate Professor of Journalism

W

hatever you think of the government’s proposed ‘reform’ of the electoral system, it is surely depressing to contemplate the barrage of propaganda, argument, and lies to which we shall be subjected in coming weeks.

The question to ‘pocket’ or not to ‘pocket’ is one to which there is no single answer. The argument boils down to different predictions of the future. But the future is essentially unknowable. Even the predictions of experts, research has shown, do little better than chance. Clearly people are choosing particular predictions for reasons of their own. Careful considerations of fact and logic have nothing to do with it. Many of the predictions insulate themselves from close scrutiny by hiding in metaphors. So Carrie Lam says Hong Kong is “at a crossroads” and could fall into a “political time warp”. Whatever that means.

It is distressing to find academics playing this game. Consider the argument, seriously advanced by two of the op-ed page prostitutes recently, that if it can be shown that a majority of the public supports the government plan, then all legislators have a democratic obligation to vote for it. The usual objection to this comes from Edmund Burke: “Your representative owes you, not his industry only, but his judgment; and he betrays instead of serving you if he sacrifices it to your opinion.”

I am not a great fan of Mr Burke. But it is surely true that the first obligation of a legislator is to do the right thing for Hong Kong, whether that is currently popular or not. Actually this argument is based on a fallacy, because it is far from clear that a majority of Hong Kong people want the reform to pass. Both sides have managed to run polls indicating support for their views. The question implies the answer. Nobody is going to say “no” to universal suffrage or “yes” to fixed elections. But these words describe the same thing.

A more fundamental objection is that the drafters of the Basic Law could easily have devised a system in which all legislators needed the support of a majority, but the Basic Law deliberately sought to have a LegCo in which a wide variety of interests and views were represented. Clearly a system with real estate and banking functional constituencies was not intended to reflect the public’s views in a simple majoritarian way. Why should it do so now?

Moreover, if a change in the electoral arrangement requires a two-thirds majority in the chamber, we must suppose that the law drafters meant that a proposed change should not just be acceptable to 51% of the population, but widely and generally supported. If large numbers of elected members are prepared to vote against it, then that requirement has not been met.

Actually, there is a fundamental hypocrisy in the argument that legislators should follow public opinion, because the people offering this do not apply it elsewhere. If legislators were mere implementers of the popular will, they would long since have voted C.Y. Leung out of office. Mr Leung’s lack of popularity is so well-known that some supporters of the government reforms use the prospect of his

46 HONG KONG BUSINESS | JULY 2015

re-election as a threat. If we keep the present system we will have Lufsig again!

It is an argument of convenience, wielded when the polls go one way and dropped when they go the other. Those offering it do not even accept the obvious corollary that if the polls fail to show a clear majority for the ‘reforms’ then all conscientious councillors should vote against them.

Another argument is that the government’s proposals are a ‘compromise’. This is a word which has a long history in this context, all of it depressing. A compromise is a situation in which two people with different ideas or purposes make some roughly equal sacrifice to reach agreement.

As far as political reform is concerned, many compromises have been offered, which have all been rejected. Some were rejected on the grounds that they would violate the Chinese constitution.

Some were rejected on the grounds that they violated the Basic Law. Some were rejected on the grounds that pro-government legislators were no longer in the mood after Occupy Central. Some were rejected on the bizarre basis that they had not been greeted with great enthusiasm by the pandemocrats.

So there has been no compromise. The consultations were as bogus as the envisaged elections. Nothing was changed. Compromise is not on the menu.

Compromises offered were rejected

OPINION

Hemlock

HK delays white elephant, wrecks global reputation, apparently

E

arthquakes in Nepal come to a swift halt.

Executions in Indonesia are postponed.

Riots in Baltimore fizzle out. The planet drops everything to watch Hong Kong in shock and dismay. The Big Lychee’s reputation as a world city lies in tatters because of delays to its sports hub. So says a South China Morning Post editorial. What ‘sports hub’, we ask? Why, the one slated long ago for Kai Tak – the one we all vaguely assumed had been scrapped as a pointless waste of money and space. The project is still on, it turns out. At least, that’s the plan. But (as the paper points out) two decades after it apparently became policy to turn Hong Kong into a centre for major sporting events, nothing has actually been done.

To their great credit, Legislative Council members have been holding up the HK$65 million funding necessary for just the ‘pre-construction investigatory work’. This sounds like something to do with determining the site’s suitability – in order to avoid nasty surprises of the sort that befell the MTR, when it found to its horror that there was hard stone beneath the New Territories, rather than something soft and mushy, which is why the cross-border Express Rail Link is costing an extra HK$20 billion or so. But the editorial implies that the “investigatory work” would “throw some light on whether the proposed 50,000 seat stadium would be a white elephant on space that could be used for housing”.

So the HK$65 million is needed to discover whether we need to dedicate 28 hectares of space and billions of bucks to having a massive complex in which people wearing shorts run round in circles. I could answer this question for a fraction of this amount (let’s say HK$10 million), and deliver my executive (one-word) summary this afternoon. I would like to think our lawmakers are thinking along similar lines. (The SCMP inadvertently hints at the same conclusion: 20 years after it became policy, we seem to be getting on quite happily without being ‘a centre for major sporting events’.)

We all know what is going on here. The government continues to suck vast amounts of the people’s wealth out of the economy and seeks to transfer yet more of it to its buddies in the construction industry, a sector that overlaps more than many realize with our old friends the property tycoons, who own all sorts of (often privately

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held) building and materials companies, which no doubt operate the usual cartel agreements.

The standard excuse (and probably the original reason for the sports-hub policy circa 1995) is tourism. But with the city’s streets and transport systems sinking under the weight of swarms of visitors, the We Need More Tourists argument is – like residents’ patience – wearing thin. The SCMP (whose owner presumably holds shares in a cement company or something) latches onto an equally tired argument: we will ‘fall behind’ some tedious city we care little about, like Shanghai...or Singapore. Whichever.

We can only wish our lawmakers well in holding up this particular boondoggle. I would love to think they are going to make the most of it, and rouse the people’s righteous anger. This is a classic opportunity to gather together the yellowumbrella brigade, the students, the housewives, the taxi drivers, and everyone else against the tycoons. We need homes, hospitals, nurseries, elderly care places and parks, or just tax cuts.

There is no call, beyond a dozen subsidized loserathletes, for multibillion-dollar stadiums with diamond-studded retractable roofs.

But I’m not hearing any of that. My hunch is that the lawmakers are holding this up as part of their Grand Filibuster Everything Always Gesture, which does so little to impress the public and gives the government and its supporters ammunition to use against the pan-dems. Which would be both sad and typical.

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

Lawmakers seem to have missed the goal