Hong Kong Business (June - July 2016)

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the art issue

Asia’s art paradox Find out where the smart money spent $500m

Hong Kong loses its financial centre magic hong kong’s pop-up stores popping up profits Is hong kong in a crisis?

Hong kong aviation’s fight or flight moment

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HONG KONG

BUSINESS

FROM THE EDITOR

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

Welcome to Hong Kong Business. Our annual Art Report reveals that while a lot of signs pointed to a gloomy art market this year, the insatiable appetite of Asian art collectors has forced the market to thrive. Additionally, auction houses fared well despite the slowdown, especially during Asia Week. As it turns out, Asian collectors are not to be counted out.

Publisher & EDITOR-IN-CHIEF Tim Charlton associate publisher Louis Shek production EDITOR Ephraim Bie art director Bryan Barrameda

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We also feature an in depth look at Hong Kong’s venture capital market, and how it is well positioned to overtake its competitors. Hong Kong pours large investments into the technology sector, which has led to a surge in local startups and venture capital interest. Analysts say with Hong Kong’s bright venture capital future, it may eventually step out of the mainland’s shadow in attracting VC deals.

louis@hongkongbusiness.hk Rochelle Romero rochelle@charltonmediamail.com

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In this issue, we also discussed how headwinds continue to buffet Hong Kong’s economy as tourists from China continue to curtail their retail spending. This issue also features a report on Hong Kong’s aviation sector, as it tries to take off despite airport rivals and stiffening cargo load competition.

Enjoy the issue!

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HONG KONG BUSINESS | MAY 2016 1

CONTENTS

26

analysis Hong Kong aviation’s flight and fight moment

40

analysis RMB depegging: A looming spectre

Cover story

28 Art dealers find safe haven in Asian collectors’ insatiable appetite FIRST 08 HK’s unhealthy appetite for private sector debt

09 Is Hong Kong in a crisis?

10 HK losing its glitter as a financial centre

RANKINGS

REGULAR 20 Financial Insight 24 Economic Insight 36 Legal Briefing 38 CMO Briefing

12 The return of the overnighters 14 Hong Kong pop-up stores popping up profits

32 Is an MBA a must-have in Hong Kong?

OPINION 44 Ian Perkin: HK economy slows in Q1

46 Tim Hamlett: Why banks don’t want your business

48 Hemlock: Helping out the HK Tourism Board

Published Bi-monthly on the Second week of the Month by Charlton Media Group Pte Ltd, 19/F, Yat Chau Building, 2 HONG KONG BUSINESS | MAY 2016 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

INFORMATION TECHNOLOGY

APAC companies plan on investing 6% on digitalisation in five years It has been noted that industrial companies from all sectors across the globe are getting down to business with Industry 4.0.

According to a release from PwC, its new report “Industry 4.0: Building the digital enterprise” surveyed over 2,000 Chief Digital Officers or other senior executives with top-level responsibility in their company for Industry 4.0 strategy and activity.

COMMERCIAL PROPERTY

Industrial property investment turnover and volume slumps in Q1 Investment turnover and volume for industrial properties dropped in Q1 2016. According to a research note from CBRE, this follows after the expiry of the industrial revitalization scheme, with only three transactions worth over US$10 million registered.

AVIATION

Cathay Pacific, Dragonair passengers creep up by 2.6% in March Cathay Pacific Airways has released combined Cathay Pacific and Dragonair traffic figures for March 2016 that show an increase in the number of passengers carried compared to the same month in 2015.

According to a release from Cathay Pacific Airways, Cathay Pacific and Dragonair carried a total of 2,960,915 passengers last month – an increase of 2.6%.

HR & EDUCATION

Women are still under-represented across APAC boards: study A comprehensive Asia Pacific study by Korn Ferry revealed that companies with greater female representation in the boardroom tend to be profitable, but women still remain under-represented across Asia Pacific boards.

COMMERCIAL PROPERTY

Low vacancy in Grade A office force occupiers to lease shadow space The low vacancy environment in the Hong Kong Grade A office market continued to force occupiers to lease future vacant space or shadow space, which made up most of the transactions recorded in Q1 2016.

According to a research note from CBRE, landlords continued to use the limited availability of space to drive further rental increases.

Overall rents rose to 2.4% q-o-q in Q1 2016 growing by 8.8%.

MARKETS & INVESTING

Investment market records drop in number of transactions in 1Q16 It has been noted that in the investment market of Hong Kong, the number of transactions fell significantly across all sectors in 1Q16. According to a research note from CBRE, there were just eight deals in the office sector.

co-published Corporate profile

TGT to embrace more golden years to come by conforming to Big Data developments

Boosted by immense market demand for processing and information technology, Towngas Telecom (TGT) has been riding the wave of the big data era. drive cabinets. The centre aims to serve the company’s future development needs and provide services for local and overseas markets. In order to ensure a secure environment and confidentiality, TGT delivers a robust infrastructure and the highest level of reliability, in compliance with the TIA-942 Tier 3+ facilities and The United States Green Building Council has awarded TGT Hong Kong Data Centre 2 as its coveted Leadership in Energy and Environmental Design (LEED) Gold certification.

T

he world’s economic environment is currently entering the “Big Data” era, where there is high demand for data processing and information technology.

A report published in 2013 by American research company, Gartner, found that the world used 1 Zetta bytes of data (ZB) in 2010, and in 2012 that number dramatically increased to 2.7 ZB. It forecasts the world’s data usage to increase 50 fold by 2020.

It is apparent that the data market holds tremendous investment potential.

TGT’s data centres have developed as a direct result of immense market demand.

The company currently operates two large scale data centres in Hong Kong and four in Mainland. The Chinese data centres are located in Shandong Province (Jinan City), Liaoning Province (Dalian City), Guangdong Province (Dongguan City) and Heilongjiang Province (Harbin City). In addition, TGT aims to invest in three additional large-scale data centres in Mainland China – further satisfying the increasing demand for this service.

Hong Kong is Asia’s hub for information and communication technology, and the need for data centre services is high. TGT Hong Kong Data Centre 1 in San Po Kong (established in 2006), along with the newly established TGT Hong Kong Data Centre 2 in Tseung Kwan O, aim to fulfill the industry’s needs.

The new TGT Hong Kong Data Centre 2 has an area of about 22,000 square metres, and is able to accommodate 3,000

About Towngas Telecom (TGT) Founded in 2004, Towngas Telecom (TGT) is a wholly owned subsidiary of The Hong Kong and China Gas Company Limited (Towngas).

Adopting the company’s pragmatic approach to quality services, TGT is a carrier-neutral telecommunication service provider with a number of world-class data centres and network infrastructures operating in Hong Kong and Mainland. Riding on the advantage of the colossal gas pipe network and synergizing it with the advanced Glass-In-Gas (GIG) and Glass-Along-Gas (GAG) European technology, TGT has also been able to provide customers with up to 100Gbps point-topoint fibre links and dedicated bandwidth services such as T3/DS3, STM-1, STM-64, GE and 10GE, as well as economic and efficient network communication services to reputable corporations, international network service providers, and professional clients.

Further inland in mainland China, TGT has

developed numerous telecommunications infrastructure projects to provide premium and environmentally friendly services to telecommunications operators and broadcast institutions in Liaoning, Shandong and Jiangsu.

From previous success, TGT has also been able to develop a reliable mode of operation. TGT has helped contribute to a more sustainable future by minimising environmental pollution derived from the roadwork required in the construction process.

Additionally, by integrating reliable and high-speed connectivity with advantages such as world-class data centres, TGT has also been able to build a Cloud Computing platform of secured privacy and high flexibility to meet growing needs for this type of service.

TGT has been providing customers with bespoke intelligent home solutions to make life easier and more enjoyable. This unique Cloud Computing solution is designed with infrastructure with high security and reliability to devise advanced private Cloud solutions.

“TGT’s data centres have developed as a direct result of immense market demand. It operates two large scale data centres in Hong Kong and four in Mainland.”

FIRST according to Atsi Sheth, associate managing director, Moody’s Investor Service. According to Keen, property speculation has driven up the appetite for private sector debt. “Banks won’t lend for anything else on the scale they will lend for property. And this drives property prices up in a vicious positive feedback cycle. Then it breaks, as positive feedback cycles always do,” he says.

non-cash perks

Money is a great motivator, but Hong Kongers are wishing for more non-monetary perks to work harder. According to a survey by jobsDB, 60% of workers in the region hope their employers could improve on non-monetary benefits in order to prevent them from engaging in personal matters during work hours. JobsDB says these non-monetary benefits include an extended lunch time, a 15-30 minute work break, and work incentive programmes.

According to Justin Yiu, general manager of jobsDB Hong Kong, economic uncertainties in Hong Kong have pushed employers to be increasingly cautious when it comes to pay raises and bonuses.

“At the same time, employees are becoming more careful when changing their job and job seekers can expect to face stiffer competition for available vacancies. In order to stand out from the crowd, they should be able to develop a personal brand for themselves,” he says.

Bigger contributions Meanwhile, Yiu adds that the survey shows that most of the employees in Hong Kong are willing to make bigger contributions to the company when better benefits are received.

“Other than the salary package, non-monetary perks also play a crucial role in retaining quality staff by helping them stay healthy at the office and maintaining work-life balance,” said Yiu. Additionally, the study says 57% of employees are also willing to work under less favourable working conditions if they are provided a 30% salary raise.

“Among them, over half of the respondents (57%) are willing to take up “heavier responsibilities”, while only 9% would accept “bad relationship with coworkers and bosses”.

8 HONG KONG BUSINESS | MAY 2016

Hong Kongers are borrowing more than they can handle

HK’s unhealthy appetite for private sector debt

I

n the aftermath of the global financial crisis, Hong Kong— along with its regional peers—has since amassed significant private sector debt, leading several analysts to become cautious about the city’s leveraging and growth prospects.

“The majority of Asian economies have seen an increase in private sector debt since the global financial crisis, and we believe that the rapid rise in corporate and household debt could pose downside risks to growth over the coming years, owing to the ensuing debt overhang,” warns BMI Research. Compared to other nations, Hong Kong’s private sector debt seems to be nearing critical levels. “Hong Kong’s private debt-toGDP ratio is off the scale compared to every country on the planet apart from Sweden—and even then it’s 50% of GDP higher than Sweden’s,” remarks Steve Keen, head of the School of Economics, History, & Politics at Kingston University.

Citing data from the Bank of International Settlements, BMI Research says Hong Kong’s total private debt now accounts for 28.5% of gross domestic product—one of the highest in the region—as Hong Kong companies continue to take advantage of favourable financing conditions to seal cheap funding,

Hong Kong’s private debtto-GDP ratio is off the scale compared to every country on the planet apart from Sweden—and even then it’s 50% of GDP higher than Sweden’s.

Rising corporate leverage “High corporate leverage poses systemic risks if adverse growth and financial conditions pressure borrowers’ repayment capacity.

When the borrowing is largely from the domestic banking system, governments could bear some of the costs of cleaning up [the] bank balance sheet,” explains Sheth.

“Although we do not see a corporate debt crisis on the horizon for the region, historically, very sharp increases in corporate sector debt have been associated with rising defaults and an eventual deleveraging, which results in slower growth going forward,” BMI Research notes.

Exposure to China may also compound the risks. According to Fitch Ratings, approximately 27% of Hong Kong banks’ system assets have “significant mainland China exposure,” and since the global financial crisis, the Chinese Government has encouraged the amassing of private sector debt to jumpstart a lagging economy, resulting in their surge in recent years.

“The risk is that a substantial portion of the debt was taken on by inefficient state-owned enterprises (SOEs), many of which now face overcapacity,” BMI Research says.

Top 7 private dept to GDP growth rates in 2015

Source: Steve Keen

FIRST Retail sales and export volumes

Source: CEIC and Deutsche Bank

Prices have fallen to GFC levels

Is Hong Kong in a crisis?

M

any are saying Hong Kong is in a crisis, with falling share and property markets pounding the territory’s wealthy and even not so wealthy spenders. In the first quarter of the year, real property prices fell 7.5% yoy and real equity prices fell 23% imparting the strongest negative wealth effect since the Global Financial Crisis of 2007.

Almost all figures are pointing down - exports, retail sales and property prices are all falling, sentiment is weakening and ever more dire predictions are published in the newspapers.

Unquestionably, some of the data have been terrible, but if this is a crisis it is a very slow-moving one, argues Deutsche Bank.

“For an economy essentially at full employment, a temporary negative shock can be absorbed easily enough. A prolonged slowdown – as we have seen since the GFC – is also no cause for alarm for an economy as flexible as Hong Kong’s, although it should stimulate discussion about how to enhance productivity more than appears to have been the case.

The real risk to Hong Kong is that these external shocks trigger

In the first quarter of the year, real property prices fell 7.5%yoy and real equity prices fell 23% imparting the strongest negative wealth effect since the Global Financial Crisis of 2007.

declines in employment and/ or incomes, leading to a further deterioration in domestic demand.”

So should we be reading the tea leaves in Hong Kong or watching the Fed for its moves? While most commentary seems to focus on the risks to the economic outlook stemming from the Fed’s rate hikes, Deutsche Bank thinks that risk is exaggerated.

“The very gradual pace of rate hikes that we expect – even more so the pace implied by market pricing – is likely to be consistent with falling real interest rates.

Property price declines have been moderating and at this rate prices could stabilize in Q3.”

A greater risk, the bank argues, is that the labor market weakens.

While employment growth has slowed in recent quarters – to 0.3%yoy in Q1 from 2.6% a year previously – real wage and salary growth had continued to rise.

The chartist: SME owners turn gloomier as business outlooks dip There appears to be no light at the end of the tunnel for Hong Kong’s small and medium-sized enterprises (SMEs), as business sentiment fell to another record low for the second quarter, according to Standard Chartered.

Following a shaky start to the year, Hong Kong’s SME owners couldn’t be any gloomier, as the hiring subindex fell below 50 for the first time, suggesting that uncertainties are eroding SMEs’ long-term confidence in their own business outlooks. “All but one industry sub-index came in worse, led by a 17% q/q drop in ‘import/export/wholesale’,” Standard Chartered says. Meanwhile, the firm says the silver lining lies in the stablilisation of Chinese economy and the Renminbi since March.

Another record low for our SME index

Weakness across main industrial sectors

Source: Hong Kong productivity council, Standard Chartered Research

Source: Hong Kong productivity council, Standard Chartered Research

HONG KONG BUSINESS | MAY 2016 9

FIRST

HK losing its glitter as a financial centre

Survey

Save now mindset

S

ingapore and Hong Kong have long been jostling for the title of best global financial centre in Asia, but the former seems to have snatched the crown based on the latest Global Financial Centres Index (GFCI) by Z/Yen. Singapore rose to 755 points in the new GFCI released in April 2016, jumping ahead of Hong Kong’s 753 points, to become the top Asian financial centre based on assessments by more than 2,500 financial services professionals. “One interesting result of the survey is that Singapore is ranked number one (with the most number of mentions) when respondents were asked which financial centre will become a more significant financial centre in the next few years,” says Judy Hsu, chief executive officer at Standard Chartered Singapore.

“This implies that the professionals in the financial industry foresee Singapore playing a bigger role in shaping the international financial landscape in future,” she adds.

Hsu credits Singapore’s rise in the index to the Monetary Authority of Singapore’s cooperations with financial institutions to develop and

Hong Kong has been lagging behind its rivals

promote the country as a strategic hub for the fast-growing Association of Southeast Asian Nations region.

Still, Singapore still has a long way to go before it can outshine the top two global financial centres, London (800) and New York (792).

“Whilst London and New York still lead the field, the next three centres are all Asian,” says Mark Yeandle, associate director at the Z/Yen Group and the author of the GFCI. “The top financial centres of the world are all well developed, sophisticated and cosmopolitan cities in their own right,” adds Yeandle.

survey

Working while sick isn’t efficient at all Hong Kongers are so dedicated to their jobs that they’re going to work even when they’re sick. While one might assume that this would be more productive, the opposite is actually happening—it’s costing the local economy over $30b in lost productivity. According to Bupa Wellness@Work Research, 90% of respondents were sick the past year, but a staggering 68% of them are still opting to work even when they are ill. Going to work while unwell, also known as presenteeism, can reduce an individual’s productivity by one-third or more.

“On average, presenteeism accounted for 64 days, or approximately a quarter of the total working days in 2015 – approximately 1.3% of Hong Kong’s total GDP,” the study said. The research also showed that presenteeism is also 3.4 times more costly than just taking a leave when ill, accounting to a HK$8.9b loss.

10 HONG KONG BUSINESS | MAY 2016

The top financial centres of the world are all well developed, sophisticated and cosmopolitan cities in their own right.

Enjoy life today and worry about savings and investments later?

Hong Kongers aren’t exactly fans of the hedonistic adage as a survey by GfK revealed that one in four (27%) online consumers in Hong Kong say they disagree completely with the notion of sacrificing future financial security while enjoying some pleasures now. The rate is highest among all the countries surveyed globally, with another 27% saying they somewhat disagree with the lifestyle.

Meanwhile, Hong Kong also stands as the only country where more than half of the online population show a ‘save now’ mindset, with 54% overall disagreeing with the idea of enjoying life today and worrying about investments later.

“Looking at the other end of the scale: China has the highest proportion of consumers of all the APAC countries surveyed who agree overall with the ‘have fun now’ mindset, standing at 38% in total. They are followed by the Australians at 32%,” the study says.

Being savings-minded Interestingly, women are more inclined to be savings-minded, while men are more evenly divided. “Although a third (33%) of women internationally agree with enjoying life now and worrying about financial security until later, a greater number (40%) disagree. Men, however, are more evenly divided with 36% agreeing and 35% disagreeing,” the study says. Twenty-somethings are the most fun-loving of any age group, with 41% agreeing to have fun now and worry about saving later, beating teenagers and thirty-somethings with 37% and 36% respectively.

FIRST

The return of the overnighters

H

ardly a day goes by when retailers don’t lament the decline of the once powerful Chinese consumer. June 2014 marked the beginning of declining retail sales for Hong Kong retailers, and it wasn’t until a year later that mainland visitors also started slowing.

Since then there has been little good cheer, with 2015 reporting a 3% drop in visits from the mainland and 2016 expected to post a further 6% drop, according to figures compiled by HSBC research.

The retail sales figures for the first half of the year are also looking dire. Retail sales volumes fell 9.9% QoQ in Q1, the steepest decline in records going back to 1981. At -11.2%yoy last quarter, the decline in retail sales is consistent with about a 4.5% decline in domestic consumption, notes Deutsche Bank.

A cause for optimism So what is giving some analysts case for optimism? The trick is to look at who is visiting and what they are buying. Since 2011 a greater number of Chinese have been coming as day visitors, rather than overnight visitors.

These day visitors tend to come and stock up on things like baby diapers and milk powder, and return quickly over the border with plastic bags stuffed full of produce.

By contrast, the proportion of overnight survey

Work-life balance a priority for HK workers

Hong Kongers may sometimes have workaholic tendencies, but make no mistake—work-life is the most important factor for job satisfaction for the territory’s workers. According to a survey

by Microsoft Asia, 75% of Hong Kong’s respondents indicated that work-life balance was important to their jobs, while ‘being productive on your own terms’ and ‘work with collaborative teams’ led the Asia Pacific with 74% and 71% respectively.

Meanwhile, only 7 out of 10 working professionals are expected to be contactable outside of work. Seven in 10 working professionals in the Asia Pacific are expected to respond to colleagues and teammates in less than four hours.

The survey also reveals that working professionals in Hong Kong are not wellequipped to be responsive in work, with 16% saying that they were well-equipped.

12 HONG KONG BUSINESS | MAY 2016

visitors, who may stay in the Mandarin Oriental and shop at Louis Vuitton, has been falling. But the good news is the wealthier visitors may be back. “Every month since August 2015, trends for overnight visitation have outperformed those for same day visitation and in April 2016, overnight visitation from China was positive y-o-y (+3%) for the first time since January 2015 whilst same day visitation was still somewhat depressed (- 8% y-o-y),” HSBC research noted.

Debunking misconceptions For a couple of years, bullish investors have argued that you cannot comp a -20% retail watch sales drop on top of -20%, but they have since been proven wrong.

However, general retail sales, specifically sales of jewellery and watches, have been unimpressive over the recent period. “Our projection of a slower decline in inbound flows from China over the full year (-6.9%) than over the first 4 months (y-t-d April -12%) is a reflection of the fact that last year was really a game of two halves between a very positive 1H (+4.7% trips from China) and a rough 2H (- 9.6%),” HSBC research explained.

“While the month of April was solid (-4% with overnight visitors up 3%) it’s difficult to assess whether this is short-term relief or not,” they added.

Same day visitation outpacing overnight stays since 2011

Source: HK Tourism Board

Hong Kong total retail sales and sales of watches and jewellery

Source: HKSAR Census and Statistics Department

Still, analysts remain optimistic that with the current FX, geopolitical, and price set-up, Hong Kong retail pain is bound to ease in the second half of the year. “Leaving aside Chinese tourists, consumer sentiment with locals in Hong Kong remains very low but is not deteriorating either,” HSBC research added.

“We are not bullish on Hong Kong and the city could well continue to be a market share loser in terms of luxury and premium goods to other cities,” HSBC research noted.

How well-equipped are you to be responsive in your work?

Source: Microsoft

To do your job effectively, are you expected to be contactable outside of work?

Source: Microsoft

FIRST NUMBERS

hK Business spending

Click-to-brick is gaining traction fast

HK pop-up stores popping up profits

A

mid a marked decline in sales in the first quarter, e-commerce brands in Hong—a slowly emerging area in the retail sector—are beginning to shift their business models to include a format not typically associated with digital space: popup stores.

Pop-up stores, which are also known as “click-to-brick” stores, are designed to attract online buyers via a physical retail outlet.

“Most sophisticated retailers now understand that a point-ofsale strategy must include multiple channels of commerce. Bricksand-mortar stores are becoming important to e-commerce retailers just as e-commerce is important to more traditional bricks-andmortar retailers,” shares Sebastian Skiff, executive director at Colliers International.

Pop-up stores offer clear economic benefits. “To boost their business as well as brand awareness, some e-commerce retailers will lease pop-up stores or kiosks in shopping malls, while others will hire promotional vans/trucks. The costs are usually substantially lower than leasing a shop for a longer term. Short-term premises also allow for greater flexibility in terms of operation budget,” Joe Lin, executive director, 14 HONG KONG BUSINESS | MAY 2016

retail services, at CBRE. Pop-up stores located in shopping malls are able to exploit the vast retail opportunities there, as they are are able to better harness space and reduce void periods—“an important consideration given the current challenges facing the city’s retail sector,” says Cathie Chung, local director, consulting in JLL Hong Kong.

Moving forward, analysts believe pop-up stores are here to stay, primarily “[They] will definitely increase. As a channel, a physical store is important, and as a retailer it is important to trade in as many channels as their customers are present in,” says Skiff. Lin agrees, noting that Hong Kong’s weak retail market, will spur more merchants to open pop-up stores.

Most sophisticated retailers now understand that a pointof-sale strategy must include multiple channels of commerce.

Rental index for core retail locations (Q1 1996 = 100)

Source: CBRE Research, Q1 2016

Source: American Express/CFO Research

FIRST accommodate mainly retail-related and other commercial tenants.

The property is also Link’s first commercial property in a core retail location in Hong Kong, and will undertake 18-24 months to be transformed in to a mass market retail destination. Its strategic location will also attract big fish retail, services, and F&B tenants. The mixed-use commercial complex is located in Mong Kok, at the intersection of Nathan Road and Mong Kok Road.

Wan Chai

6 biggest investment deals in 1Q

H

ong Kong’s investment momentum has unsurprisingly slumped towards a downward trend, but end-users and mainland Chinese corporates continued to display solid demand for office properties, according to CBRE Research. Commercial real estate investment turnover in Hong Kong fell to a quiet HK$21.8b in 1Q16, marking 35% decline. The anemic transaction appetite also seeps across all sectors, as there were just eight deals in the office sector, and seven involving retail properties.

Additionally, the looming expiry of the industrial revitalisation scheme at the end of March has prompted even less interest in the sector, seeing investment turnover plummet from HK$6.5b in 4Q15 to a measly HK$362m in 1Q16, its lowest quarterly total since 3Q08. Meanwhile, no hotel transactions were also recorded this quarter, the first instance since 1Q09.

According to CBRE, mainland Chinese corporates are primed to remain active in the Hong Kong Property investment market. “Many such companies have already purchased office assets in Hong Kong, mainly for self-use. In the land market, mainland Chinese developers have been outbidding local players and have acquired different types of development land.” Additionally, CBRE says that it sees the government offering more commercial and residential sites to Chinese developers in the coming years.

Meanwhile, investment activity is also due for a rebound as some private tenders 16 HONG KONG BUSINESS | MAY 2016

are scheduled to close. “The level of market activity will continue to rest on the pricing gap between potential sellers and buyers,” CBRE said.

The following are the largest investment transactions in Hong Kong for the first quarter: 1 Dah Sing Financial Centre The second-largest office transaction in the administative region, state-owned China Everbright has purchased the Dah Sing Financial Centre for HK$10b from SEA Group. The 33-floor Grade A office building is located on Gloucester Road, in the thick of the bustling Wan Chai. It also allows for easy access to different methods of transportation, including the MTR station, buses, taxis, and trams.

The building also has a total area of 350,000 square feet, with 10,000 square feet of office plates. It can also be located near the Hong Kong Convention and Exhibition Centre. The Dah Sing transaction is also an indication of the growing appetite of mainland enterprises to acquire prime Hong Kong office buildings.

2 Industrial and Trade Department Tower Another major deal for the first quarter is Link REIT’s purchase of 700 Nathan Road, the former Trade and Industry Tower owned by the government, for HK$5.9b by way of a public tender.

According to CBRE Research, the new owner will also refurbish the building to

3 SBI Centre The 50 year-old office centre also caught property analysts’ eyes when it was sold en-bloc for HK$1.58b. The 45,100 sq. ft. structure is a definitive structure in Central, and its unit prices have sold for HK$35,033 per square feet.

4 Shek Yam Shopping Centre The retail destination’s purchase was also one of the notable transactions in the first quarter, sold en-bloc for HK$880m. The 75,270 square feet structure can be located in Kwai Chung, and has a unit price of HK$11,691 per square feet. The Shek Yam Shopping center serves the Shek Yam East Estate, a small public housing estate comprising of residential buildings.

The Shek Yam Shopping Centre also serves the Shek Yam Estate, an 8-block low cost housing estate. A company named Yan Yan Motors has bought the property for more than HK$160m on top of its original valuation, and the 7-storey property is said to be a 93% occupied.

5 Wan Tau Tong Shopping Centre As part of the shopping slump in Hong Kong’s retail sector, Link REIT has also sold Wan Tau Tong Shopping Centre for HK$810m. Located in Tai Po, the 54,464 square feet Wan Tau Tong Shopping Centre was purchased by Prosperous Glory Investment for more than HK$64m over its expected valuation. Together with the Shek Yam Shopping Centre, Link REIT has gained a combined HK$1.69b.

6 Sun Kwai Hing Plaza Multiple units have also been sold in Sun Kwai Hing Plaza, an established retail destination. The transaction amounted to HK$503m, where 50,246 sq. ft. of space was sold. A fixture in the Kwai Chung Area, the property’s unit price sold for HK$10,011 per square feet.

Lan Kwai Fong Hotel @ Kau U Fong reached the milestone of 10 years since it settled in Sheung Wan: a decade of providing stylish boutique accommodation choice to guests from all over the world. To kick off the celebration of 10th Anniversary, we have invited French street muralist Philippe Baudelocque to add some magical touch to the hotel with his signature street murals of animals filled with geometric and starry patterns.

3 Kau U Fong, Central, Hong Kong 香港中環九如坊3號 T: (852) 3650 0000 WhatsApp: (852) 5411 8515 www.lankwaifonghotel.com.hk

enquiry@lankwaifonghotel.com.hk

startups

Helping organise the helper hiring process

W

hile technology has accelerated at breakneck speed in the past decade, Annemarelle van Schayik, cofounder of Helper Choice thought that the helper hiring process has been stuck. “Employers flip through helper profiles, agencies recommend candidates and the helper often has no idea who she will work for when signing the contract. More often than not, this leads to disappointment, frustration and anger when expectations are not met,” Annemarelle says. This is what led her to co-found HelperChoice, where employers and domestic helpers can connect with each other, talk over

the phone, and meet in a comfortable place outside agencies.

“Once they feel they are a good match, employers can easily find an agency to take care of all the paperwork in a safe way for both parties,” Annemarelle says.

On maternity leave last 2012, Annemarelle co-founded the startup with her husband, Florian, who has been working as a salesperson in investment banking for the past ten years. “I found it difficult to find the right helper to take care of my daughter. We want to eliminate the reliance of agencies when it comes to the hiring step. The current employment agency system is ineffective as it is profit-based, not result-based,” she adds.

Currently, Annemarelle says they have enough backing to continue for at least another year and implement new innovations. “Disrupting the market is an ongoing process that does not end with breaking even or being comfortable with our current funding structure. We are, as any startup, always open to investors and their advice, and are considering to actively seek them in the future,” she says.

Envisioning a check-less world

Co-founder Shao Li Robert absolutely hated writing 10-15 checks a month for his previous job, so he set out to get connected with banking partners to rid himself of the hassle. This was where he got the idea for Yintran, the startup aiming to eliminate checks in five years. Born in Taipei, Robert co-founded Yintran with M. Scott, computer scientist for 20 years who has worked for IBM, Apple, and Microsoft.

A participating member of PolyU 18 HONG KONG BUSINESS | MAY 2016

Social Innovation Entrepreneurship Development program, Shao Li Robert says Yintran allows anyone or any business to transfer money via the internet safely with privacy and with bank-grade security. He says he started it with a few friends and anyone he knew that was willing to help. He also talked with engineers and contractors from all parts of the world, including the United States of America, Japan, Taiwan, China, Philippines, Vietnam, India, Kuwait, Qatar, and Ukraine.

With 12 months worth of funding for the startup, SL Robert envisions a future where consumers wouldn’t need to walk to banks and ATMs, but instead pay someone with just an email address. According to Robert, among the challenges that Yintran faces in the near future is getting the merchants on board with the startup.

Creativity though licensing

Combining marketing, creativity, and technology through new media is the goal of Alexis Bautista, founder and chief executive officer of Kokonuzz.

With licensing at the centre of its business model, Alexis says the startup develops its licensing work for the brands from the moment they are created.

“We don’t have to wait until they have a big audience because we have detected a segment in the market where we can offer them,” Alexis says.

Detecting a drastic shift in entertainment consumption patterns (multi-screen, mobile, and shorter content) Bautista co-founded Kokonuzz with Daniel Guerra and German Torrado. At the same time, Bautista says, they saw that technology was enabling some entertainment brands such as Angry Birds to experience viral growth and, in turn, unprecedented opportunity to perform at a competitive scale in the licensing industry.

“On the industry side we found out that the licensing industry was extremely concentrated with giant licensors (Disney, Sanrio) squeezing margins and therefore had a huge unsatisfied need of companies that wanted to license content but could not afford the big players,” Bautista says. “So we created our model that consists on creating fast growth licensing friendly brands.”

Tough start Kokonuzz started business mid-2012 with zero funding, while Alexis tried to develop t-shirts with the characters. However, access to retail is extremely hard in Hong Kong. A;exis found the spark he needed when he took a gamble and attended the Hong Kong Licensing Show. “That show changed everything, it was a tremendous success and there I met my partners Daniel and German, who provided funds and experience that marked the beginning of our growth. After that we got funding from friends and business angels from HKBAN and we are currently raising a much bigger round to continue our global expansion,” Alexis says.

Currently, Alexis says the team has raised a round of funding and is currently looking to raise their Series A. “We are doing extremely well in the global market and we need to reinforce our team to consolidate and boost that growth. We also have a number of content projects in the pipeline that can boost our visibility both online and offline,” he says.

FINANCIAL INSIGHT: venture capital

Deal #1: Futu5.com clinched a US$60m Series B financing round with Matrix Partners China, Sequoia Capital, and Tencent Holdings (Photo: Ma Huateng, Tencent CEO)

Deal #2: App Annie inked a US$55m deal with Institutional Venture Partners, IDG Capital Partners, Greycroft Partners, Sequoia Capital, and e.ventures (Photo: Bertrand Schmitt, App Annie CEO)

Deal #3: CompareAsiaGroup secured a US$40m deal with Goldman Sachs, Route 66 Ventures, Jardine Pacific, Nova Founders Capital, and ACE & Company (Photo: Sam Allen, CompareAsiaGroup CEO)

Venture capitalists pin hope on FinTech

Financial technology (FinTech) startups are luring more investors, with Futu5.com, a FinTech startup, clinching the largest deal of the past year—a $60m series B financing round led by Tencent.

I

f Hong Kong has a plan to step out of China’s shadow in attracting venture capital deals, its strongest play will likely involve its growing stack of technology startups. The Hong Kong government is pouring large investments into the technology sector, especially in financial technology (FinTech), which has led to a surge in local startups and venture capital interest. Analysts say this government support plus the ongoing industry consolidation paint a rosier outlook for venture capital deals in Hong Kong in 2016 and beyond, especially if Hong Kong comes into its own as the preferred connecting bridge for cross-border deals.

“Hong Kong definitely has an eye on FinTech with its biggest deals going into the industry,” says Melissa Guzy, co-chair of HKVCA Venture Committee and managing partner of Arbor Ventures. In the third quarter of 2015, Tencent led a $60M Series B financing round with Matrix Partners and Sequoia Capital for Futu5.Com, a Hong Kong based FinTech startup and online stock trading platform.

Guzy reckons Hong Kong government support is nurturing an attractive ecosystem for entrepreneurs and a more conducive one for startups, which in turn will generate more investments from both foreign and China based investors. Among the Hong Kong government’s efforts to support technology startups, its partnerships with angel investors and venture capital 20 HONG KONG BUSINESS | MAY 2016

The number of incubatees in the Hong Kong Science Park grew from 140 in 2013, to 171 in 2014, then to 231 in 2015 – a 65% rise over a twoyear period.

groups are especially worth noting, says Peter Mok, head of incubation programmes at Hong Kong Science and Technology Parks Corporation (HKSTP).

HKSTP, in a joint effort with Hong Kong Business Angel Network (HKBAN) and other sources of funding, enabled incubates and graduates to attract a total investment of over HK$500 million (46 cases), from both individual and institutional investors in 2014 to 2015. It also launched the Venture Capital Partnership Programme to offer investment advisory services to incubatees and partner companies, then help them raise funds and connect to the investment community.

Government initiatives Mok says these government initiatives helped the startup ecosystem clustered around research hubs expand rapidly.

The number of incubatees in the Hong Kong Science Park grew from 140 in 2013, to 171 in 2014, then to 231 in 2015 – a 65% rise over a two-year period. Around 600 technology companies currently operate in the Science Park, and the research and development community comprises nearly 13,000 individuals, with approximately 70% are actively engaged in research and development work.

Guzy adds that aside from HKSTP, Hong Kong has seen many emerging accelerators and incubator programs that eventually pair startups with investors launched by

FINANCIAL INSIGHT: venture capital the likes of InvestHK, Cyberport, the Hong Kong Design Centre, Nest and FinTech Super Charger.

Investors have responded with rabid interest in promising, well-supported local technology startups, with total investment injected into incubatees of Science Park and Park companies amounting to HK$300 million in 2015, up 50% from 2014.

HKSTP also partnered with major corporations such as JP Morgan and China Energy Conservation Investment Corporation to organise programmes to support high potential tech startups in Hong Kong.

“As the local technology and innovation ecosystem develops, Hong Kong has attracted more and more startup investors to pay attention to local tech startups,” says Mok. “Hong Kong, as an international financial hub, has a robust financial infrastructure and stable exchange rate, making the city highly desirable for international investors to come to and operate in,” he adds.

HKSTP: Incubation programmes Seed to Series A Investment Funding Trend

Source: HKSTP

Venture capital consolidation As FinTech startups draw in more investors, a glut in funds has formed. Analysts believe consolidation will be a key theme in Hong Kong’s venture capital scene this year, and will mostly be a positive development.

“We’re at an inflection point this year as the broader private equity and venture capital industries realize there are too many funds chasing the same deals,” says Eva Ip, Greater China private equity leader at EY. She reckons there has been a reduction in new funds being established although there is still plenty of ‘dry powder’ for venture investing. “This is a positive direction as the larger venture eco-system thrives better when the more established investors stay focused on the market,” says Ip. “Venture capital industry will continue its consolidation while there are emerging secondary funds looking for later stage opportunities. The border between venture capital and private equity is is getting blurred,” concurs Danny Po, Asia-Pacific mergers & acquisitions tax leader at Deloitte China. The venture capital industry seems to be at the winning end of this consolidation trend, based on data last year, says Po. Venture capital fundraising dropped by a low single digit percentage last year, explained by the global tightening of capital, but outperforming private equity which suffered a double digit decrease in fundraising in the same period.

Po attributes venture capital’s better performance to its

Eva Ip

Melissa Guzy

Asian quarterly financing trends to VC-backed companies Q1’11 - Q4’15 Tytus Michalski

Source: KPMG

Danny Po

focus on early stage investment. In fact, venture capital deal size increased by more than 100% indicating the availability of more mature investment opportunities and the venture capital’s bullish attitude in Hong Kong and the rest of Asia-Pacific.

In China and Hong Kong, Po reckons FinTech will be one of the growth engines powering the venture capital industry, along with the China New Third Board and VIE’s return to the A-share market. The New Third Board will divide listed companies in the The National Equiities Exchange and Quotations into two markets—a basic market and an innovation market – in order to assist small and medium-sized enterprises better meet requirements.

Ip shares the optimism, expecting China and Hong Kong to post a robust 2016 in venture capital deals. China is increasingly becoming a center of innovation in the areas of FinTech and ecommerce, healthcare services and consumer products delivery, such as of fresh produce.

Hong Kong, while seeing investments that are dwarfed by the capital in China, is displaying impressive resilience despite market volatility.

Market volatility impact Recent market volatility slammed global venture capital investments at the tailend of 2015, but Hong Kong has escaped relatively unscathed.

Guzy notes that Asian startups had a break-out year for investment activities in 2015, raising a total of US$39.7 billion (more than the previous four years combined) on 1,442 deals. But the growth significantly tapered off in fourth quarter of 2015 (4Q15) due to public market turmoil and concerns over China’s macroeconomic growth, with a 30% drop off in funding to US$27.2 billion invested across 1,742 deals globally.

This lowest quarterly deal activity since the first quarter of 2013, says Guzy, and China felt a heavy pinch with deal volumes dropping 39% to 71 deals and funding falling 29% to US$7.3 billion in 4Q15 from the previous quarter.

By contrast, market volatility had a muted impact on Hong Kong’s venture capital activity.

HONG KONG BUSINESS | MAY 2016 21

FINANCIAL INSIGHT: venture capital “In our view, the market volatility has had little effect on Hong Kong’s venture capital flows, which traditionally focus on early-stage investing,” says Ip. “The market volatility is directly related to more established businesses, which have seen fluctuations (mostly downward) in valuations.” Po says Hong Kong’s strength also lies in its role as the most important hub of China venture capital managers and China’s venture capital initial public offering and mergers and acquisitions (M&A), which outweighed trade sale as preferred exits.

The recent market volatility has not changed the approach of successful venture investors but what it has done is remove some of the excess speculation from startups, making it overall beneficial for the Hong Kong venture capital industry, says Tytus Michalski, managing partner at Fresco Capital. He reckons the shake-up has also taught investors that venture capital investment requires long-term thinking.

“Anyone speculating about the trend of this month or even this year should stay away from venture capital and stick to trading public markets or betting on horses,” says Michalski. “We are seeing a trend of more corporate investors getting involved in startup investment and have found our ability to connect corporate partners with the right startups is in very high demand,” he adds.

Corporations are also priming themselves for acquisition with over 30% participation in Asia venture capital-backed deals for three consecutive quarters.

Cross-border opportunities While Hong Kong seems to have found its stride in its technology and innovation focus, Michalski says that its greater fortune lies in capturing cross-border opportunities instead of focusing solely on local or even regional growth. “Rather than looking at venture capital industry by separate geography, we believe that crossborder opportunities are the key trend,” says Michalski.

“Record M&A activity by companies from Asia into the US is likely to continue because every large company wants to avoid being disrupted by new startups.”

Guzy says there has been a significant M&A activity, specifically mergers between travel websites, dating websites and restaurant booking and reviewing apps.

Corporations are also priming themselves for acquisition with over 30% participation in Asia venture capital-backed deals for three consecutive quarters. “Hong Kong has a key role to play as a connector between East and West,” says Michalski. “Beyond the domestic market in Hong Kong, the larger value of the city is the ability to bridge cultures.”

CVC participation in Asian deals to VC-backed companies Q1’15 - Q1’16

Source: KPMG

22 HONG KONG BUSINESS | MAY 2016

singapore view

Singapore’s long VC summer Venture capital deals should continue to shine bright in Singapore even as investments around the world are starting to dim. Winter is coming, at least if the first months of 2016 are any indication, with a notable drop in venture capital deals globally, although Singapore will likely escape a protracted withering in deal activity.

The country will be resilient relative to the rest of Asia, according to analysts, due to its abundant dry powder, nurturing environment for entrepreneurs and the growing focus of local startups to expand in the lucrative Southeast Asian region.

“The increase in both the number and total value of venture capital deals in Asia through 2015 was part of a broader global trend – the same uptick in venture capital activity was recorded across all regions,” says Felice Egidio, head of venture capital products at Preqin. “In particular, the average size of funding rounds increased, suggesting that more sizeable investments are becoming more commonplace.”

“In contrast, in 2016 we have seen that trend reversed, with the number of venture capital investments globally declining in the first quarter of 2016 (1Q16). However, this decrease is not uniform across all regions and industries, and it might be that some investors view markets such as Singapore as a relatively safe haven when compared to more volatile markets in Asia,” says Egidio. Preqin data reveals Singapore is off to a fantastic start in 1Q16 with the number of venture capital deals in Singapore rising to 34 with aggregate deal value of US$290 million, up from 28 deals with aggregate deal value of US$111 million in the same period last year.

Also, as of April 15, 2016, Singapore captured 17% of total funds closed and 3% of aggregate capital raised in Asia, both higher than its 2015 full-year performance of 8% of total funds closed and 2% of aggregate capital raised. These trends suggest that 2016 will be another banner year for Singapore venture capital deals despite signs of a global deceleration. It helps that the country holds inherent advantages compared to less developed and riskier neighboring Asian markets.

The growing strength and ambition of Singapore startups, supported with a swath of government initiatives, will fuel venture capital activity.

Venture capital deals in Singapore 1Q10-1Q16

Source: Preqin

economic INSIGHT: consumption in 2014, while retail sales volume— which covers consumer spending on goods and excludes spending on services such as entertainment and transport—also fell by 3.9% from a growth of 3.1%, data from Hang Seng Bank showed.

Moreover, retail sales’ 3.7% decline for the full-year 2015 has been described as “the sector’s worst annual performance since 2002.” Like Shik, HSBC attributes this to the poor economic environment currently being experienced by mainland China.

As a result, tourism-linked sectors suffered the most in 2015, “with the sharpest falls seen in tourismrelated outlets selling mainly jewellery, electronic goods, and clothing,” says Zhu, while sectors unaffected by tourist spending such as food and fuel managed to scrape by. This data may prove worrisome as, according to Shik, tourism spending on retail sales may have represented almost half or 42% of Hong Kong’s retail sales in 2014.

Tourists are being picky about spending

HK economy to turn sluggish Headwinds will continue to buffet Hong Kong this year as locals and tourists from China continue to temper retail spending.

H

ong Kong’s typically robust economy is likely to take a hit and incur weaker growth in 2016 versus the previous year as several key industries are expected to disappoint as a result of potential declines in local and tourist spending.

“Hong Kong’s economy grew by 2.4% in 2015, but the likelihood of it managing to maintain that pace in 2016 is slim. Both external and domestic demand conditions are likely to be weak in 2016, but one of the major changes will be that private consumption turns into a drag on GDP growth after several years of consistently positive contributions,” says John Zhu, economist at HSBC. According to Selena Ling of OCBC Bank Treasury Market Research & Strategy, “economic slowdown at home and abroad, coupled with the heightening domestic job insecurity, hit retail sectors.”

Retail, a traditionally strong sector in Hong Kong, appears to be the economic culprit. “Retail sales have 24 HONG KONG BUSINESS | MAY 2016

Retail sales’ 3.7% decline for the full-year 2015 has been described as “the sector’s worst annual performance since 2002.”

been slowing, influenced in significant part by tourist spending, which is a dominant factor in retail sales movements,” says Thomas Shik, acting chief economist at Hang Seng Bank, noting that in recent years, retail sales growth has been volatile due to fluctuations in tourist spending.

Fewer visitors, lower sales For the fourth quarter of 2015, visitor arrivals contracted by 4.3% from a growth of 12.1% in the same period Consumer durables vs PCE

Source: Macrobond, Hang Seng Bank

Double economic whammy “A combination of the slowdown in the Chinese economy and the depreciation of the renminbi against the US dollar—to which the Hong Kong dollar is linked—means that the fall in tourist arrivals has been much sharper than anticipated,” Zhu emphasizes.

In addition to tourism arrivals, mainland China has also posed a risk to Hong Kong in terms of government borrowings, putting the economy under “high-risk.”

“Hong Kong joins the high-risk category after its credit-to-GDP growth gap hit a five-year average of 9.0ppt in December 2013, before starting to decline more recently. Mainland China-based entities have been big

economic INSIGHT: consumption drivers of this change as onshore leverage growth has been brought under control,” says David Mann, chief economist, Hong Kong at Standard Chartered Singapore.

“While the domestic debt-to-GDP ratio may not be the best gauge of repayment ability for a financial centre such as Hong Kong, the fact that a large portion of this debt is linked to China is a source of concern,” Mann adds.

Local spending dips Domestically, spending has also been tepid. “Local consumers have also become more reluctant to spend, as reflected in the recent slowdown in sales of consumer durables,” Shik notes.

Together with consumers, businesses are no more optimistic. “Sentiment among small and medium-size enterprises (SMEs) in Hong Kong fell to another a record low for the second quarter of 2016. The Standard Chartered Hong Kong SME Leading Business Index (SME Index), released jointly by Standard Chartered Bank and the Hong Kong Productivity Council, deteriorated to 40.4 in the second quarter of 2016 from 42.8 in the first quarter of 2016,” says Kelvin Lau, senior economist at Standard Chartered Bank Hong Kong, with the SME Index’s five main sub-indices falling across the board, suggesting broad pessimism following a shaky start to the year.

While Lau cites the recent stabilization of the Chinese economy and the renminbi, coupled with expectations of a Fed rate hike, as positive factors that may be considered by investors, “both are risk-positive near-term.”

According to Lau, “SMEs in Hong Kong are likely to need more sustained Services consumption

Source: Macrobond, Hang Seng Bank

data and market improvements before they start to feel better about their own business outlooks. We therefore think it is too early to claim that the SME Index has bottomed out.”

Consumer durable goods growth— a reliable gauge of local consumer spending—plunged to 3.6% in the fourth quarter of 2015 from 37.5% in the second quarter, while private consumption expenditures (PCE) or the amount spent on goods and services by local consumers and a component of gross domestic product also fell to 3.2% from 6.2% in the same period, Hang Seng Bank data showed.

Sustaining the trend For 2016, the trend appears to have been sustained. “Indeed, in the first two months of 2016, consumer durables growth turned negative, suggesting that PCE growth may slow further in the first quarter this year,” Shik says. Separately, Adrienne Lui, analyst at Citi Research notes that March retail sales volume and value dropped year-on-year by 8.8% and 9.8%, respectively.

“We see retail sales in the near-term will remain dragged by changing tourist shopping patterns and fragile local consumption sentiment,” Lui says.

Overall, Shik believes that “uncertainty surrounding global economic prospects and financial market volatility” have impacted consumer confidence and thus squeezed spending” in Hong Kong. “With PCE accounting for about two-thirds of GDP, slowing consumption will likely lead to it providing less support for overall GDP growth this year compared with last year,” he says.

With the general uncertainty following Hong Kong’s less-than-stellar

Consumer goods growth is plunging fast

Consumer durable goods growth plunged to 3.6% in the fourth quarter of 2015 from 37.5% in the second quarter.

performance in 2015 and for the first quarter of 2016, analysts are bracing for disappointing numbers for Hong Kong’s full-year growth.

“Subdued retail sales and trade growth will remain to weigh on the Hong Kong economy,” Ling forecasts.

“We expect Hong Kong to record GDP growth of 1.8% in 2016, down from 2.4% in 2015,” Shik predicts.

Relief measures Zhu is more somber. “We therefore forecast overall growth to fall to 1.5% for 2016 as a whole due to weaker consumption and investment. There may actually be a small positive contribution from net exports, but this will be entirely due to imports falling by more than exports.” A series of “relief measures” in the government’s 2016 budget should soften the impact of poor economy, but overall, “2016 will be a challenging year, even in the context of Hong Kong’s ‘new normal,” Zhu says.

For 2016, consumption is expected to further weaken in line with a sustained economic slowdown.

“Despite smaller-than-expected declines, we think the weak consumption trend is well established, which will have lagging effects on hiring and shop rentals. Restaurants receipts saw smaller growth each month in the first quarter (January: 4.6% year-on-year, February: 1.3% year-on-year, and March: 0.3% year-on-year),” Lui says, citing reports involving rising restaurant closures and late staff payrolls for staff in the foodand-beverage industries.

HONG KONG BUSINESS | MAY 2016 25

Industry briefing: aviation Handling more than 63 million passengers yearly, HKIA is a point of pride of the territory, consistently cited as one of the best airports in the world. Consumer aviation website Skytrax ranked HKIA as the fifth best airport in the world. It is also one of the bestperforming airports in Asia in terms of capturing commercial opportunities along with Incheon and Singapore Changi, says Jack Xu, analyst at HSBC.

The aviation industry could potentially contribute $52b to the GDP

Hong Kong aviation’s flight and fight moment

The aviation industry is taking off to uplift the economy but it must contend with airport rivals and stiffening cargo load competition.

H

ong Kong’s aviation sector is soaring with the Hong Kong International Airport (HKIA) breaking daily passenger volumes in 2015 and flagship carrier Cathay Pacific Airways ramping up the number of passengers it carries, but this impressive flight path could hit some turbulence soon. China is looking at upgrading its airports, including Shenzhen Airport, which could reduce the number of passengers traveling from nearby provinces to HKIA for international flights, while Cathay Pacific Airways faces a continuing decline in carried cargo due to strong competition.

Tony Tyler, CEO of the International Air Transport Association, believes aviation and related activities can lift up the Hong Kong economy, which is 26 HONG KONG BUSINESS | MAY 2016

Handling more than 63 million passengers yearly, HKIA is a point of pride of the territory, consistently cited as one of the best airports in the world.

reeling from lower visitor arrivals and retail sales. He predicts that by 2035 the industry would generate 612,000 jobs and contribute $52 billion to the territory’s gross domestic product, but airline executives warn delays in building a third runway and other upgrades can hinder this potential.

Shenzhen Airport on the rise

Strong headwinds But HKIA may take a big hit when Shenzhen Airport starts spreading its wings as a rival provider of international flights. The China Aviation Administration of China recently raised Shenzhen Airport’s status to a regional hub, which Xu says will increase international flights and bring back local residents from Hong Kong and Guangzhou.

“Shenzhen has a relatively small catchment area and an underdeveloped international network, and as a result many local residents travel to Hong Kong or Guangzhou to fly to international destinations,” says Xu. “In the medium and long term, Shenzhen will focus on recovering international passenger traffic by offering new international flights. Its share of international traffic, 6%, is substantially below the 23-33% at three major international hubs in China,” he adds.

Xu reckons Shenzhen Airport

Passenger throughput growth 2011-15

Source: Airports, HSBC

industry briefing: aviation is poised to capture a larger share of profitable outbound traffic because of the relatively large size and wealth of its local market and surrounding hinterland.

Shenzhen Airport is only one of many airports that are receiving a lot of attention and resources from the Chinese government as it addresses gridlocks and full capacity issues. Xu says a solution that will likely be implemented to solve these challenges is to increasingly use wide-body planes.

“Major airports have several runways, which are often parallel to each other. If they are too close together simultaneous take-offs and landings are prohibited on these ‘dependent’ runways, reducing traffic and airport revenue. In addition, appropriate intervals are required for take-off/ landings due to airflow turbulence or wake vortex,” says Xu. “The solution is to increase the number of wide-body aircraft, which carry more people and generate higher fees. This has helped Hong Kong and Beijing airports to accommodate growing traffic as their runway utilisation nears the limit,” he adds, noting that as of March 2016, nearly 60% of flights at Hong Kong International Airport use widebodies.

Chinese airports will likely adopt the same solution, says Xu, as it is also the best way to grow revenue since wide-body planes generate up to five times higher fees than smaller aircraft used for domestic routes, and also improve duty-free sales.

“Increased use of wide-body

The two Cathay Pacific Airways airlines – Cathay Pacific and Dragonair— carried 157,006 tonnes of cargo and mail in March, a drop of 0.4% compared to the same month last year.

Catchment area size versus GDP per capita

Source: Airports, CEIC

Terminal and runway utilisation of major Asian airports

Source: Airports, HSBC

aircraft has helped airports to accommodate growing traffic numbers as their runway utilisations near their limits.

We think wide-body planes are suitable for some major domestic routes as well as international flights, due to high volumes and long flight hours,” says Xu.

of the world’s first alliance of independent low-cost carriers called the U-Fly Alliance, with other member airlines including Lucky Air, West Air and Urumuqi Air, which Cowen says expands the range of destinations and low fare opportunities for Hong Kong passengers.

Slots shortage HKIA is not only grappling with the emerging threat from Shenzhen Airport, but also expansion hiccups that industry players blame for missed growth opportunities not only for airlines servicing Hong Kong but also for the local economy.

“Slots shortage has long been by far and away the biggest challenge for HK Express. We could very quickly launch at least 20 more destinations if HK Express could secure more slots,” says Andrew Cowen, CEO of HK Express.

“The delays in increasing the capacity of the existing airport infrastructure and building the 3rd runway, simply translate into fewer destinations for Hong Kong people and reduced opportunity to secure low fares. The slot constraints also mean less opportunity to offset the decreases underway in Hong Kong visitor numbers, which can’t be good for Hong Kong,” he adds.

To cope with the slot constraints, Cowen says HK Express has focused instead on using the available slots more efficiently with high seat density on their aircraft, as well as investing in larger A321 aircraft. The airlines also led the founding and launch

Cargo decline Another emerging weak spot for HK aviation industry is in the declining cargo performance among airlines, including flagship carrier Cathay Pacific Airways.

Carried cargo dipped in March, continuing a downward trend over the first quarter of 2016.

The two Cathay Pacific Airways airlines – Cathay Pacific and Dragonair—carried 157,006 tonnes of cargo and mail in March, a drop of 0.4% compared to the same month last year. The cargo and mail load factor also fell by 5.4 percentage points to 63.0%. Cargo and mail revenue tonne kilometres (RTKs) fell by 4.1% as well as capacity, measured in available cargo/mail tonne kilometres, increased by 4.1%.

Cathay Pacific and Dragonair can also smile about their increasing number of passengers carried, up 2.6% to 2.96 million from the same period last year, although there is still room for improvement in filling up new capacity.

This is because for first quarter of 2016, the number of passengers carried might have risen by 5.3% but it fell short of the 6.5% increase in capacity.

HONG KONG BUSINESS | MAY 2016 27

singapore’s hottest startups 2015

Kazuo Shiraga’s Chikisei Sesuisho

Art dealers find safe haven in Asian collectors’ insatiable appetite Despite predictions of doom and gloom earlier this year, it seems Asian collectors are still having an impact on the art market and are not to be counted out.

A

fter several years of growth the international art market took a turn for the worse in 2015, and according to the latest TEFAF Art Market Report, released in March, global art sales fell 7 percent last year on an annual basis to US$63.8 billion. This was the first decline since 2011 and was led by a sharp fall in the Chinese market, down 23 percent to US$11.8 billion, which set the UK above China once more as the second-largest market for art sales in the world, behind the United States.

There were still plenty of headline-grabbing sales though, such as Pablo Picasso’s 1955 painting Les femmes d’Alger (Version ‘O’), which set a new record for contemporary art when it sold for US$179.3 million (well above its $140 million estimate and offering a significant return on the US$31.9 million it sold for at auction in 1997) or the US$170.4 million paid by Shanghai tycoon Liu Yiqian for a Modigliani.

However, the art market’s slowdown was evident in overall results. Christie’s reported its first decline in annual sales since 2009, down 5 percent to £4.8 billion (US$5.47 billion), though this was still its second highest result in history (the privately-owned company does not release profit numbers), and while Sotheby’s total sales of US$6.7 billion in 2015 were flat on the year, the New

28 HONG KONG BUSINESS | MAY 2016

Christie’s reported its first decline in annual sales since 2009, down 5 percent to £4.8 billion (US$5.47 billion), though this was still its second highest result in history.

York-based auction house posted a fourth-quarter net loss of US$11.2 million with CEO Tad Smith warning consignments were tighter with buyers “in a wait-andsee mode.”

Dampened art market The slowdown of the world economy may have put a damper on the art market in general, and many Chinese collectors have become rather more cautious with the country’s slowest economic growth in 25 years — at 6.9 percent a year — coupled with the ongoing clampdown on corruption, but a closer look at Christie’s 2015 data shows that the number of Asian buyers continued to increase (up 7 percent) and they now account for 18 percent of global buyers, with buyers from Japan and Singapore up 12 percent and 14 percent respectively.

Asian buyers’ spending was up 15 percent in 2015 and contributed to 30 percent of Christie’s total sales, a clear indication that they are willing to spend on big ticket items. “So far we haven’t really seen China slowing down.

There are buyers out there if you have the right property at the right price,” says Francois Curiel, Christie’s Chairman for Asia Pacific.

Asian collectors’ appetite for Asian art has remained strong so far this year, as shown by the US$130 million

singapore’s hottest startups 2015 ASIAN ART REPORT worth of sales achieved in March during the 10-day Asia Week New York sales, as well as the strong sales reported during the five-day Art Basel in Hong Kong art fair, plus some impressive headline prices at Sotheby’s Hong Kong auction in April.

In New York, Chinese specialist Eric Zetterquist of Zetterquist Galleries remarked that pessimism about the impact the faltering Chinese economy would have on sales was “completely unwarranted,” stating he had seen many Chinese collectors and dealers, with several new clients amongst the purchasers. James Lally of J.J. Lally & Co., which participated in Asia Week New York with an exhibition of ancient Chinese jade, reported that 80 percent of his gallery’s work at the event had sold, while New York gallery Joan B. Mirviss Ltd., which dedicated a showcase to mizusashi (a Japanese water jar), was 95 percent sold.

Auction houses fared well during Asia Week too.

“It was a robust week of sales. The Chinese paintings was over 90 percent sold by lots, the works of art also performed extremely well, and Chinese furniture outperformed expectation. So overall, I felt the market is there and the buyers are there,” says Jonathan Stone, International Head of Asian Art at Christie’s Asia. Stone, who was in New York at the time, noted the presence of numerous collectors from Greater China. “It was

I Xuan’s Tibetan Girl

A fine and very rare teadust-glazed gu-shaped vase

Amongst top prices achieved, Tina Keng Gallery sold two works by artist Wang Huaiqing for US$3.3 million, while Galerie Gmurzynska sold a Fernando Botero painting for approximately US$1.3 million.

clear that at the top end there was a lot of Chinese participation,” he says, adding he remains “cautiously optimistic” for the year: “At a time where there is quite a lot of volatility in different markets, art and in particular blue chip art looks like a very viable and sound place to keep your fund as an alternative asset.”

Sotheby’s Asia CEO, Kevin Ching was also brimming with optimism after the firm’s April auctions in Hong Kong, pointing out that overall, sales were up 17 percent over last spring. “If this is what a correction feels like, then I sure hope we have one in the autumn too,” he quipped after the sales, which brought in US$405.5 million, exceeding the pre-auction estimate of $386 million.

Record attendance of 70,000 people at Art Basel Hong Kong also translated into strong sales in the primary market, though galleries also reported collectors were taking their time and proved more cautious. Amongst top prices achieved, Tina Keng Gallery sold two works by artist Wang Huaiqing for US$3.3 million, while Galerie Gmurzynska sold a Fernando Botero painting for approximately US$1.3 million and David Zwirner sold a 2008 work by Luc Tuymans for $1.6 million.

“The market, from our perspective, is as strong as last year,” says Jennifer Caroline Ellis, head of marketing and development at Edouard Malingue Gallery in Hong Kong, “There were more young collectors and a higher number of five-figure works sold to collectors, but both emerging and established ones.”

Joanna Strumpf of the Sydney-based Sullivan+Strumpf gallery, which participated in Art Stage Singapore and Art Basel Hong Kong, also reports that in Hong Kong experienced collectors were out in force, “and while there was not the same frenzy as we have seen in previous years, there was no doubt that they were buying.”

“It was a good mix of collectors for us — of the faithful and the new. And we were impressed by the number of younger collectors taking part in this year’s fair,” she says, adding “Having a Mandarin speaker on hand is definitely essential!”

Growing interest This growing collector interest at a lower price point had also been noted at Art Stage Singapore in January. “The economic slowdown of China has definitely influenced the mood of collectors,” said Pablo Espinel, director of VIP relations at the fair, adding“However, something very interesting happened, collectors and casual buyers focused on lower price points. I would say the mood was cautiously optimistic; if in past editions a big number of sales were made in the range of S$40,000‑60,000, this year the most popular price range was S$20,000‑25,000.

So in that sense, it was very successful for many participating galleries, because they sold more pieces, despite (these being) at lower prices per piece.”

According to Espinel, Asian collectors are still showing nationalistic tendencies, buying from artists they know and from areas they are most familiar with, but the development towards a more integrated art scene and HONG KONG BUSINESS | MAY 2016 29

singapore’s hottest startups 2015 ASIAN ART REPORT market in the region is evident.

“New buyers, especially younger investorsturned-collectors, increasingly cross-buy emerging contemporary Asian and Western artists. I believe that fairs such as Art Basel Hong Kong and Art Stage are the key drivers of this integration,” he says.

Confident in the underlying demand in the region, the organizers of Art Stage Singapore have announced an expansion with the inaugural edition of Art Stage Jakarta (August 5‑7), a new boutique outpost that will bring together about 50 galleries offering contemporary art from across Indonesia.

One of the galleries considering is the Singapore-based Chan Hampe Galleries run by Benjamin Hampe, who also heads the planning and development committee of the Art Galleries Association in Singapore (AGAS), which has 32 members.

“A number of our members have been regularly participating in international art fairs and we’ve been tracking sales figures and they have been steadily going up,” Hampe said. In September 2014, AGAS members participating in KIAF in Korea sold US$401,000 worth of art and US$711,000 worth of art at Art Paris in 2015, and had sales totaling US$1.15 million at Art Basel Hong Kong this year.

Thriving business “Business is not bad; business is actually doing well and growing. But in the current environment, yes if your business model is not strong, then there will be some natural attrition, because it’s a tough business.

You have to work at it through thick and thin and continually grow your client base,” Hampe said, adding that the closure of seven galleries at Gillman Barrack in Singapore in the last year, along with that of the Pinacotheque museum should be put into context.

“I don’t think it has anything to do with the market.

A lot of these organisations appeared because of unnatural intervention. The galleries at Gillman had been incentivized by EDB (Singapore’s Economic

Wu Guanzhong’s The Yulong Mountains After Rain

30 HONG KONG BUSINESS | MAY 2016

AGAS members participating in KIAF in Korea sold US$401,000 worth of art and U$711,000 worth of art at Art Paris in 2015.

Development Board) to set up there, but many had not thought through their business model and [researched] the market in the region and what collectors were ready to embrace. A lot of them were never going to work,” Hampe said, adding “as for the Pinacotheque, museum audiences are hard won over in Singapore and there is already a glut of museums. It really wasn’t well thought out!”

Gillman Barracks will soon get a new tenant. Believing in the strength of the current market in the region, Sullivan+Strumpf will open there in June. “Yes it is true, some of the galleries [at Gillman] have closed there recently, but to be honest galleries close in Sydney all the time too,” Strumpf said. By Sonia Kolesnikov-Jessop

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Residential projects House, Belleview Drive, Repulse Bay 6,000 S.F. Apartment, The Mayfair 6,000 S.F. Apartment, The Leighton Hill 2,200 S.F. HONG KONG BUSINESS | MAY 2016 31

hong kong’s 20 largest mba programmes

Graduates are thinking twice about getting an MBA

Is an MBA a must-have in Hong Kong?

An MBA is still advantage, but maybe not as much as it used to be.

F

or Hong Kong professionals planning to get an MBA in the hopes that it will fast-track their fledgling career, their investment may yield underwhelming returns.

Recruitment experts reckon an MBA is becoming a commodity in the territory, and that employers are putting more emphasis on work experience than a shiny master’s degree in business administration, eroding the bargaining power of MBA graduates unless they came from top schools with strong alumni networks or have developed expertise in mainland China.

“As more higher institutions offer MBA programmes and more professionals hold such qualifications, an MBA is no longer a guarantee for a big jump in salaries or managerial positions,” says Matthew Bennett,

32 HONG KONG BUSINESS | MAY 2016

The value of an MBA is not lost on companies as it can help professionals up skill and grow their business network, benefitting the organization.

managing director – Greater China at Robert Walters.

“In Hong Kong, hiring managers generally value work experience more than someone who holds an MBA degree. An MBA degree is seldom a pre-requisite for positions across middle management and below,” he adds.

Bennett also explains that an MBA does not immediately guarantee a pot of salary gold, especially in Hong Kong where experience is very highly prized.

Jack Lee, president of the Hong Kong MBA Toastmasters Club, reckons in recruiting senior level managers earning at least HK$100,000 a month, an MBA is viewed merely as a nice-to-have that complements the far more critical employee asset: Industry experience.

When evaluating candidates, Hong Kong employers seem to

consider previous and current employers, regional exposure and team size as far more important than an MBA. But for employers that do hire MBA graduates, the perceived prestige of the school comes into play, so a graduate looking to raise his hiring prospects will want to enroll in more esteemed institutions instead of just any MBA school.

“Branding of the schools is very critical to the point that the interviewers would associate the profiles of the graduates from that school with the interviewees,” says Lee. But then again, there is increasing hesitation to enroll in such expensive prestigious programmes as sectors that have traditionally clamored for MBA graduates face headwinds, says Richard Hanson, co-founder and CEO of Jobable.

“The financial services and consulting industries have tended to be the biggest hirers of MBA graduates in Hong Kong and also been some of the biggest and most consistent payers of high salaries and total compensation,” says Hanson.

Hanson observes a shift in the opportunities available to MBA graduates from the financial services sector to other industries such as technology.

Who made it to HKB’s list?

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

The list welcomes 4 new entries - HKUST EMBA for Chinese Executives, HKUST MBA for Professionals, KelloggHKUST Executive MBA Program, and The University of Hong Kong EMBA-Global Asia.

240

Kevin Chiang Prof. Andrew C. F. Chan Stephanie Villemagne

Sean Ferguson Yan Xu

Yan Xu

Dr. Mak Wai-ming, Mac Ms. Rebecca Lui

Charles Huang Qin

89 116 315

90 300

300

355

100 112

45

89 115 249 50 100 300 230 61

61

300

355 52

100 54

49

City University of Hong Kong College of Business

The Chinese University of Hong Kong Business School

The Chinese University of Hong Kong Business School The University of Hong Kong The Hong Kong Management Association The University of Hong Kong

Hong Kong UST Business School

Hong Kong UST Business School

Hong Kong UST Business School

The Hong Kong Management Association Manchester Business School (The University of Manchester)

Hong Kong UST Business School

The Hong Kong Polytechnic University Kaplan Higher Education

University of Iowa’s Tippie College of Business

CityU MBA2

CUHK Executive MBA

CUHK MBA

EMBA-Global Asia

Glyndŵr University, UK

HKU MBA

HKUST MBA

Hong Kong UST EMBA for Chinese Executives

Kellogg-HKUST Executive MBA Program

Macquarie Graduate School of Management

Manchester Global MBA2

MBA for Professionals (Bi-Weekly Part-Time)

PolyU MBA

The University of Hull Executive MBA

University of Iowa Tippie Hong Kong MBA

800

800 350

800 270

International Academy of Management The Hong Kong Management Association

University of Wales, Newport MBA2

University of Wales, UK

270

300

300

49

54

100

52

355

300

61

61

121

300

109

60

179

115

39

Hopkins Training & Education Group

William Chow

Sean Ferguson

Richard Petty

Mr. Sachin Tipnis

50

70

50

160

100

University of Northern IOWA MBA2

Survey period: April to May 2016. Data provided by companies.

1 AGSM’s Hong Kong branch will be closing this 2016.

2 Data are retained from 2015 Lifelong College did not participate in this year’s listing.

Foreign currencies were converted to HKD based on FOREX rate as at May 31, 2016

1

1

100

Richard Johnson

160

160

The University of Chicago Booth School of Business

Chicago Booth EMBA2

Mr. Dave Evers

Julia Herries

100

PART TIME

100

FULL TIME

DURATION

542,994

513,000

1,200,000

510,300

290,400

104,000

108,000

147,600

249,600

160,000

229,500

383,602

386,000

326,720

1,204,048

899,272

383,602

354,000

105,500

356,400

489,600

249,600

1,200,000

318,240

2 years

2 years

1.5 years

12 or 16 months

2 years

18 months

20-24 months

15-18 months

2 years

2 - 4 years

24 months

2.5 years

2.5 years

18 months

16 months

24 months

14 months 24 months

19 months

16 months 24 months

1 year

21 months

3 years (max. 7 years)

FULL TIME PART TIME FULL TIME PART TIME

TOTAL No. OF STUDENTS MINIMUM COST in hk$

Australian Graduate School of Management UNSW Business School

HEAD OF hong kong OFFICE

AGSM MBA, The University of New South Wales1

TOTAL NO. OF TOTAL NO. OF STUDENTS 2016 STUDENTS 2015

PROVIDER

MBA PROGRAMME

2

3

2

12

1-2

1

1

2

2

1

1

1

1

2

1

1

1

1

1

4

NO. OF INTAKES PER YEAR

hong kong’s 20 largest mba programmes

HONG KONG BUSINESS | MAY 2016 33

analysis: China Slowdown

Is time running out for policymakers?

Risks resurface for emerging Asian economies after brief respite

Economic growth risks are again haunting emerging Asian economies as China’s slowdown takes the centre stage.

A

sian markets are restless, and economies, large or small, are offering little by way of direction. Additionally, policy makers appear to be suffering from a lack of conviction about how to navigate the uncertain waters.

We are sure that there will be a lot of headlines about the US elections, Brexit, and the economic and political situation in various EU economies in the coming months, but after a couple of months of respite, we think China will again dominate global After a poor 2015, regional exports remain very weak

Source: CEIC, Deutsche Bank, Data for 2016 through March, except for China, S Korea and Taiwan

34 HONG KONG BUSINESS | MAY 2016

We are uncomfortable with the ongoing credit boom, which seems to be fuelling speculative positiontaking.

economic sentiments going forward.

It was a rare but welcome phase during March/ April, when a combination of Fed relent, weak dollar, rebounding commodities, and signs of a turnaround in China boosted global asset markets. We consistently reported during this period that fundamentals did not justify such a strong rebound, and as May has begun, it appears that those weak fundamentals are now dragging the markets back again.

Having engineered some degree of economic bottoming through stimulus measures and benefitting from the US Fed’s dovish tone, the Chinese authorities will have to demonstrate renewed policy vigour soon, as there is a palpable sense of economic momentum slowing and financial market risks resurfacing.

Vulnerabilities rise We are uncomfortable with the ongoing credit boom, which seems to be fuelling intra-financial sector intermediation and speculative position-taking as opposed to supporting real economic activity.

The renewed proliferation of investment products, many of which are characterized by a high degree of complexity and opacity, is a source of concern. China’s

analysis: China Slowdown While structural reform has become a popular catch-all term to encapsulate almost everything outside the spheres of monetary and fiscal policy, and has been used widely in this broad context, in our view more work needs to be done on systematically analysing the progress of specific structural factors and identifying the most important reform priorities in different countries.

Looking at the overall scores, Asian stalwarts Hong Kong, Singapore, South Korea, and Taiwan take up the top of the table of the structural performance scorecard.

It is striking how these economies score high almost in all categories, underscoring the point for economies aspiring to achieve high levels of prosperity that comprehensive, across-the-board reforms are needed as opposed to piecemeal efforts. At the other end of the spectrum, Argentina, Ukraine, and Venezuela remain the bottom ranked countries. These economies are characterized by very poor quality of institutions, weak financial and goods markets, and high level of state intervention in the economy.

There have been some striking changes to structural rankings between 2007 and 2014. India has seen marked deterioration in its scores, ranging from education to financial and goods markets. This contrasts with its relatively high economic growth performance during that period, but is consistent with the view that the impetus for high quality growth had slipped considerably in recent years. We will watch with interest if matters improve under the aegis of the new government, which came to power in mid-2014.

While there is considerable worry about China’s slowing growth momentum and debt problems, we take heart from its steady improvement in structural strength. While much more needs to be done, there has been encouraging improvement in its institutional quality, infrastructure, financial market, as well as goods and labour markets. Some slippage in economic openness however is a source of concern.

In terms of regions, Asia remains the most advanced on structural quality scores and Latin America the least advanced. EMEA is in the middle of the pack but there is divergence within EMEA: Czech Republic, Israel, and Poland rank much higher than Russia, Romania and South Africa. By Deutsche Bank

trade and PMI readings are not helping matters, with exports remaining weak and PMI flattening out lately, soon after reaching a trough late last year.

The readings are in fact uniform across Asia, with Asia-ex China PMI, both headline and manufacturing, turning lacklustre in recent months. Without a rebound in regional trade and manufacturing, the economic outlook will continue to darken, we reckon.

Some rebound in commodity prices and continued improvement in US labour markets have yet to translate into better exports figures. After an exceptionally poor year for trade, Asian exporters have not seen anything promising in 2016. In fact, for China, Hong Kong, Singapore, South Korea, the Philippines and Taiwan, year-to-date declines are worse than the 2015 outturn. Soft US/ EU consumer demand for Asian exports despite improvement in labour markets and an historic oil windfall (akin to a major tax cut) remains a vexing problem for the region.

In our latest update of the Asia vulnerability monitor, which looks at 9 sets of indicators for the 10 EM Asian countries in our coverage, we see China, Hong Kong, and Malaysia flashing red.

China’s transition has been striking, from very low vulnerability in 2014 to high risk ranking during the last two quarters.

Slowing growth, uncertainty about the exchange rate, high levels of corporate and state-owned enterprise debt, and fragile asset markets make the world’s second largest economy a source of substantial risks, in our view. At the other end of the risk spectrum, India and Indonesia have made substantial progress in mitigating macro risks over the past couple of years, as reflected in their “green” scores.

Hopes for structural reform As terms of trade have worsened and China has slowed, there has been a marked slowdown among EM economies in recent years. With limited fiscal and monetary policy room available, and the efficacy of demand supportive policies suspect, EM economies have little other than the pursuit of structural reforms as the way to counter the ongoing growth malaise.

We find many EM economies displaying an unsurprising and yet disappointing slippage in structural strength in recent years. This is disappointing particularly in the current cycle, which is characterized by pervasive demand weakness.

Empirical evidence from long term studies of economic growth show that most EM economies have grown on the back of strong accumulation and deployment of capital (by channelling high savings rates) and labour (taking advantage of favourable demographics), as opposed to improvements in total factor productivity (TFP).

Manufacturing PMI- new orders After an exceptionally poor year for trade, Asian exporters have not seen anything promising in 2016.

Source: Haver Analytics, Deutsche Bank. Data through April 2016

HONG KONG BUSINESS | MAY 2016 35

Legal briefing

Hong Kong breaks up the real estate club New guidelines should dissuade collusion among real estate companies and their agents.

W

hen the Competition Ordinance came into force late last year, real estate players and agents felt like they were walking on eggshells. Many were careful to act in fear of violating the stricter regulations and incurring harsh penalties. But in April, the Hong Kong real estate regulator Estate Agents Authority issued a circular and frequently asked questions (FAQ) with detailed compliance guidelines. Analysts reckon these guidelines should give more confidence to players and agents in compliance training and commission rate setting, respectively.

What are the implications of these new guidelines?

“The circular alleviates difficulties that the industry was facing following the entry into force of the Competition Ordinance,” says Marc Waha, competition lawyer at Norton Rose Fulbright.

“Rather than a change in regulation, the main effect of the circular and the FAQ is that they assist estate agents in their understanding of the new competition rules and in how to comply with them.”

The guidelines emphasise that real estate businesses must determine their commercial strategies independently, and must not enter into arrangements with their competitors on matters such as pricing and customer targeting, according to Waha.

Meanwhile, the circular reminds estate agents that

“These guidelines should give more confidence to players and agents in compliance training and commission rate setting, respectively.” failure to comply with the Competition Ordinance may also constitute a breach of ethics, which may lead to disciplinary action.

Waha explains that the additional guidelines in the circular and FAQ give concrete examples on how agents should comply in the specific context of their profession, exploring nuances in the regulation that were not immediately apparent when the Competition Comission issued general guidance for all Hong Kong sectors. “Estate agents facilitate market transparency, informing landlords and tenants alike of market trends. Information sharing is thus a key feature of what they do, but under competition law this carries a significant risk if it turns into a collusive practice. From this perspective 36 HONG KONG BUSINESS | MAY 2016

the circular is useful in helping estate agents assess the type of information they can share without giving rise to risks under the Competition Ordinance,” says Waha.

Marc Waha

James-Wilkinson

How should real estate players and agents brace for these new guidelines?

If even with these guidelines real estate players and agents still do not comply with the Competition Ordinance, then they should be prepared to pay the price. “Real estate players and agents need to take steps to ensure they comply with the guidelines. The consequences of breaching competition law can be severe,” says James Wilkinson, senior associate at King & Wood Mallesons.

Wilkinson points out that real estate businesses may be fined up to 10 per cent of their company group’s annual turnover for competition law breaches.

Compliant agencies will need to review their business practices, in particular their interactions with competitors, and provide training for staff on competition law compliance. “Competition law guidance and training should in particular be given to high-risk employees such as those who regularly communicate with customers or competitors. A company may be held responsible for any wrongdoing by employees,” says Wilkinson.

For their part, erring real estate agents may be subject to disciplinary action by the Estate Agents Authority, including licence suspension or revocation.

“While agents could have suspected that competition law breaches could have disciplinary consequences – as with any legal violations – the circular now makes this clear,” says Waha. Wilkinson reckons agents must be especially mindful about following any standard rate or a rate that is set collectively in any way.

Do you see any challenges in implementing these guidelines?

While the circular and FAQ do not impose additional challenges in implementation, analysts reckon the Competition Ordinance last December created significant risks for estate agents and may cause some painful adjustments.

Waha says agents used to justify the level of the commissions they charge by referring to ‘market rates’ or ‘going rates,’ but it will be dangerous to continue this practice. A small comfort for agents is that the new circular provides concrete guidance on how estate agents should price independently and avoid any collusion when setting commission levels.

Wilkinson reckons The Competition Ordinance made many standard business practices in Hong Kong illegal after the new competition law took effect, and difficult adjustments are to be expected.

HONG KONG BUSINESS | MAY 2016 37

CMO Briefing

customer journey – from online to offline,” says Ng Yew Hwee, Greater China managing director at Adobe Systems. “Always-connected, everdemanding customers experience a brand from multiple touchpoints – from physical stores, to smartphones, to the web, to large in-venue screens – and they are making judgements about businesses based on the experiences they have with the brand, and the quality of such experiences.”

Ng enumerates three parameters that customers use when evaluating whether the brand is delivering engaging experiences or not.

The secret to a winning online-to-offline plan The onus is on marketers is to make the experience engaging, personalised and seamless.

W

hen Hong-Kong based jewellery brand Chow Sang Sang wanted to add some excitement to its stores, it set up interactive stations where customers could design and “try on” accessories virtually on a display screen. Customers were so pleased with experience that they would take images and share these to friends on social media, creating online buzz and driving more visitors to Chow Sang Sang stores.

Chow Sang Sang’s virtual jewellery stations represent the new face of online to offline strategy or O2O, where interactive technology work together with the brick and mortar experience to boost foot traffic, says Nicholas Kontopoulos, global vice president of fast growth markets marketing at SAP Hybris, which helped Chow Sang Sang install the in-store displays.

“In today’s retail world, brands and retailers are constantly looking to fully blend the physical and digital presence seamlessly to cater for modern day customers,” says Kontopoulos. Kontopoulos reckons the latest wave of O2O initiatives have enabled retailers to boost the number of visitors and consumers to their stores, and he expects more brands to adopt similar strategies.

Engaging experiences A key goal in any O2O push is to craft engaging experiences for customers across the different platforms that they interact with the brand.

“Customers today crave personalized, relevant and real-time digital experiences, no matter where they are or how they happen to be interacting with a particular brand. They expect consistent content, offers and experiences throughout their entire 38 HONG KONG BUSINESS | MAY 2016

First, is the experience personalized?

“Customers want brands to know their buying histories and make customized suggestions, with properly designed loyalty programs,” says Ng. Marketers can do a better job in this area or risk eroding customer loyalty, says Kontopoulos, citing a Forrester survey his brand commissioned which revealed that 61% of consumers that report lessthan-satisfactory personalized experiences are somewhat or much less likely to advantage of future offers.

Customers are making decisions in the so-called ‘micro-moment’ and Kontopoulos challenges brands to collect small data and respond to micro-moments with personalized experiences. Doing so will allow them to capture a customer at that point of time and potentially generate sales.

Second, is the experience omni-channel, useful and contextually relevant?

“Customers move through their journeys with the brand, and they expect content offered to them to change accordingly at every step,” says Ng. “Single transactions must also be accessible across all channels available to customers in a seamless manner, like starting a transaction on a phone, continuing it on a tablet or laptop, and finishing it on a desktop.”

Customers today crave personalized, relevant and realtime digital experiences, no matter where they are.

Third and last, is the experience timely?

“The right experience must be delivered at the right time, not only across digital touchpoints, but also in brick and mortar, including waiting time on the phone at a store or the amount of time a customer spends to locate something on a brand’s website,” says Ng. With customers jumping from one online touchpoint to another, or to an offline touchpoint and back, it is important for the O2O initiative to make these transitions as seamless and hassle-free as possible.

“Nowadays, customers expect to be able to make purchases anytime and anywhere. They may go offline for product experience and price comparison, and then purchase online to enjoy free and fast delivery,” says Katie Choy, manager at Microsoft Online Store.

HONG KONG BUSINESS | MAY 2016 39

analysis: RMB depegging

The RMB is expected to de-peg from the US dollar

RMB depegging: A looming spectre

Hong Kong is expected to be at the wrong end as the renminbi falls, as analysts predict repercussions for various industries, ranging from mildly disturbing to catastrophic.

O

ur chief economist Eric Fishwick expects forex-reserve depletion to push Beijing to let the renminbi find its market-determined value by 2H17. That is likely to trigger a 25% depreciation but a bounce thereafter. This report explores the spectre of Rmb8/US$1, which is where we expect the currency to be by end-2017 before it appreciates further in 2018. There will be much pain for the region before the gains come through. However, removing the renminbi overhang will allow a more sustainable rebound for Asian equities to follow.

Unless China can return to a balance of payments surplus, the central bank will have to adjust the exchange rate. Doing this gradually through an ever bigger current-account surplus would be inefficient and counterproductive. Letting the currency fall quickly will restore financial flows to equilibrium: it is China’s financial account that needs fixing, not its current account.

The market sees Rmb8 as a tail risk but which fattens with each month of decline in FX reserves. Our analysts quantify the consequences for stocks and sectors.

The usual suspects - airlines, utilities, property and construction – will be worst affected, while in China, commodity producers, gold, upstream oil, infrastructure and exporters are likely to be more resilient. The secondary impacts on consumer confidence, potential capital flight, bankruptcies, unemployment, NPLs and 40 HONG KONG BUSINESS | MAY 2016

“China’s foreign reserves have fallen

by US$800bn since peaking in mid-2014 at US$3.99tn.”

political uncertainties are somewhat unquantifiable.

Hong Kong will face major deflationary forces as the renminbi falls, as the HK dollar peg against the US dollar will remain for a while yet. Property will be negatively hit by capital flight from China and deflation in Hong Kong.

Mainlanders’ reduced buying power will be felt further away in Singapore and Australia. Financial volatility, risk-aversion and, in some markets, deposit flight will be extremely negative for banks. Commodity producers outside China will face more competitive mainland rivals.

In particular, tech demand will fall as China is a major buyer of consumer electronics as well as telecoms and enterprise infrastructure.

We expect greater stress for Australia, Korea and Taiwan, which send over a quarter of their exports to China. Currencies across the region will fall. Our economics team projects greater depreciation for the Aussie dollar, Taiwan dollar and the won; and more moderate declines for the yen, rupiah, Singapore dollar and peso. Overall, it will not be pretty.

Renminbi unhinged What can’t go on forever must come to an end. China’s foreign reserves have fallen by US$800bn since peaking in mid-2014 at US$3.99tn. Monthly FX reserve increases since 2H14 have been few, small and far apart – despite massive trade surpluses. Capital is flowing out and has

analysis: rmb depegging accelerated with the rumblings of an unhinged renminbi.

Ongoing interest-rate cuts to boost the economy, lower returns from mainland assets, a policy of allowing the currency to decline when the US dollar is strong, plus the ongoing anticorruption crackdown all point to continued capital flight. As China’s reserves fall below US$3tn, the prospect of further declines will snowball the outflows.

The depletion of foreign reserves to support the currency cannot continue forever. Our economics team expects that by 2H17, Beijing will step back and allow the renminbi to find its market-determined value. That will lead to a sharp fall in the renminbi before buyers have confidence to accumulate an undervalued currency.

We estimate the renminbi could fall to 9/US$ - ie, a 25% decline - and then start to rebound. Our Rmb8/US$1 forecast is an estimate of where the renminbi will be by end-2017. Our economics team’s view is that the currency will appreciate further into the following year and get back to Rmb7/US$ by mid-2018. Volatility in the FX market will have major implications for financial markets and Asian equities.

Property will be one of the most affected sectors

would be particularly exposed by a sharp downward move in the renminbi. Insurers would be somewhat better off as most have significant foreign assets, but they will still see a downdraft from their investment portfolios.

While they will unwind as the renminbi subsequently rebounds, these secondorder effects from a sudden depreciation of the currency will be quite ugly. The firstorder impacts are clear. Companies with US-dollar costs and liabilities will be squeezed. Airlines with large dollar debt are net losers; a potential shift of travel patterns towards more local holidays would also be negative for the sector. Macau gaming would face the unfavourable prospect of lower revenue, as the bulk of its customers’ spending power is tied to renminbi while much of the debt to finance projects has been raised in dollars.

The machinery sector and some importers in tech and consumer would also be adversely impacted.

Somewhat counterintuitively, the materials sector in China could outperform. Local producers that are exporters will get higher renminbi pricing as long as commodity prices do not fall more than the projected renminbi decline. Mainland gold producers could well be major winners, especially as in this scenario the dollar price of gold is likely to rise. In the oil & gas sector, upstream producers that sell oil internationally will benefit from a stronger dollar, in particular CNOOC, as we do not expect oil prices to weaken as much. The impact will be somewhat muted for Sinopec and PetroChina as a larger share of their upstream production is sold domestically ie, in renminbi rather than dollars. However, downstream operations will be squeezed by upward pressure on input costs in renminbi terms.

Drastic impacts of RMB volatility The impact of significant renminbi volatility is likely to be drastic on the ground. In the initial period when the renminbi is allowed to float, there will be a greater rush to take funds out. A large swathe of domestic industries would be impacted by the drain in domestic liquidity.

Property companies with high gearing (and quite a large portion of their debt in US or HK dollars) will attempt to accelerate sales and offer tempting discounts to get cash in, particularly as banks are likely to pull credit lines if their deposits are depleting. We estimate the rush to sell will lead to a rapid 10% nationwide decline in property prices.

Banks and the regulators would have to react very quickly to the panic outflows that can be expected. One possible consequence is that the authorities reverse the reforms and tighten controls. However, capital controls for an economy as large and as open as China’s will be porous. Outflow of deposits as the currency declines will lead banks to push up rates. Margins will be squeezed as lending rates will not adjust upwards as quickly as on deposits. NPLs would rise fairly quickly. Thus the banks would be squeezed even tighter by the pincer of shrinking margins and rising loan provisions.

Banks such as CMB and ABC with net foreign liabilities Renminbi exchange rate

Source: CLSA, Bloomberg

“We estimate the renminbi could fall to 9/ US$ - ie, a 25% decline - and then start to rebound.”

Currency swings Large swings in the currency will have not just an economic impact but also implications for the political masters. The perceived loss of control if the renminbi turns out to be extremely volatile will be negative for the perception of order and command. The messy outcome of pure market forces is likely to lead the authorities to try

analysis: Rmb depegging for a controlled move - ie, a dirty float of the renminbi.

However, a managed float means that the currency will not find its equilibrium value as quickly. The pain might be less sharp, but uncertainty about the currency’s true value and direction would be an overhang for longer.

The trajectory could turn out to be similar: a significantly lower renminbi value before natural buyers come in.

Moreover, a drawn-out adjustment would make the pain last longer at the cost of a greater depletion of reserves.

Meanwhile, in the Hong Kong Special Administrative Region, the deflationary forces of a drop in the renminbi will be severe. The peg will be maintained against the US dollar as the authorities in Hong Kong are unlikely to move to a renminbi peg until the fundamental value of the motherland currency is clear. Hong Kong will become even more expensive, meaning an even sharper falloff in mainland visitors and greater pain for retailers in the SAR. Office rents will be under pressure as mainland companies will be reluctant to open big offices in Hong Kong.

1997 flashback As the HK dollar is held up while the renminbi and regional currencies fall, we expect a replay of the turmoil seen in 1997. The peg will come under attack, which will result in a spike in interest rates as the HKMA buys local currency to support the unit, in that process taking HK dollars out of the commercial banking system. Rising rates will exacerbate the deflationary pressures of holding up the currency: we estimate residential property prices could fall a sharp 15-20% very quickly.

However, after the renminbi adjusts to a marketdetermined value, and once the renminbi capital account is liberalised, the HK-US dollar peg is more likely to be converted at some point into a more natural peg to the motherland that determines the financial viability of the SAR. Across Asia Pacific, unhedged US-dollar loans of borrowers as well as a poorer outlook for commodity producers and China second-derivative economies would be generally negative for banks. NPLs will rise for Chinese banks, especially if there is liquidity flight, while deflationary pressures in HK will be a major stress on the sector. Regionally, financials will be vulnerable when there is turmoil in markets as the renminbi plunges. Insurers will be geared towards downward moves in the markets given their investment portfolios.

Asian currency depreciation: two years to end-17CL

Source: CLSA, Bloomberg

42 HONG KONG BUSINESS | MAY 2016

Analysts expect a replay of the turmoil in 1997

As the HK dollar is held up while the renminbi and regional currencies fall, we expect a replay of the turmoil seen in 1997.

A fall in the renminbi will be negative for commodity producers globally where China is a marginal producer, as it lifts China’s competitiveness. Thermal coal and aluminium prices are most vulnerable, since China is a highcost supplier and has excess capacity to export.

However, gold, iron ore and copper will probably be less impacted as prices are more influenced by ex-China factors. A sharp renminbi decline is thus negative overall for ex-China producers, but positive for Chinese miners.

China’s oil demand in the international markets is likely to ease, and sentiment for the sector will be negative while the renminbi is falling. However, with supply rebalancing and China’s contracts with Middle-East suppliers denominated in renminbi, the magnitude of the oil price drop may not be as large as feared - ultimately possibly only around US$5/bbl.

Nevertheless, the expectation that oil prices might be capped while China’s buying power is reduced would be negative for upstream producers and relatively better for downstream energy stocks outside China. As noted earlier, capital outflow and a sharp correction in liquid asset classes will undermine the property sector in China.

We believe prices could decline by 5-10% on average as developers rush to offload their inventories to raise cash. In Hong Kong, the Hibor is likely to spike with potential speculative pressure on the HK dollar; and with deflationary forces as the HK-US dollar peg is maintained, property prices could drop by 15-20%. We expect property prices across the region to similarly be soft, particularly in Singapore.

China represents 22% of global demand for consumer tech hardware. We expect that a 25% depreciation of the renminbi will lead to a sharp contraction in unit-demand, which would be a major headwind for component suppliers, assemblers and brands. China also accounts for about 20% of telecom and enterprise infrastructure investment globally; a lower renminbi would be negative for demand in these sectors as well.

The mainland accounted for 17% of Japan’s exports and 25% of its imports in 2015. Chinese visitors are now 26% of inbound visitors to Japan, thus it is highly sensitive to the spending power and patterns driven by

analysis: rmb depegging renminbi moves. However, Japan’s real effective exchange rate (REER) is half of its peak in 1995; a short, sharp depreciation in the renminbi will still leave Japan as a relatively cheap tourist destination. Our economics team expects the yen to weaken against the US dollar, reducing the impact on the renminbi/yen cross.

Japan strategist Nicholas Smith notes that a ¥1/US$ move has only 0.4% impact on operating profit for the market. However, the market PE quite obviously moves with the yen. Three-quarters of the trading on the Topix is by foreigners, thus the yen/dollar rate impacts how these companies are valued globally. We find that the stocks most correlated with the yen are not exporters but those that are driven by risk appetite - ie, banks and other financial stocks.

In the past, the yen has tended to strengthen in periods of renminbi weakness given the risk-off trade. However, if the yen depreciates somewhat as the economics team predicts in a period of significant Asian currency weakness, the losers in Japan would be power companies that run thermal plants and thus import gas and oil fuels, along with some retailers such as ABC-Mart.

With 26% of its exports going to China, Korea is one of the most exposed countries in the region to mainland buying power as determined by the renminbi rate. It presently enjoys a US$50bn annual trade surplus with China. Lower buying power from China as the renminbi depreciates will put pressure on the won; we see it depreciating 13% over the two years to end-2017.

Effect on tech companies Tech companies such as LG Display and auto manufacturers (particularly Kia, where exports make up 40% of total volume, versus 23% for Hyundai Motor) are likely to gain from won weakness. The tourism sector is likely to be viewed as negatively impacted by a renminbi decline, but the ultimate impact depends on the extent of won depreciation.

Taiwan has a long-serving central bank governor who has built up the bank’s credibility and kept the Taiwan dollar’s value fairly stable. However 25% of Taiwan’s exports are to China, and thus its currency is likely to be vulnerable if the renminbi sees a sharp move. We project 16% downside in the two yearsto end-2017 for the Taiwan dollar, fairly close to our projected renminbi depreciation.

This will have a negative wealth effect and lead to higher unemployment domestically. It will be negative for domestic sectors such as property, autos and banks.

A weak Taiwan dollar would be a boost for exporters, particularly in tech, machinery and textiles.

Indonesia’s ratio of exports to GDP has halved from 40% in 2000 to less than 20% now. As it becomes more domestically driven, the economy and currency will be more resilient than in the past. We forecast only slight rupiah depreciation to end-2017. Some importers may benefit if the rupiah appreciates against the renminbi, such as Kalbe Farma and Ace Hardware. Very few listed companies now have dollar debt exposure (MNC being a notable exception). But further weakness in commodity prices and secondary impacts on the economy would

Technology companies are poised to benefit

be negative for the banks. Remittances and the businessprocess-outsourcing (BPO) sector will give the Philippine currency relative strength even as regional currencies head lower. We expect the peso to depreciate just under 10% by end-2017. The government will face a bigger strain, however, as foreign-currency obligations are 40% of its total debt. Companies with dollar debt or costs that would be negatively impacted include JG Summit, GT Capital (depending on the yen cross), PLDT, LTG and Globe.

“We estimate the renminbi could fall to 9/ US$ - ie, a 25% decline - and then start to rebound.”

Bad news for exporters?

Exporters such as Del Monte and URC would be net gainers. Our economics team projects a 20% devaluation of the renminbi will mean around 10% decline for the baht. Thailand is one of the cheapest places to visit, going by hotel rooms, and it is likely to remain competitive for Chinese visitors. Baht weakness will be negative for petrochemicals and airlines in particular, given their US-dollar debt, but positive for food exporters and the domestic medical tourism industry.

Malaysia’s trade deficit with China has ballooned from RM3bn in 2012 to RM23bn in 2014. The central bank historically has steered the ringgit lower whenever the renminbi has depreciated. We expect the ringgit to decline 11% to RM4.8/US$1 over the two years to end-2017.

Beneficiaries are exporters such as Top Glove, Karex and Petronas Chemicals, and potentially tourism plays such as Genting Malaysia. Companies with significant USdollar costs - such as UMW, Astro and AirAsia - will be negatively impacted.

Singapore’s monetary authority will manage the Singapore dollar such that it will not depreciate as much as other regional currencies. We forecast the Singapore dollar to decline moderately. Lower commodity prices and pressure on oil prices will be negative for oil & gas plays as well as the commodity sector, and will hit domestic demand. Weaker regional currencies will be negative for tourism into Singapore. A sharp renminbi devaluation is likely to lead to asset deflation and risk aversion will push up bank NPLs. HONG KONG BUSINESS | MAY 2016 43

ECONOMICs

Ian Perkin

HK economy slows in Q1

G

iven the turmoil on global markets in the opening quarter of this year, it hardly comes as a surprise that the Hong Kong economy was caught in the backlash.

Even so, the first quarter economic growth (GDP) figures issued on May 13 came as a bit of a shock with real growth in the economy slowing to just 0.8% compared with the same quarter a year earlier.

This was less than half the year-on-year growth recorded in the final quarter of last year (1.9%), which was itself well down on the growth seen in the proceeding three quarters.

It continues the slowdown in growth in the local economy over the past three years after its solid recovery from the impact of the global financial crisis in 2008. The first quarter outcome does, however, help explain the cautious forecast for 2016 growth of just 1-to-2% contained in the recent Hong Kong Budget and the expansionary measures included in the Budget itself. It also confirms the deterioration in Hong Kong’s goods and services trade position obvious in the volume and price indices for trade issued earlier in May. Most significantly, the first quarter GDP figures confirm that the local economy is being negatively impacted by the Mainland’s slowdown as much as wider global conditions.

Local weakness It is also significant that the local weakness is now evident across the whole economy, with only government spending maintaining its growth rate for the latest quarter. Private consumption spending was particularly weak with only 1.1 percent growth, almost one-fifth the rate of growth in the first quarter of last year (5%) and less than half the growth in 2015’s closing three months.

Domestic investment (Gross Domestic Fixed Capital Formation) slumped 10.1%, with machinery and equipment down 11.9% on a year earlier and even building and construction down another 0.8%.

External trade, whether with the Mainland or the rest of the world, is now clearly having a major impact on the Hong Kong SAR economy, negatively impacting local sentiment.

But the slower growth on the Mainland is also having a more direct effect on the domestic Hong Kong performance, as crossborder trade and tourism moderate.

Given this situation, it is hardly surprising the first quarter report from the Principal Economist, contained the following warning about the immediate outlook and employment: “The Government needs to stay alert to the repercussions of the slowdown in inbound tourism (dominated by Mainland visitors) and slower economic growth on the labour market conditions in the period ahead,” it said.

Figures out earlier in May showed that Hong Kong’s global merchandise exports in the opening three months of the year were down 4% compared with a year earlier, with exports to the Mainland showing a much bigger decline. Imports also fell 5.4%. Re-exports for the period were off 4% on a year earlier, domestic exports dropped 12.1%. Reflecting global price trends, prices of re-exports

44 HONG KONG BUSINESS | MAY 2016

IAN PERKIN Independent Economic Consultant perkin888@hotmail.com Still slowing: Hong Kong GDP 2016 (%year-on-year)

Source: HongKong Government

fell 2.9%, domestic exports by 3.4% and imports 2.8%.

Importantly, exports to the Mainland were down a larger 7.6% in volume terms in March (a reflection of the slow down in the mainland economy), although imports into Hong Kong from the Mainland were only 0.2% lower. The Mainland economy grew at a 6.7% annual rate in the opening three months of the year, the slowest quarterly growth in seven years, but in line with expectations.

Beijing’s targeted growth for the year was in the range of 6.7to-7%, but this has since been revised downwards to a range of 6.6-to-6.8% according to the Chinese Academy of Social Sciences.

Given this background, it is no surprise that the Government has maintained its Budget prediction for annual growth this at just 1-to2%. Indeed, the first quarter outcome suggests annual growth will likely be at the lower end of that range, rather than 2% or higher.

Modest economic growth The government itself believes that global economic growth is “likely to remain modest” in the period ahead, “with risks still tilted towards the downside.” It is worried about the performance of major western economies (and their impact on trade in goods and services), continuing geopolitical tensions, US interest rates and divergent central bank policies.

But it is more sanguine about the Mainland economy meeting its growth targets for the year, which should help support local sentiment somewhat, despite South China Sea tensions. “In short, the trading environment for Hong Kong’s exports will remain rather difficult in the coming months,” the government said.

Combine that with weaker domestic sentiment in consumption and investment and the remainder of the year is unlikely to produce any significant recovery. Much will clearly depend on the Mainland being able to keep its own economy motoring along in the midto-high single digits. The leadership in Beijing has shown that it is aware of the difficulties facing the Mainland in its transition from an investment and export-based economy to greater reliance on domestic private consumption.

HONG KONG BUSINESS | MAY 2016 45

OPINION

tim hamlett

Why banks don’t want your business

T

he whole of the Hong Kong commentariat – or at least that segment of it which likes banks and the Hong Kong government – has been churning out explanations for Joshua Wong’s mysterious difficulty in opening a bank account at HSBC. As often happens when the destination to be reached by an argument is more important than the means for getting there, the two leading innocent explanations flatly contradict each other.

On the one hand we have the apologists for the banking sector, explaining that Mr Wong’s status as a high-profile person would mean his account, if he were allowed to open one, would need constant supervision and attention. No doubt this is necessary to ensure he does not join many famous people in sending his money to Panama.

On the other side we have people who, perhaps, do not like banks but really dislike Mr Wong. They say that Mr Wong, far from being a high maintenance celebrite, is a nobody. He is a young man with no job and no income. Why would a bank anywhere want such a customer?

Well times may have changed but I found this last question easy to answer. Mr Wong is a student. Banks have long since realized that by being nice to people while they are students they can snare customers whose future prospects are bright, however poor they may be now.

When I was a student this recruitment of the poor but promising was conducted with enthusiasm. All the banks advertised in student publications, however disreputable the other contents of those publications might be. All sorts of goodies were offered as an inducement to setting up an account. Indeed having inherited the family connection with Barclays before I reached university I rather resented the fact that I could not qualify for any of the presents.

The University of Lancaster’s then small and isolated campus had two bank branches, which in those days averaged out at about a branch per 1,000 or so students, which seems rather generous. Also generous was the general attitude to overdrafts. The manager of the Nat West branch, who was particularly famous as a willing lender, once explained to me that his employers accepted that his branch should not be measured by any of the usual banking metrics: its job was to recruit grateful future customers.

Well-placed branches Universities continue to enjoy this sort of service, though. Baptist University also has two bank branches. As banking in Hong Kong is almost entirely a duopolous enterprise split between the HSBC group and the Bank of China fleet we can hardly expect more. I suspect that if Mr Wong had turned up at a university branch where penniless young people are the standard cannon-fodder he might have opened an account without anyone noticing.

This may of course be quite wrong. One of the strange features of Hong Kong life is that

46 HONG KONG BUSINESS | MAY 2016

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

although banking is supposed to be a fiercely competitive business one hears many complaints nowadays from people less newsworthy than Mr Wong of how difficult it is to open an account. Perhaps both explanations are true. They don’t want you if you are rich and famous – too much trouble – or if you are poor and obscure – no money, no profits.

Taking small businesses into consideration Certainly there is a particular problem for small businesses wishing to open a business account. Banks do not make it easy and will often flatly refuse. I have heard several sad stories of people tramping the streets of Central in search of a bank which was willing to take their business. Indeed a popular view in start-up circles is that this would be a better route for government aid than the usual loans, advice, start-up parks and what have you. To boost business creation what they need is a simple bank, doing the simple stuff – cheques, deposits, credit cards – and skipping the investment advice, “financial products”, insurance disguised as financial products, and other efforts to diversify in the direction of rich customers. It should be willing to open an account for anyone with a business registration certificate, an ID card, and a deposit. It should have no connection with New York, so the American authorities can be told what to do with their FATCA forms.

Banking is a fiercely competitive business

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OPINION

Hemlock

Helping out the HK Tourism Board

T

his has been a week of unrelenting trauma, and there are six more days to go. I am unwittingly helping the Hong Kong Tourism Board’s latest campaign to cram millions of additional visitors onto our shores, regardless of the city’s capacity to accommodate more bodies in its midst. In particular, they are targeting families.

(In addition, they are trying to lure professionals aged 25-45 – those 46 and above apparently being undesirable, which sounds about right.

And Mainlanders keen on ‘quality and honest tours’ (as opposed to those who prefer being ripped off and assaulted). And travellers who find the idea of our ‘Wine and Dine Festival’ appealing, if any. Ditto something called a ‘Formula E Championship’. These special ‘events’ are secretly designed to repel potential visitors, surely?)

It’s all part of the Great Hong Kong Tourism Hub-Zone Strategy of the 2010s. Take all the buildings, neighbourhoods, culture and activities that give the city its characteristics and ambience, unique in the world – and eradicate them.

In their place, put the same plastic, designerlabel, Disney-fied, fake, tacky, sterile crap you get everywhere else in cities-that-look-like-airportdeparture-halls. Then scrabble around trying to find people brainless enough to want to come here.

So, as I say, I am contributing to this noble effort. I have guests: a family. My brother’s.

As (allegedly) a world ‘leader’ in his creative field, he has been on a lecture tour Down Under, and is holding a workshop here on his way back home. He has his wife and two tweeny youngsters with him, because if he left them behind they would be wasting time on stuff like bringing in a second income and attending school.

A typical day… We start with the Botanical Gardens (monkeys – can’t go wrong). A swing past the Peak Tram to confirm the Tourism Board’s worst fears about plummeting numbers of Mainland visitors; yes, it is nearly all Westerners lining up. The HK Park aviary is of course brilliant. Lunch at Pacific Place proves impossible, as the sort of kid-friendly food-hall outlets have vanished because the landlord has focused on luxury blah-blah retailers whose Mainland money-laundering clientele has sadly dried up.

So off to CanTeen in Queensway. I have eggplant, pork and rice. HK$38. Simple. Yummy. But one of the things I have noticed with family/kids is

48 HONG KONG BUSINESS | MAY 2016

that ‘simple’ is not good enough if ‘horrendous problem’ is at all possible.

Snag: there’s ‘not much’ on the menu. That’s because my brother’s family voluntarily impose upon themselves a rule that they must not eat meat. Seafood is OK (in reluctant deference to nutritional science), so they go with Portuguese baked fish – the gooey coconut/egg thing. The kids pick at the rice but can’t handle the vivid yellow sauce and accompaniments. (Raised to fear meat, they also seem to distrust vegetables.

So far, I have seen them eat only refined starches like breakfast cereals, bread, toast and crackers, with a bit of cheese thrown in.)

Simple is not an option The big excitement is to ride on a tram – part of authentic Hong Kong that the bureaucrats and tourism/property sector have not wiped out.

But as always, ‘simple’ is not an option. Despite a visit to the facilities at Queensway, a restroom emergency is declared. So we bail out at Victoria Park, where the squat toilets cause some initial amusement. But then things take a sinister and nightmarish turn. The little girl, who has not been herself, has… worms.

I am advised that I am not helping by displaying my extreme horror so visibly. The well-travelled kids have had this before; we just need the right remedy. The first place we find in Tin Hau does not look promising, offering mainly milk powder and shampoo.

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

Is Hong Kong still a famous tourist destination?

50 HONG KONG BUSINESS | MAY 2016