Hong Kong Business (October - November 2016)

Display to 30 November 2016 HK$40

THE

PROPERTY ISSUE

• Why the luxury market is the hottest right now • Will home prices fall by 30% in the next three years?

• What are the mainlanders buying in Hong Kong?

+ NEW BOWLERS

HOODIES ARE THE BANKERS’

DIM SUM BONDS

LOSE FLAVOUR

MARKETERS: HAVE YOU MAPPED OUT

YOUR CUSTOMER JOURNEY?

ICAC EYES RETAILERS 38

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

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. In this issue we look into real estate troubles linked to falling retail sales and dwindling tourist arrivals from the mainland. Banks are letting go of expensive office spaces whilst retailers are urged to take advantage of softening rents.

Publisher & EDITOR-IN-CHIEF Tim Charlton associate publisher Louis Shek production EDITOR Terry Gangcuangco graphic artist Elizabeth Indoy

ADVERTISING CONTACTS Louis Shek +852 6099 9768

At the same time serviced offices are becoming a popular workspace solution. In terms of residential property, analysts expect the addition of significant supply in the near term to suppress home prices.

In our Economic Insight, OCBC says the Hong Kong property market could regain traction in the near term. Meanwhilst UBS doubts there will be much recovery in store beyond the bottom.

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

In this issue we also talk about how dim sum bonds are losing their flavour, with Panda bonds eating away at their popularity.

Enjoy the issue!

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

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Hong Kong Business erred in its August-September issue by placing an incorrect caption for one of the photos in the HKB Awards coverage which should have read “Dr Mak Wai Ming of The Hong Kong Polytechnic University” instead of “Henry Tan delivering congratulatory remarks.”

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We will however take the gains.

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HONG KONG BUSINESS | NOVEMBER 2016 1

CONTENTS

28

Cover story hong kong home prices facing a precipice

FIRST 06 Shenzhen’s boom is

Hong Kong’s bane

07 08 10 12

Hong Kong’s REITs get a reno

Banks on the move to cheaper digs Mouseketeers avoiding Hong Kong Hoodies are the bankers’ new bowlers

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 | NOVEMBER 2016 262 Des Voeux Road Central, Hong Kong

26

analysis are luxury brands’ glory days in hong kong over?

42

event coverage Why the IoT got everyone panicking about security

REGULAR

OPINION

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

44 Ian Perkin: Economy withstands

political headwinds

46 Tim Hamlett: Welcome to a new

concept: Soft lobbying

48 Hemlock: HK’s next punishment:

New cross-border revenue streams

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

news

Mainland visitors in Hong Kong plummeted by 10.6% to just 20.4m In the first half of 2016, it has been noted that Hong Kong welcomed 20.4 million mainland visitors, down 10.6% year-on- year.

According to a research note from Knight Frank, mainland visitors also reduced their spending in Hong Kong while increasing it abroad.

News

Why Hong Kong employers risk losing millennial talents Employers in Hong Kong are apparently not doing enough to motivate and retain the next generation of professionals.

According to a research note from Morgan McKinley, its findings show that hiring managers should be more collaborative from the very early stage of the hiring process.

news

Hong Kong to be home to world’s richest residents by 2020 Switzerland tops the current ranking of the world’s wealthiest territories measured by savings per capita, with the average Swiss citizen holding more than $186,000 in liquid assets. However, Hong Kong will overtake Switzerland to have world’s richest citizens by 2020.

News

Salary expectations of Hong Kong’s fresh grads hit $17,314 per month A global survey conducted in Singapore and Hong Kong earlier this year found that it would cost an employer more to hire fresh graduates in Singapore as their average expected monthly salary amounts to $3,308. In comparison, their counterparts in Hong Kong expect to draw the equivalent of $2,798 (or HK$17,314) per month.

In focus

Why a recovery is highly unlikely for Hong Kong’s retail sector The retail sector in Hong Kong continues to show no signs of recovery as overall sales keep falling. Hong Kong consumer sentiment and disappearing visitor numbers have led to the 16th consecutive month of declining retail sales.

in Focus

Hong Kong leads world in number of IPOs and funds raised in 2016 The volume of IPOs and funds raised ensured Hong Kong continued to rank first globally. According to PwC, due to pressure from slowing economic growth in China, weak economic recovery globally, uncertainty over the UK referendum to exit the EU, and the pace of US interest rate hikes, overall market sentiment had been less than ideal.

The all-new E-Class.

Masterpiece of Intelligence.

HONG KONG BUSINESS | NOVEMBER 2016 5

FIRST With the RMB continuing to be under pressure, the trend of PRC middle-class and high-net-worth individuals allocating a portion of their investments to overseas assets should continue and buying assets denominated in a US$-pegged currency, such as properties in HK, would make sense from a wealth protection standpoint.

hey, Millennials

Firms in Hong Kong may be neglecting to motivate and retain the next generation of professionals as new research says companies in the territory aren’t collaborative enough in terms of dealing with millennials.

According to a study by Morgan McKinley, the lack of feedback from hiring managers and complaints that the actual role did not meet the description were some of the common issues raised by millennials. One in four (25%) millennials interviewed felt that the lack of response was the biggest challenge.

The study also notes that hiring managers believed that the new generation wanted more feedback and does not understand the importance of experience in the workplace.

Millennials, meanwhile, disagreed with this view, with 23% stating that they have learned all they can and are open to more learning opportunities.

One in ten (10%) millennials also stated that they were not really learning anything new, compared with 15% of non-millennials, according to the study.

Job satisfaction Millennials also had different views in terms of career progression and job satisfaction.

26% of interviewed millennials ranked faster promotion as the most important factor in job satisfaction compared to 16% of non-millennials. In comparison, hiring managers believed personal development and career progression were the biggest challenges in retaining millennial generation talent.

Further, hiring managers were also pessimistic about the quality of millennials’ work motivation and career goals, noting how they tend to change jobs more frequently.

6 HONG KONG BUSINESS | NOVEMBER 2016

It all makes sense from a wealth protection standpoint

Shenzhen’s boom is Hong Kong’s bane

A

Mainlanders are the main buyers The mainland buyers are even starting to show up in unusual places such as Homantin, where Wheelock indicated about 20% of the units sold at its One Homantin project in September were bought by mainlanders even though many of them are subject to an extra 15% BSD. The percentage of mainland buyers was only 5% earlier this year for the project, notes Bank of America Merrill Lynch. And while no one living in Hong Kong would think of homes in the SAR as being affordable, they are becoming “relatively more affordable” vs firsttier cities in China.

HK’s housing affordability ratio, defined as monthly mortgage payment as a percentage of median private household income, now stands at 58%, according to a BoAML calculation assuming flat size of 700 psf, 70% LTV, and 25 years of mortgage tenor. It notes that in reality, this ratio should be slightly lower as HKMA has tightened mortgage limits for flats valued below HK$7m from a maximum LTV of 70% to 60% starting March 2015.

So for the would-be Hong Kong property buyer it looks like there is no respite from the pressures of mainland buyers at least for this year.

ny potential Hong Kong property buyers hoping property prices would fall in the wake of the foreign buyers tax can only be scratching their head at the resurgence of the mainland buyer. In the second quarter of 2016, northerners accounted for 25% of new market purchases, their coffers and confidence buoyed by burgeoning prices in Shenzhen property. It is a doubling of mainland interest in a year from punters undeterred by the additional buyer stamp duty.

Sure, it is still lower than in 201112 when the tax was introduced and mainlanders accounted for a third of sales, but it is where the home sales are happening that paints the most interesting picture.

In the three months to June this year mainlanders accounted for 32% of luxury properties.

Where are the sales coming from?

In the three months to June this year mainlanders accounted for 32% of luxury properties vs just 11% for small-and medium-sized units.

The real value to mainland buyers of luxury property seems to be not as a place to live, but as a store of value. With the RMB continuing to fall against the US$ and expectations that the latter will strengthen further if rates rise, it may well be a solid bet to continue to buy luxury property.

Historical correlation between HK prop prices and CNY/HKD FX

Source: Centaline, Bloomberg, BofA Merrill Lynch Global Research

FIRST HK retail sales value growth yoy

Source: CEIC Bloomberg, BofA Merrill Lynch Global Research

How much difference does a nice paint job make?

Hong Kong’s REITs get a reno

I

n times when tenants are balking at rent rises and retail sales are falling, is it better for a mall operator to invest and renovate the mall or milk it for all they can earn? That question has been answered emphatically over the first half of 2016 by Link REIT, which has spent the past few years investing in sprucing up its malls.

With 44 properties renovated, or as they call it in the industry, asset enhanced since 2006, how much difference does a nice paint job make to rents in a falling market?

Quite a lot it seems.

Analysts were somewhat

astounded that in the quarter to June 30, Link’s tenants saw store sales rise 4.2% yoy whilst retail sales in Hong Kong fell by 6%.

That is some feat, even more so considering competitor Wharf said its tenant sales in Harbour City and Times Square fell in July.

The only signs of life in Hong Kong retail that Wharf saw was an increase in foot traffic growth during the mid-autumn festival, although still no signs of a sales pick-up. Wharf believes the drop in retail sales will continue to narrow based on improvement in tourist arrivals and luxury retailers’

Link’s tenants saw store sales rise 4.2% yoy whilst retail sales in Hong Kong fell by 6%.

global price harmonisation.

Bank of America Merrill Lynch analyst Karl Choi reckons things were not as bad for highend shopping malls as their key shoppers are Individual Visitor Scheme (IVS) visitors (down 13.7% yoy in Aug, which was less severe than the decline in group tours).

Sales at Harbour City, for example, outperformed the overall Hong Kong market (-7.8% YoY) in July.

Elements Mall recorded mild sales growth in July although it endured a bigger retreat in sales in August and Hysan’s portfolio (excluding Apple Store) saw a narrower drop in sales in Jul-Aug vs down 8.9% in 1H16. “It remains our view that high-end retail sales in HK should see a narrower decline in 4Q,” says Choi.

The chartist: The tWIN EFFECT OF WEAK TOURIST ARRIVALS Contracting by 10.5%, retail sales fell for the 18th consecutive month in August. Persistent weakness looms, and BMI Research believes accommodation services will be negatively affected as well. “Retail sales will suffer from weak tourist arrivals from the mainland due to strong anti-mainland Chinese sentiment and further expectations of Chinese yuan depreciation,” says BMI Research.

These same factors are impacting the accommodation sector, as Chinese tourists go on day trips instead. “Indeed, data from censtatd showed that business receipts from accommodation services (which cover hotels, guesthouses, boarding houses, and other establishments providing short-term accommodation) continued to contract for the sixth consecutive quarter.”

Hong Kong - retail sales value and mainland visitors arrivals. % chg yoy

Hong Kong - accommodation services business receipts. % chg yoy

Source: BMI, Censtad

Source: BMI, Censtad

HONG KONG BUSINESS | NOVEMBER 2016 7

FIRST

Banks on the move to cheaper digs

Survey

Don’t touch the 7’s

I

n the choice between cutting staff or quitting expensive office space, Hong Kong’s banks are at least choosing the latter in their quest to reduce expenses. No longer is a prime central address necessary on one’s name card, especially if one is a middle or back office worker reconciling derivatives trades at 3 in the morning. All of which explains the latest rumoured moves by a number of banks to cut their “exposure” to expensive Central real estate.

News on the grape vine has it that a French bank will reportedly surrender 88,000 sq ft of space at Three Exchange Square to move its back-office operations to Taikoo Place. Also relocating out of 3 Garden road is a US bank which will apparently give up three of its floors. And finally, and oh the horror, a Japanese bank will make the almost unthinkable move and head for cheaper digs at the New World Centre at Tsim Sha Tsui.

None of this is good news for landlords who face a tougher 2017 than this year, which has seen office rents rise 3.5% so far. Rents in decentralised districts such as Tsim

There is no doubt that the Hong Kong Sevens is the most significant sporting event on corporate Asia’s calendar, but is it too under threat from Singapore? The Lion City has been steadily improving its sporting infrastructure and recently won the bid to host the World Tennis Association finals partly because the stadium in Victoria Park can seat over 3,600 people, whereas Singapore’s indoor stadium can seat 12,000.

Banks are holding on to their people

Sha Tsui and Kowloon East fell 1.3% qoq and 0.3% qoq, respectively.

While Central office space is still showing little vacancy, one notable change in the market is the cooling interest from PRC renters.

Analysts at Bank of America Merrill Lynch say landlords seem more willing to offer rent concessions that are not necessarily reflected in open market rates in order to retain large tenants.

This should lead to a 5% drop in Central office spot rent in 2017 and beyond when new office space becomes available in 2H17 and 2018.

Rents in decentralised districts such as Tsim Sha Tsui and Kowloon East fell 1.3% qoq and 0.3% qoq, respectively.

Mobile APp Watch

This app helps you find a place for your next night-out Hong Kong is home to some of Asia’s most exciting dining and after-hours venues. With a bevy of trends entering the marketplace, choosing the backdrop for your next social gathering can sometimes be daunting.

Enter Happy Owl, a new subscription-based app which allows subscribers to redeem one drink every day at its partner establishments for a monthly fee of $199.

“We combine technology innovation and marketing tactics to provide a platform and solution to drive more traffic to bars and restaurants at a very low marketing cost to a very targeted audience, who love to eat and drink,” says co-founder Cassie Mak. The app has 51 partner establishments across eight districts in Hong Kong. A rapidly expanding list of noteworthy locations includes Bitters and Sweets, Cé La Vi, and Ammo. Cassie founded Happy Owl with friend Daniel Cheng.

8 HONG KONG BUSINESS | NOVEMBER 2016

What should keep HK worried?

With Singapore’s Joseph Schooling’s recent gold medal win at the Olympics, the city state now boasts five olympic medals to Hong Kong’s three.

But it’s the new 35-hectare Sports Hub that includes a national stadium, indoor stadium, multipurpose halls, aquatic centre, water centre, sports museum and a mall that should have Hong Kong worried.

The Hong Kong government is planning the Kai Tak Sports Park which will include a 50,000-seat stadium, public sports grounds, indoor sports centres but that won’t be ready until 2022.

But it is Rugby that Singapore is also looking at and had a very successful 2016 when it bought back the IRB Sevens at the 50,000-capacity stadium.

Sure, it’s not the south stand yet, but Singapore is nothing if not ambitious and a Tiger goes down just as nicely as a San Miguel. Add to that the English Premier League’s Asia Trophy which was held in the Sports Hub in 2015 and was hugely popular, the Formula 1 race, and one does get the feeling that Hong Kong literally needs to rev up its sporting efforts if it is not to lose to its cousin in the south.

FIRST

Mouseketeers avoiding Hong Kong

A

ngola, Cuba, Yemen, Eritrea, and China are amongst just 25% of countries whose citizens require a visa to visit Hong Kong, and that has some questioning the wisdom of a one country, two visa system. This year has seen the number of mainland visitors to Hong Kong fall by 4% year to date so far, whilst every other Asian market has seen more mainland tourists visit. So what is behind this slump in Hong Kong’s fortunes and what can be done about it?

It can’t have gone unnoticed by officials from the Hong Kong Tourism Authority that the drop in mainland visitors has coincided with the opening of Disneyland Shanghai this year, which obviously competes with Disneyland Hong Kong and is on track to draw 8 million visitors this year, whilst Disneyland Hong Kong draws 6.8 million. But whilst it would be easy to blame the cannibalistic mouse, there are more subtle changes going on in China tourism trends that should have Hong Kong concerned.

A survey by research firm CLSA securities amongst middle-class families in tier 1 to 5 cities reveals stronger interest in domestic tourism than overseas travel in 2016, and among those who travelled abroad last year, the average number of overseas trips is likely to fall from 1.5

in 2015 to 1.2 in 2016. Around 38% of respondents expect to spend more on domestic travel in 2016 than in 2015, compared with 19% who plan to spend more overseas. One easy fix would be for the government to relax visa laws for mainlanders and allow more residents to travel to Hong Kong individually. Currently only residents of 49 Chinese cities can travel without a group tour to Hong Kong, so it would seem simple to extend this to more tier 2 and 3 cities.

More tourists, less quality?

In the age of the Skyscanner and TripAdvisor, the idea of being forced to go on a group tour to visit Hong Kong seems very 1980’s. Multiple-entry visas would also make life easier for mainlanders wanting to pop in via Hong Kong on the way back from somewhere else too. But as the shift to more tourists grows, there is also a risk that the quality will decline.

CLSA analyst Aaron Fischer notes that per-capita spending of overnight mainland Chinese tourists started falling in 2014, before volume started dropping in 2015. In 2014, entertainment was the only category that recorded an increase, whilst others —such as shopping, accommodation, and meals - all fell by single digits Spending on tours dropped a sharp 24%, resulting in an

Tourist arrivals in Hong Kong

Source: CLSA, CEIC

Per capita

Source: CLSA, CEIC

overall decline of 3% yoy from HK$8,937 to HK$8,703.

In 2015, meals outside hotels went up, but shopping, accommodation, entertainment, and tours spending were all down, driving a total 9% all to HK$7,924. Perhaps it is inevitable that as China develops its own tourist attractions, people will prefer to either stay at home or venture to far abroad like America or Europe, leaving Hong Kong rather stuck in the middle.

OFFICE WATCH

How the start-up culture fuels KAYAK Travel search engine KAYAK, which is experiencing explosive growth across the Asia Pacific region, is set to take advantage of what is becoming the world’s largest digital travel sales market. Currently leasing a private office in a co-working space in Hong Kong, US firm KAYAK will likely transition into its own independent office space amidst regional growth.

Its APAC headquarters was set up in Central to enable KAYAK to be surrounded

by Hong Kong’s thriving business and technology hub. “The talent pool of Hong Kong made it a clear choice for our first office in APAC – there’s an entrepreneurial vibe here that’s indisputable,” says Keith Melnick, President of KAYAK. “While we are no longer a start-up, we still act like one, so surrounding ourselves with entrepreneurs and innovators is important to us.” The office is located on Des Voeux Road, Central.

10 HONG KONG BUSINESS | NOVEMBER 2016

KAYAK Stamford office

KAYAK Cambridge office

Open seating area

KAYAK’s terrace area

FIRST NUMBERS

hong kong’s entrep shift

Serviced offices have been a popular workspace solution

Hoodies are the bankers’ new bowlers

T

he days of the bowlerhatted and briefcase-toting banker may be long gone, but at least everyone still shows up for work on time as they stride into the great banking edifices in Central. Alas, that morning sight too is now under threat as a new generation of tech-driven bankers is demanding to work in cool startup spaces complete with fussball tables and presumably a dog or cat roaming the corridors.

So how is a bank to mesh the free-spirited tech wizards of the future with the stuffy three-piecesuited boardroom environment that typifies banking in Hong Kong?

Following an industry trend In HSBC’s case it has decided to move its entire digital innovation team into one of those trendy co-working or flexible work spaces that are mushrooming in Hong Kong. The bank has leased two floors comprising 400 desks from WeWork in the 535 Tower in Causeway Bay, a most unusual location for a bank.

But as Colliers analyst Zac Tang notes, the move by HSBC follows the industry trend of large financial institutions establishing innovative technology-focussed teams away from their traditional office space in order to benefit from the unique 12 HONG KONG BUSINESS | NOVEMBER 2016

culture and work environment offered by these operators.

In the US and Europe, banks such as Barclays, Citi, Mitsubishi UFJ, and RBS have set up centres outside their main operations aiming to attract new technologically aware talent and to allow staff to work in a more creative setting. And HSBC is by no means alone in opting to outsource its offices.

While large corporate tenants have not taken up this type of space in Hong Kong before, serviced offices have been a popular workspace solution for major tenants such as Abu Dhabi Investment Authority, Ping An Securities, Tokyo Stock Exchange, and Western Union. Indeed, HSBC’s decision could well mark the beginning of a trend in Asia.

How is a bank to mesh the free-spirited tech wizards of the future with the stuffy threepiece-suited boardroom environment that typifies banking in Hong Kong?

Space leased by flexible workspace operators in 2016

Source: Colliers International

Source: GoDaddy.com/garage

ANALYSIS: RETAIL SALES WEAKNESS

The decline in mainland visitors has weighed on luxury sales

No ka-ching as tills ring silent

BMI Research believes weakness in Hong Kong’s retail sales will persist, with calculations showing a high correlation between the growth of retail sales value and mainland visitors.

H

ong Kong’s retail sales (in value terms) fell for the 18th straight month in August in y-o-y terms, contracting by 10.5% y-o-y (versus -7.7% y-o-y in July). We believe that the decline will likely persist over the coming months, which will weigh on private consumption growth in the territory. We highlight that Hong Kong’s retail sales are heavily dependent on spending by tourists from the mainland. As we expect mainland Chinese tourist arrivals (accounting for around 75% of total visitor arrivals) to Hong Kong to be negatively impacted by increasing antimainland sentiment and a weaker Chinese yuan, and consequently weigh on retail sales.

Our calculations show that there has been a high correlation of 0.8 between the growth of retail sales value and mainland visitors since January 2012.

Antimainland Chinese sentiment remains strong in the Special Administrative Region (SAR), and this was evident from the record voter turnout of 58% during the September 4 Legislative Council 14 HONG KONG BUSINESS | NOVEMBER 2016

Hong Kong’s retail sales are heavily dependent on spending by tourists from the mainland.

elections, in which a younger generation of politicians (who are more radical than the traditional pro-democracy camp won eight seats in the 35-seat geographical constituencies). In addition, banners stating ‘Hong Kong Independence’ were also put up in various universities on China’s National Day on October 1. This has in turn benefitted the travel market in other Asian countries close to China such as South Korea and Japan. Indeed, Chinese visitors to South Korea and Japan rose by 48.8% y-o-y and 33.9% y-o-y, respectively, for the first eight months of 2016.

Furthermore, expectations of further Chinese yuan depreciation against the Hong Kong dollar will also dampen tourist arrivals from the mainland. We note that the number of mainland visitors declined by 9.1% y-o-y for the eight months of 2016, and it is unlikely to pick up over the coming months.

Luxury sales under pressure Together with the ongoing anticorruption campaign by

Chinese President Xi Jinping, the decline in mainland visitors has weighed on luxury sales, and we expect this trend to remain intact.

According to the Hong Kong’s Census and Statistics Department (censtatd), the value of sales for the ‘jewellery, watches and clocks, and valuable gifts’ category has been one of the worst hit, having fallen for 23 consecutive months in y-o-y terms, clocking in at -26.6% y-o-y in August (versus -26.2% y-o-y in the previous month).

We therefore believe that the profitability of major jewellery retailers with significant operations in the territory is likely to remain under pressure over the coming months.

These include Hong Kong listed companies such as Luk Fook Holdings (International) Limited, Chow Tai Fook Jewellery Group Limited, and Chow Sang Sang Holdings International Limited.

We note that for Luk Fook, the Hong Kong market accounted for 58.6% of overall revenues for FY2016, while for Chow Tai Fook, the territory, Macau, and other Asian markets was 39.2% of total sales for FY2016 (both ending in March 2016). Lastly, for Chow Sang Sang, 59.1% of the top line came from Hong Kong and Macau for FY2015 (ending in December 2015).

Indeed, their overall return on equity (ROE) has suffered significantly in recent years due to poor performance in sales and also upward pressures on rental expenses, and it is difficult to see an improvement any time soon. Data from Bloomberg showed that ROE for Luk Fook and Chow Tai Fook fell to 11.1% in March 2016 (from 29.6% and 31.5% in March 2012) while that for Chow Sang Sang dropped to 8.4% in December 2015 (versus 14.7% in December 2012).

From “Economic Analysis - Retail Sales And Accommodation Services Weakness Not Yet Over”

by BMI Research

startups

New service for landowners too busy to manage their Airbnb’s

B

eing a host on short-term rental platforms can be tedious and time-intensive. A team of experienced entrepreneurs set up GuestReady with the mission “to take the hassle out of short-term rentals.”

GuestReady is a startup that professionalises hosting for shortterm rental platforms such as Airbnb.

Its service is aimed at Airbnb hosts and property owners with the goal to provide hassle-free hosting to help homeowners double their income.

Services include listing creation, guest communication, housekeeping, laundry, and key management.

GuestReady keeps the unique aspects of Airbnb and, by doing so,

hopes it will not only provide ‘hotellike services’ to guests but will also create a listing that generates higher yield for short-term rental properties.

The founding team consists of experienced ex-Rocket Internet venture executives from Zalora, Foodpanda, Wimdu, and Kaymu who are all avid travelers, so they understand the particular needs of a guest. However, they are often disappointed by either the listing, the host, or the service provided. Hence, the idea to professionalise the shortterm rental industry was born.

GuestReady was simultaneously launched in August in Hong Kong, Kuala Lumpur, Singapore, London, Amsterdam, and Paris. By launching GuestReady globally, managing director of GuestReady Hong Kong Lou Chan explains that the startup leverages location-specific advantages and taps into economies of scale to keep costs at bay. The co-founders manage multiple homes to gain insights and experiences on what it takes to be an outstanding short-term rental host.

Swiss Founders Fund, a seed and early stage investment fund, helped fund GuestReady.

Check out this one-stop shop for gifts “Gifts are so embedded in the Asian culture. It’s not like the West where there is only Christmas. There is midautumn festival, Chinese New Year, there are two Valentine’s Days in Hong Kong, and giving gifts is part of life in Asia,” says Justin.

The team behind GiftSomething had no programming or e-commerce experience, yet they managed to build a website in two weeks so they could start the ball rolling to meet demands for mid-autumn festival. Three years later, GiftSomething has grown to be Young entrepreneur Justin Chung one of the most successful players in believes that no matter how bad the the industry. economy, everyone needs gifts. After The company is currently selfhis fashion business in Australia failed funded with US$130,000, yet it is during the financial crisis, he moved profitable with an estimated turnover to Hong Kong in 2011 to be in the gift of US$3 million this financial year. business. He founded GiftSomething – The team is raising US$1 million to billed as the world’s first one-stop gift ramp up operations and expand into department store.

Southeast Asia.

16 HONG KONG BUSINESS | NOVEMBER 2016

Lifestyle upgrade with Qualitarian

The global marketplace for health and wellness products is filled with tons of offerings that oftentimes do not work, work incorrectly, or are plain harmful. The media’s endless supply of contradictory and confusing information adds to the hassle. Finally, the industry is often set up so that consumers never win but always have to return for more. A new health and wellness platform called Qualitarian promises to do differently by enabling consumers to upgrade their lifestyle.

Founded by Mikko Revonniemi, Qualitarian serves as a one-­stop s­ hop for Hong Kong’s health and performance community. It aims to provide premium items and high-quality educational materials through its online platform, Qualitarian.co.

According to Mikko, they only provide curated products and have developed strict guidelines on what can go into their store. Citing an example, Mikko says, “Sugar cane has nothing but damaging effects to your body and it can be easily replaced by better ingredients. There are no reasons to use cane sugar, so we have locked it out from Qualitarian.co.”

They also focus on sustainable packing materials such as recyclables.

Qualitarian is an evolution of established health and wellness platform Berrytime. The upgraded platform features over 1,000 products ranging from Personal Care, Healthy Home, and Biohacking. It offers free delivery to any location in Hong Kong.

According to Mikko, Berrytime was a two-year project to test the waters and learn more about the Hong Kong eCommerce space in a “stress-free” environment. Now he felt he had all the pieces of the puzzle, so he went ahead and rebranded to Qualitarian and began building the founding team.

Prior to Berrytime, he co-founded and was the CEO of US-based startup Four Sigmatic – another pioneer in the wellness industry.

After Four Sigmatic, Mikko wanted to start from scratch again. He invested all his personal savings to Berrytime.com and got some seed funding totaling HK$1.5 million. “While I could have used the funding to hire an army of people, and leverage on human capital, I believe the deep understanding I gained by doing everything myself is much more valuable now, when it’s time to scale up and move fast,” he says.

According to Mikko, they are planning to close the first round of seed funding amounting to HK$15 million in the next few months.

CO-PUBLISHED CORPORATE PROFILE

Hummingbird identity set to help FTLife soar to great heights in the insurance market

Fresh addition to the local financial services industry draws on a heritage that has served the market for more than 30 years.

FTLife’s Regional CEO Lennard Yong, Chairman Fang Lin and CEO Stuart Fraser pose for the camera just before the official brand-launch party kicks off

F

bristles with hi-tech facilities that include a TLife Insurance Company Limited medical unit offering check-ups and other (FTLife) is one of Hong Kong’s services. largest life insurance companies and Meanwhile, the company’s branding serves customers from a rich portfolio campaign has taken the city by storm, of insurance and wealth management thanks to the vibrantly-colourful products. hummingbird logo adorning billboards in The company’s brand is a fresh addition major tunnels, as well on buses, trams and to the local market, which it intends to throughout the MTR. lead by generating strong growth based Formerly known as Ageas Insurance on the guiding principle “Your Future Our Company (Asia) Limited, FTLife is a whollyPromise” and by helping customers lead owned subsidiary of fulfilling lives.

“We will uphold Tongchuangjiuding In short, FTLife our commitment to Investment aspires to become Management a leading insurance delivering excellent group in Asia, customer service via Group Co Ltd Group). The based in Hong our 2,800-plus agents (JD new company Kong, with roots in and staff” serves individual mainland China. and institutional CEO Stuart clients from a diverse portfolio of financial Fraser said: “We will uphold our protection and wealth management commitment to delivering excellent customer service via our 2,800-plus agents products.

FTLife is about achieving genuine and staff. In fact, our state-of-the-art highnet-worth customer service centre opened customer satisfaction. In fact, a company statement reads: “FTLife provides in October, underscoring our intention customers with comprehensive insurance to become a leading provider of financial and financial planning services to help them services in Hong Kong.” achieve their aspirations. The desired result Called FTLife Prestige, the VIP customer is for our customers to enjoy the financial service centre is in Harbour City and

18 HONG KONG BUSINESS | NOVEMBER 2016

FTLife’s neon sign radiates a firm commitment to Hong Kong

freedom to lead fulfilling lives.”

The brand also reflects FTLife’s status as an insurance industry heavyweight. Fraser said: “This new brand on the financial services scene represents one of Hong Kong’s largest such companies, based on a heritage that has served the local community for more than three decades.

And solid fundamentals and prudent investment strategies have earned the company favourable rankings from global rating agencies.”

The hummingbird logo embodies the company’s proactive approach to serving customers – and now hovers just above the city on a giant LED sign on the Far East Finance Centre rooftop overlooking Victoria Harbour.

FTLife Chairman Fang Lin said: “We chose the hummingbird as our logo because its amazing manoeuvrability, extraordinary adaptability and incomparable vitality symbolise FTLife’s core attributes.

In fact, our hummingbird logo projects the agility, innovation and ambition we apply to serving customers in ever-changing markets.”

He added: “At the same time, our ‘Your Future Our Promise’ motto is about providing customers with a fully-rounded

CO-PUBLISHED CORPORATE PROFILE

FTLife Prestige is the state-of-the-art high-net-worth customer service centre opened in Tsimshatsui

Aggressive FTLife advertising adds a splash of colour to the city

financial planning, risk management and in life. Blue symbolises youth. We insurance service to suit different stages help our customers lead fulfilling lives of their lives. FTLife aspires to become a by planning for a bright future. Red top-notch insurance group in Asia, based symbolises adulthood, during which we in Hong Kong, with roots in mainland help customers get the very best out of China.” maturity and Four colours “FTLife aspires to become parenthood. were chosen Lastly, orange a top-notch insurance to represent represents the group in Asia, based in FTLife’s sunset years.

Hong Kong, with roots in And we enable corporate mainland China” identity. Fraser our customers to said: “The enjoy life after corporate colour scheme represents our retirement and accumulate wealth to product service categories, as well as the hand down.” four stages of life – childhood, youth, Two exciting events are now on the adulthood and the sunset years.”

FTLife calendar as part of the brand He added: “Green symbolises campaign. The first is the “Jacky Cheung childhood. We all aim to help nurture – A CLASSIC TOUR Live in Hong Kong” our children so they rise to great heights event featuring home-grown pop legend

Thousands of fans cheer to hear FTLife presents Jacky Cheung – A CLASSIC TOUR Live in Hong Kong

Jacky Cheung, who will be performing his first concert in nearly five years.

Fraser said: “Jacky’s well-known commitment to excellence is consistent with FTLife’s unwavering determination to provide customers with the best possible health and wealth protection.

This collaboration is guaranteed to delight thousands of Jacky Cheung fans including many FTLife customers.”

The second major attraction is the “FTLife New Milestone” lucky draw, which places eligible customers in the running to win a gleaming new Mercedes-Benz CLA 200.

Other prizes include concert tickets for the “FTLife presents Jacky Cheung – A CLASSIC TOUR Live in Hong Kong” concert and free credit on an FTLife Credit Card, as well as travel and hotel dining coupons.

Our hummingbird logo catches the eye immediately

HONG KONG BUSINESS | NOVEMBER 2016 19

FINANCIAL INSIGHT: dim sum bonds

ecimen p s

Panda bonds are eating away at dim sum bonds’ popularity

Dim sum bonds losing flavour

Issuers and investors are starting to turn away from dim sum bonds and are now flocking to Panda bonds.

O

nly a couple of years ago, issuers and investors were feasting on dim sum bonds like there was no tomorrow, but there is a new star in the debt market world: Panda bonds. Analysts note that while the dim sum market has grown rapidly and even reached record proceeds in 2014, Panda bonds are starting to amass momentum, and may soon overtake dim sum bonds in popularity. While the competition between dim sum bonds and Panda bonds heats up, Hong Kong dollardenominated (HK$) bonds are performing very well, almost doubling in proceeds so far this year.

“In the long run it is likely that the Panda bond will win out,” says Keith Pogson, senior partner, financial services, Asia Pacific at EY. “Depth and pricing will likely be key reasons as well as the present uncertainty as to conversion rights for currency.”

With the move to internationalise the use of renminbi, Panda bonds are receiving quite a push from Beijing.

Loose monetary conditions meant to spur the economy have kept onshore funding costs lower, and made Panda bonds increasingly more attractive to foreigners that want to raise funds on the mainland.

The debut of China’s Panda bonds, an equity boom, and the yuan devaluation have helped slow down the demand and issuance for dim sum bonds, says Elaine Tan, senior analyst, deals intelligence at Thomson Reuters.

Dim sum bonds began gaining traction in 2010 after the 20 HONG KONG BUSINESS | NOVEMBER 2016

With the move to internationalise the use of renminbi, Panda bonds are receiving quite a push from Beijing.

loosening of restrictions and the issuance of international institutions, until reaching a peak record level in 2014 when total proceeds raised amounted to RMB337.7b (US$54.9b). But total dim sum bond proceeds so far this year amounted to RMB85.6b (US$13.0b), down 38.8% from the same period last year.

“Although dim sum bonds started to pick up again during the second quarter of this year, potential headwinds include currency concerns and increasing interest in China’s onshore bond market,” says Tan. In contrast, Panda bonds issuance increased in 2016 year-to-date and reached RMB17.6b (US$2.7b), a large jump from RMB5.0b (US$777.8m) issued in 2015.

Issuers and investors might be losing their appetite for dim sum bonds, but they will have a growing taste for Panda bonds, especially with incoming measures to increase the latter’s adoption. Pogson says Chinese authorities have been showing interest in necessary reforms to spur the take-up of Panda bonds, including the relaxation of filing requirements to support multiple formats of accounting, which has been one of the key problem areas in issuing Panda bonds.

The increase in defaults have also dented interest in dim sum bonds, but analysts believe there is still a healthy pool of investors keen to snack on dim sum bonds.

“PRC issuers are hungry for capital and the whispers of looming defaults certainly spook some investors, but there

FINANCIAL INSIGHT: dim sum bonds are a lot of investors out there still looking for yield and dim sum is one familiar way to participate,” says Thomas Kollar, partner at Mayer Brown JSM. “For the right issuers, dim sum will always be an option,” he adds. “It will be interesting to see the interplay between the fast developing onshore Panda market and the offshore dim sum market over the course of the next year.”

Favourable yields While the rivalry between dim sum bonds and Panda bonds dominates headlines, Hong Kong’s local currency remains a viable source for issuers seeking to meet regulatory capital requirements, says Tan. In fact, total issuance of HK$ bonds continued to grow at a record pace with proceeds amounting to HK$137.6b (US$17.7b), an 89.5% increase from the same period last year.

The Financials and Government sectors accounted for majority of the issuance with 95% market share. Overseas issuers, excluding China, tapped the HK$ bond market and accounted for 26.7% of the market share.

Kollar says the recent uptick in activity is due to issuers seeking to take advantage of favourable yields either to raise new funds or re-finance existing debt.

Tan reckons the strength of the HK$ bond market stems from Hong Kong’s sterling reputation as an international financial centre, and an array of recent measures to develop the market.

The Hong Kong SAR Government has been at the forefront of strengthening the city’s bond market. One of its key initiatives is the Government Bond Programme, which was implemented to bolster the breadth and depth of the local bond market. The larger programme consists of the institutional bond issuance programme and the retail bond issuance programme, and looks to build up the bond market as a complement to the equity market as well as strengthen Hong Kong’s financial stability as a premier international financial centre.

The government has also been keen on enhancing Hong Kong’s position as an Islamic Finance centre, particularly in capital markets, and a gateway to China. Hong Kong issued its first sukuk or Islamic bonds in 2014, and since then there have been more banks offering Islamic banking services across the island. Officials have also made it a priority to retain Hong Kong’s status as the largest offshore Chinese Yuan clearing centre.

Dim sum bonds

Source: KPMG

It will be interesting to see the interplay between the fast developing onshore Panda market and the offshore dim sum market over the course of the next year.

singapore view

SG bonds: Who’s borrowing where?

When the primary bond offerings from Singaporedomiciled issuers reached US$6.6 billion in the first quarter of 2016 – the highest first quarter period in terms of proceeds since 2013 – there was a question on whether this momentum will be sustained. So far, it has been, with companies still preferring to raise funds offshore, leaving the Singapore dollar bond market out to dry.

Primary bond offerings from Singapore-domiciled issuers this year continued to accelerate to reach US$21.5 billion, up 25.2% in proceeds compared to the first nine months of 2015, says Elaine Tan, senior analyst, deals intelligence at Thomson Reuters.

“Singapore issuers looked beyond the domestic SGD bond market and turned offshore, tapping the US dollar bond market,” says Tan, noting at least US$5.7 billion worth of issuance, a 3.4% increase in proceeds from the same period last year. This is a shift from the first quarter of 2016 when Singapore issuers tapped the US dollar bond market and only raised US$1.1 billion, down 43.6% in proceeds compared to the same period last year.

Meanwhile, EURO-denominated bonds issued

by Singapore companies reached US$3.9 billion, a sharp increase compared to US$634.6 million in the first nine months of 2015. This is a further improvement from the first quarter of 2016 when EURO-denominated bonds issued by Singapore companies only totaled US$3.1 billion compared to the US$634.6 million issuance in the first quarter of 2015.

Notable deals include Temasek’s euro debut with US$1.2 billion (€1.1 billion) and United Overseas Bank’s US$541.7 million (€498.3 million) first euro covered bond. By contrast, the SGD bond market, which has been favored as a safe haven against market uncertainty and volatility, could be facing headwinds for the rest of this year.

The third quarter of 2016 has already shown signs of a slowdown, with Singapore’s local currency bond issuance dipping to S$2.6 billion, a 63.7% sequential decline from the second quarter of 2016, and down 52.9% from the third quarter of 2015. This is a further deterioration from the first quarter of 2016 when the SGD bond market reached around S$3.8 billion (US$2.6 billion), a 21.6% decline in proceeds compared to the same period last year.

Singapore dollar bonds volume - Top Macro industry - 2016 YTD

Source: Singapore DCM Review, Thomson Reuters

HONG KONG BUSINESS | NOVEMBER 2016 21

ANALYSIS: PRIME RETAIL SPACES Despite current challenges in the retail market, a new opportunity has presented itself in the form of fast fashion, activewear, affordable luxury fashion, cosmetics and beauty brands, as well as overseas food and beverage operators.

Retailers in these sectors have become more active in looking for prime retail spaces. With shop rents having already dropped an average of 30%, these brands are taking advantage of the new, lower cost of entering or expanding their operations in Hong Kong.

Retailers should take advantage of softening rents

International brands cash in on falling retail rents

Colliers Research predicts rents of prime street shops will decline by a further 10% for the whole year of 2016.

A

further slowdown in visitor arrivals and structural changes in mainland consumer behaviour continued to squeeze retail sales across the board.

Overall retail sales fell for the 18th straight month in August 2016, with total sales value down 10.2% yearon-year (yoy) between January and August 2016, according to the Census and Statistics Department.

Meanwhile, the volume of inbound visitors decreased 6.4% yoy during January and August 2016, in which mainland tourists saw a sharper decline, down 9.2% yoy, according to the latest statistics from the Hong Kong Tourism Board.

Tourists are spending less in Hong Kong, with the overall tourist expenditure dropping 14.6% in 1H 2016, from HK$7,598 to HK$6,492 per person (US$974 - US$832). Similarly, mainland tourist expenditure fell 15.8% from HK$8,445 to HK$7,105 per person.

We expect the impact of declining

22 HONG KONG BUSINESS | NOVEMBER 2016

Brands are taking advantage of the new, lower cost of entering or expanding their operations in Hong Kong.

tourist spending on the local retail industry will start to diminish after 18 months of consecutive decreases.

The retail industry is adjusting to the changing market conditions, exploring new business models, and tailoring its services more to the local population.

Retail sales Oxford Economics predicts that Hong Kong retail sales will contract 9.4% in 2016 before rebounding to positive growth in 2017 (2.0%), 2018 (2.8%), 2019 (2.9%), and 2020 (2.8%).

Given a soft tourism market, we expect that local consumption’s share of total retail sales value will expand further as the revenue from tourists continues to decrease.

The spending power of the middle class should remain firm given a healthy employment market and steady wage growth. Accordingly, we believe consumer essentials is the sector that will continue to show strength.

Who’s taking up the prime spaces?

Godiva, a Belgian chocolate company, opened a store on D’Aguilar Street, Central, during Q3 2016 with a rent reduction of almost 40% compared to the previous lease in 2014. It is Godiva’s first standalone shop in Hong Kong as the company normally runs stores in shopping malls.

This is a tactic that was previously prohibitive on cost grounds.

In addition, the American fashion retail brand Forever 21 opened its second store, a new three-level store of 19,000 sq ft, in Mong Kok; Minki (street-style-meets-Scandi-chic design brand under H&M) opened its fourth standalone store at Windsor House in Causeway Bay; and the French sportswear brand Lacoste took over the space at The One in Tsim Sha Tsui which was previously occupied by a luxury watch brand.

Furthermore, Da-Jiang Innovations Science & Technology Company (DJI), the world’s biggest maker of drones, said it would open its 10,000 sq ft store (over three floors) at Tower 535 in Causeway Bay, according to the SCMP on 29 August 2016.

Hong Kong would mark the third flagship retail location for DJI, following the company’s first store in Shenzhen and the second outlet in Seoul that opened in March. Earlier in May, DJI expanded its “Experience Zone” inside Terminal 1 of the Hong Kong International Airport to show travellers the latest aerial photographs and videos taken by drones.

From the Retail section of Colliers International’s Q3 2016 report by Joanne Lee, Associate Director | Research

economic INSIGHT: a bearish view

Analysts doubt there will be much recovery in store

A sluggish outlook for HK The current economic improvement may not last long.

I

t looks like finally Hong Kong’s economy has stabilised—the property market has gained a better grip, inflows have resumed, retail contraction has gotten narrower, and people have become quite optimistic that the situation will get better. But it’s no time to relax.

The city’s economy has grown to become inextricably linked to those of the US, other major markets in Europe, and in the recent past, to mainland China. Hong Kong’s currency has been pegged to the US dollar for over three decades, and the impending rise in Fed rates and the city’s Chinese connection are proving to be disastrous for Hong Kong once the global economy sours.

“One should refrain from getting overly excited. The reason why Hong Kong is able to muddle through is largely because its headwinds are not getting much worse. But the headwinds are not reversing and turning into boons. These call into questions how far the ongoing improvement will go and how long 24 HONG KONG BUSINESS | NOVEMBER 2016

The reason why Hong Kong is able to muddle through is largely because its headwinds are not getting much worse.

it will last. While the macro may be getting less bad, which is comforting, we doubt there will be much recovery in store beyond the bottom. Over the next 4-6 quarters, an L-shaped path is the most likely trajectory for the city,” says Silvia Liu, economist at UBS Global Research.

Western winds Macro risks are threatening the country’s stock market which has outperformed those in Europe and the US. According to Hang Seng Inflows picked up in 3Q16

Source: CEIC and UBS calculations

Bank Investment Research, the HK stock market was among the best performers in 3Q16. HSI and HSCEI were up 12% and 10% respectively, higher than that of MSCI-Asia Index (+9.4%), MSCI Europe Index (+3.8%), and Dow Jones Industrial index (+2.1%). However, stocks are starting to plummet in 4Q16 due to these macro risks that include the US Presidential Elections in November, the FOMC meeting and the rate decision in December, and the populist movements in Europe and the risk of more member countries leaving the European Union.

Equity markets bounced back immediately after the UK vote to leave the EU shook the global economy. However, analysts still maintain a wait-and-see approach as the Brexit eventually gets implemented and the Euro zone economy finally experiences the impact of the June vote. Hang Seng Bank Investment Research believes that once the macro risks materialise in the last quarter of 2016, Asian stock markets will undoubtedly be under pressure.

“We expect the Brexit decision to negatively impact UK growth, push up inflation, and leave a cloud of uncertainty hanging over the country for years, but the immediate hit to Eurozone investment and growth ought to be manageable.

Volatility is expected to grind higher throughout the rest of 2016 as political risks in Europe and US will mask investors’ focus on corporate fundamentals, but we believe growth fundamentals in the second half will continue to expand, albeit at a slow pace. A balanced portfolio between equities and bonds with a preference

economic INSIGHT: a bearish view towards credit (US investment grade corporate bonds and Asian bonds) is still suitable in today’s environment,” says Marcella Pun, head of retail distribution at JP Morgan Asset Management in Hong Kong.

Liu adds that Hong Kong has no domestic monetary policy due to its commitment to the pegged exchange rate, rather it imports the US Fed’s monetary policy regardless of local inflation. She notes that inflation is still very important to track, because Hong Kong occasionally experiences persistent, negative real interest rates that over-stimulate the domestic economy.

There is also a need for domestic rates to catch up with the US rates, which could lead to volatility. Liu doubts that cyclical demand will also improve as the retail and hospitality sectors have been the hardest hit in the economic slowdown, with these same sectors the potential variable to improvement.

China stabilised?

The mainland’s growing connection with Hong Kong has been a disadvantage to the city over recent months, particularly in the beginning of 2016. The slowdown in the Chinese economy posed the biggest risk this year, followed by continual weakening of external economies, and lack of growth engine in the Hong Kong stock market.

However, Hang Seng Bank Investment Research said that recent economic data points to a stabilising Chinese economy that will be supportive of HK/China stock markets. “What has certainly helped since late 1Q16 is that Chinese growth stabilised a bit and China risks have

been temporarily put on back burner.

But most importantly, we believe it is the stabilisation in monetary conditions that are proving the most positive since late 2Q16,” says Liu. China remains to be a threat to the growing economy, as the issues in 1Q16 could potentially resurface together with the concerns on rate hikes.

For instance, China’s overheating property market remains to be one of the key uncertainties for 4Q16.

OCBC Bank’s Treasury and Research Strategy says that the property frenzy in the mainland will begin to spill over to Hong Kong. Due to asset shortage in the mainland together with RMB depreciation, the HK property market could regain traction in the near term while the decline of housing prices will narrow to 3%-5% at the end of 2016. This could also mean a slowdown in mainland fund flows, which could also be negative to the HK stock market.

“In 4Q the HK stock market should benefit from the Shenzhen-Hong Kong Stock Connect and expectations on Southbound fund flows from the Chinese insurers. Overall, we remain positive on the mid-to-long term prospect of the HK stock market.

However, the index gains were quite substantial recently and we recommend to overweigh HK stocks during market corrections only. As the A-share market still lags behind, it could have more upside potential in 4Q16,” say OCBC analysts.

Looking forward Despite some stabilising aspects of the Hong Kong economy, UBS expects the labour market to remain lacklustre.

Domestic demand and exports still weak

Source: CEIC, UBS

Domestic demand and exports still weak

Source: CEIC, UBS

Negative wealth effects, a weaker labour market, and the lack of additional fiscal boost have been weighing on private consumption in 2016.

According to them, the steady unemployment rate masks labour market weakness with weak employment growth and persistently shortened work hours. They add that structurally, Hong Kong is still being squeezed by a weaker China but tighter US monetary policy.

“Negative wealth effects, a weaker labour market, and the lack of additional fiscal boost have been weighing on private consumption in 2016. Domestic spending might improve slightly in 2017 if property wealth effects continue to turn more constructive,” says Liu. Hong Kong’s economic outlook will still remain in choppy waters despite a brief period of relief after the US Federal Reserve decided to postpone the rate hikes.

Once the US continues to strengthen, a rate hike will be warranted soon, pending additional information on the labour market and inflation. “While a rate hike in November is now seen as close to impossible as indicated by the Fed Funds futures, December is still an open opportunity for the Fed to hike if economic data justifies further strength in the economy, but lingering high levels of uncertainty would skew the risks toward an even later hike,” says Pun. Hong Kong investors could expect the Hong Kong Monetary Authority to raise local interest rates the moment US pushes with the rate hike. In the meantime, China and Hong Kong stocks saw sharp rises and less volatility amidst cautious investors waiting for the decision.

HONG KONG BUSINESS | NOVEMBER 2016 25

analysis: retail Hong Kong built a retail empire with ultra-luxury brands pulling in huge revenues from mainland Chinese visitors eager to splurge on extravagant purchases. But visitor arrivals to Hong Kong have slowed in the first half of 2016, dropping 7.4% yoy, and those from the Chinese mainland declined by 10.6% yoy, after falling by 3% in 2015.

Mid-market retailers compete head-to-head with luxury brands

Are luxury brands’ glory days in Hong Kong over?

Ultra-luxury brands will no longer reign supreme in Hong Kong’s retail kingdom, as mid-market brands and F&B concepts begin to take over.

E

ven as ultra-luxury brands were exiting Hong Kong, closing down stores filled with expensive watches and jewelry, fast fashion retailer Monki remained unperturbed and renewed its lease on a sprawling 5,200-sq. ft. street shop on Granville Road in Tsim Sha Tsui. For analysts, this scene captures the power shift in Hong Kong’s retail environment where Monki and its mid-market comrades will be in the ascendant and compete with ultra-luxury brands as kings of retail.

“The retail market is undergoing a structural transformation from one that is highly driven by luxury consumption goods to one that is more relying on mid-market brands and products,” says Joanne Lee, associate director at Colliers International Hong Kong. “Mass market retail brands such as fast 26 HONG KONG BUSINESS | NOVEMBER 2016

Visitor arrivals to Hong Kong have slowed in the first half of 2016, dropping 7.4% yoy, and those from the Chinese mainland declined by 10.6% yoy, after falling by 3% in 2015.

fashion, active wear, cosmetics, overseas food and beverage (F&B) operators, as well as affordable luxury fashion brands, are likely to fill the vacated space of the ultraluxury brands,” she adds.

The Hong Kong retail sector continues to limp in 2016 with luxury brands taking a hard hit due to lower tourist arrivals, which are predominantly from mainland China. Value of retail sales, in nominal terms, dropped by 10.5% year-on-year for the first half of 2016, after a decline of 3.7% in 2015, according to the Hong Kong Development Trade Council. And in a sector that has been battered, sales of jewelry & watches and electronics have been among the worst performing, falling 21% yoy in the first five months of 2016.

This is a reversal from the trend of the past decade during which

Surge of smaller players Still, even amidst this grim retail environment, there are pockets of growth. Analysts point to the new vanguards of the Hong Kong retail sector – affordable luxury brands and businesses that provide consumer necessities on the back of stable local spending.

Many retailers catering to locals are sailing on steady growth and faring better than brands that rely on mainland Chinese visitors to turn out a profit.

Locals tend to patronise midmarket brands and are continuing to spend unlike the belt-tightening observed among visitors. In response, smaller retailers are setting up shops even in prime shopping areas where the sky-high rents are plummeting due to a dearth of ultra-luxury brands that can afford them.

“We’re currently in the midst of an adaptation of the retail landscape. No longer are bigname retail brands dominating the market, the current slump has allowed smaller players to emerge and innovate,” says Paul Shelton, director for sales & marketing, supply chain & procurement and construction, property & engineering at Randstad Hong Kong.

Small companies are testing new waters by injecting the marketplace with pop-up stores, a trend that has been gaining steam over the past year. Shelton reckons that this helps smaller retailers drive awareness for their products as well as test the viability of longer-term arrangements.

The bleak outlook for the Hong Kong retail landscape has also been viewed favourably by

analysis: retail Hong Kong retail rental index

Value of Hong Kong retail sales (by type of outlet)

Source: Colliers International Hong Kong

Source: Census and Statistics department, HKSAR government

overseas fast fashion and mid-priced brands that are keen to enter the market, and are in a better position to bargain for lower rents.

High street rents across the city’s four high streets in core shopping areas are off approximately 10% for the first half of the year and sit below 2009-2010 levels, according to Kevin Lam, director, head of business space at Cushman & Wakefield Hong Kong. While rents are projected to decrease another 5 to 10% in the second half of the year, he expects rents to likely stabilise stabilise after.

Smaller retailers might be getting bolder in their bid to capture local demand for more affordable clothes and dining concepts, but the current market sentiment still carries a strong whiff of caution that prevents large expansions. “Tenants will be rather cost-conscious in terms of expanding their existing premises in Q3 and Q4 2016,” says Lam. Resilient F&B segment This renewed fixation among retailers on what local consumers want and need has led to a sustained influx of new F&B concepts and restaurant expansions. For the hardworking and hungry local populace, spending on food and dining out are activities that cannot be dampened even by the current downturn.

“In contrast to other retail trades, the F&B segment has weathered the slowdown well, and retailers in this segment retain a positive outlook towards expansion,” says Joe Lin, executive director, advisory & transaction services, retail at CBRE Hong Kong. In the first half of 2016, total restaurant receipts rose

by a further 2.5% yoy, well above the 10.5% fall in total retail sales recorded over the same period.

He notes that spending on F&B by local consumers has remained stable over the past decade, and that median households allocate around 10% to 15% of their incomes on eating out, irrespective of the economic cycle.

Spending on F&B by local consumers has remained stable over the past decade, and that median households allocate around 10% to 15% of their incomes on eating out, irrespective of the economic cycle.

Fast food shops stand out In the F&B segment, the categories with a high turnover rate have recorded the strongest growth.

In the six years to 2015, revenues of fast-food shops increased by a compound annual growth rate (CAGR) of 4.9% per annum, while other eating and drinking retailers such as coffee lounges and ice-cream shops rose by a CAGR of 7% per annum.

Lin notes how leading Hong Kong chains such as Cafe de Coral, Tai Hing, Fairwood, and Maxim’s have all expanded from their original fast-food and Chinese restaurant businesses and branched out into casual dining eateries.

Meanwhile, other F&B groups such as JIA, Gaia, and Castelo Concepts offer a wide variety of Western and Asian cuisines in Hong Kong at different price points and formats. Even retailers from other sectors are gradually entering the F&B industry due to its dependable draw among local consumers. Lifestyle and luxury fashion labels such as Agnès b., Alfred Dunhill, Armani, and Vivienne Westwood now all operate bars, coffee shops, or restaurants under their brand labels.

“They see this as a way to market

and advertise their brand and diversify their source of income,” says Lin. The Hong Kong F&B market has also attracted international celebrity chefs such as Jamie Oliver and Gordon Ramsay to open restaurants, hoping that their high-profile names will capture the attention of locals.

The F&B sector has also been benefiting from the greater rental discounts that Hong Kong landlords are offering. “Grocery and discount retailers took advantage of the soft market to secure short-term leases in traditional prime shopping areas while mass market retailers, sportswear, and cosmetic brands were among the few looking to expand,” according to Jones Lang LaSalle in its retail index report for the second quarter of 2016.

But even as mid-market fashion retailers and F&B operators expand their retail presence, some luxury brands are also re-calibrating their strategies to turn their retail weakness into a strength.

International luxury fashion brand Versace, for example, is slated to open a new flagship boutique at Shanghai Commercial Bank Tower, located at 12 Queen’s Road Central, this year. It will be the largest flagship store of Versace in Asia, spanning a reported 12,600 sq. ft. of space.

“Versace’s move to open its Asia flagship store in Central amidst tough times in the Hong Kong retail sector suggests now may be the time to seize the opportunity of falling rents to lease iconic stores in prime locations with the purpose of increasing brand awareness,” notes Lee from Colliers International Hong Kong.

HONG KONG BUSINESS | NOVEMBER 2016 27

COVER STORY

Home prices are expected to slide up to 15%

Hong Kong home prices facing a precipice Despite showing some firmness in the second quarter, Hong Kong home prices will likely tumble from their current levels as home prices are expected to fall by as much as 30% in the next three years.

W

hen the second quarter of the year ended, the Hong Kong residential market showed some semblance of stability, but do not let that fool you – the market is teetering on a cliff of price declines.

Home prices look to slide further this year and even by as much as 30% in the next three years, if analysts’ worstcase predictions prove true. A notable exception will be ultra-luxury residential homes, the prices of which might go up this year on the back of rising demand from mainland Chinese buyers and investors who continue to see it as an irresistible high-return asset.

“With negative real interest rates persisting and the pace of interest rate increases likely to slow, the Hong Kong residential market has stabilised in 2Q16 despite growing economic worries over Brexit,” says Nigel Smith, managing director at Colliers International in Hong Kong. “We expect home prices to slide 10-15% and would achieve a soft landing in 2016. However, given the severely stretched affordability, home prices could fall by 30% or more over the next three years if China’s economy continues to decelerate,” he adds.

Further correction will hit the Hong Kong residential market, according to Chua Han Teng, senior Asia country risk & financial markets analyst at BMI Research, and this is despite efforts by developers to prop up prices through aggressive marketing and financing schemes. Hong Kong home prices are still too high to be 28 HONG KONG BUSINESS | NOVEMBER 2016

Further correction will hit the Hong Kong residential market, and this is despite efforts by developers to prop up prices.

affordable to most buyers, and the recent spate of cooling measures do not appear to be creating enough of an impact to lower the prices.

“The Hang Seng Property Index has some room to rally in the near-term amidst a temporary stabilisation in residential house prices. However, we believe that there is still plenty of downside left in the Special Administrative Region’s property market due to headwinds from extremely stretched valuations, and impending housing supply amidst the regulator’s macroprudential measures,” says Chua.

“Despite the correction dating back to the peak in the middle of 2015, Hong Kong residential real estate prices are still extremely overvalued. Indeed, the market has experienced one of the most impressive run-ups in the world dating back to the global financial crisis, and this has resulted in affordability metrics that are well out of developed market norms,” he adds.

Median house prices in the territory hit 19.0 years of median household income in 2015, which was significantly above Australia’s 5.6x, the next most expensive market, based on Demographia’s 12th International Housing Affordability Survey. “This suggests that housing remains well out of reach for a significant proportion of Hong Kong citizens, resulting in widespread dissatisfaction,” says Chua.

Frustration over high home prices will likely force

COVER STORY singapore’s hottest startups 2015 the hand of the Hong Kong Monetary Authority (HKMA), which has previously rolled out an array of cooling measures, to address the problem. These cooling measures include strict loan-to-valuation (LTV) ratios of 60% on owner-occupied properties with valuations of HK$7m or below, and 50% for non-owner-occupied properties. HKMA also introduced a flat 15% stamp duty on purchases by foreigners and progressive additional stamp duties based on the property price.

Specific analyst reckons HKMA’s wide-ranging cooling measures have not been effective in damping real estate prices. As such, there is an increasing likelihood of tightened regulations over the coming months, especially concerning recent efforts by property developers to boost sales via easier loans.

Developers such as Sun Hung Kai Properties and Cheung Kong Properties have been whetting the appetite of potential buyers through aggressive marketing techniques, including a home financing option of around 120% of the property value, but only if buyers can offer another home as collateral.

Oversupply risk Despite the market stabilisation seen in 2Q16, analysts expect the addition of significant supply in the near term to suppress home prices. “With more than 35,000 units looking to be launched onto the market over the next 12 months, developers will have to continue to use aggressive sales tactics to draw buyers,” says Joseph Tsang, managing director and head of capital markets at Jones Lang Lasalle. “Coupled with the uncertainties in the interest rate outlook and flagging results in Retail property prices and rents

Source: Rating and valuation department / Knight Frank Research Note: Provisional figures from Jan to Jun 2016

Luxury residential prices and rents

Source: Knight Frank Research

With more than 35,000 units looking to be launched onto the market over the next 12 months, developers will have to continue to use aggressive sales tactics to draw buyers.

the government’s land sales market, home prices are expected to remain under pressure,” he adds, estimating the capital value of mass residential to drop 10 to 15% this year, while luxury residential will decline 5 to 10%.

Tsang reckons housing prices in districts such as Yuen Long and Tsuen Wan, which have the greatest number of new launches in the coming 12 months, will likely be under the most pressure. Similarly, David Ji, director, head of research & consultancy, Greater China at Knight Frank, expects mass market home prices to go down 10% and luxury home prices to dip 5 to 10% this year as developers sustain their aggressive selling tactics.

Still, Ji reckons the surge in upcoming supply – the Transport and Housing Bureau expects 93,000 new homes to come to market in the next three to four years – is expected to suppress growth in home prices despite the recent pickup in sales. “Developers are expected to continue offering deep discounts and competitive mortgage schemes to attract buyers in order to offload inventory before a possible US interest-rate hike in the coming months,” he says.

There is a chance though that the oversupply risks hitting the various property sectors in the coming years will be limited. “The more equitable balance between demand and supply will prevent property prices from falling drastically, even if demand softens as interest rates climb,” says Marcos Chan, head of research, Hong Kong, Macau & Taiwan at CBRE Research. To put the looming oversupply situation in perspective, Chan recalls that during the 1990s, new private residential completions averaged 27,000 flats per annum, which then rose to 35,000 flats per annum towards the end of the decade.

But in the past five years, residential supply averaged at around 11,000 flats per annum.

“Although new completions will gradually rebound over the next few years to a target of 18,000 to 20,000 flats per annum, the risk of oversupply is still considered low due to the strong demand pool,” says Chan.

Buyers may find Hong Kong homes less attractive due to the higher transaction costs and the emergence of more appealing options in other overseas markets compared to a few years ago, but Chan reckons groups such as mainland Chinese will sustain demand.

Ultra-luxury resilience In fact, mainland Chinese buyers are leading sales in the ultra-luxury residential market, with prices in the segment expected to rebound, bucking the downward trend. “The super-luxury residential market is being increasingly dominated by mainland purchasers. Local wealthies are back in the townhouse market for owner occupation,” says Simon Smith, senior director, Asia Pacific at Savills Research.

He observes a revival in luxury residential buying sentiment as reflected by record-breaking transactions on the Peak, as well as a spike in luxury apartment sales on Hong Kong Island and in Kowloon/New Territories on the back of strong primary launches.

Also, luxury apartment prices rebounded on Hong Kong Island, and Savills Research’s Smith expects both HONG KONG BUSINESS | NOVEMBER 2016 29

singapore’s COVER STORY hottest startups 2015 townhouse and luxury residential prices to rebound by around 5% over the next six months. “Mainland buyers are again making the headlines with record-high purchases in the super luxury segment. Elsewhere in the luxury apartment market, successful primary launches are taking luxury volumes back to pre-Double Stamp Duty levels,” he says.

Tsang from Jones Lang Lasalle says there has been willingness among buyers to pay a premium to secure properties that rarely come to market. In the first half of 2016, a total of 55 properties priced over HK$100m were sold. While this was 15% less than over the same period a year earlier, the average transaction value increased by 8% to HK$304m.

Real estate has outperformed other comparable asset classes in Hong Kong in recent years, which has helped keep demand strong. Annual return on residential property averaged 11% per annum over the last 15 years, well above the Hang Seng Index, which averaged 8% per annum. “These strong returns underlined why real estate has become a very attractive investment tool for both local and overseas investors,” says Chang, further noting that these high returns came in spite of market downcycles triggered by the SARS outbreak in 2003, the onset of the financial crisis in 2008, and the European debt crisis in 2011.

Conservative bidding As for government land sales, Tsang observes that local developers are adopting increasingly conservative bidding strategies as they feel the constraints of a weakening economy and market outlook uncertainties.

Mainland China developers were particularly active early in the year as they pressed on with their globalisation plans and acquired three of the first eight residential sites sold via public tender. But interest has cooled in the second quarter, with five of the winning bids for government land sales coming in at below the lower end of market expectations.

Already, residential land prices in select districts have fallen by as much as 20% over the past 12 months as of July. “Land prices are expected to fall further in the second half and add yet more pressure on the housing market,” says Tsang. There have been some healthy transactions in the otherwise muted land market, according to Ji, noting that a domestic site in Pak Shek

Mass vs luxury residential price index

Source: Colliers International Hong Kong

Hong Kong luxury residential trend

Source: Colliers International Hong Kong

Residential land prices in select districts have fallen by as much as 20% over the past 12 months as of July.

Residential S&P and commercial property investment

Source: CBRE

30 HONG KONG BUSINESS | NOVEMBER 2016

Kok, Tai Po was sold at an accommodation value of HK$3,932 per sq. ft., up 19.2% from two years ago when the adjacent site was sold.

Tenant-favourable Meanwhile, rents remain under pressure and tenants will be in a better position to bargain, especially for luxury residential properties. Tsang reckons that rents will drop 5 to 10% this year, saying that the residential leasing market will turn increasingly tenant-favourable against a surge in rental supply and creeping vacancy at the top-end of the market. “The leasing environment will continue to face challenges against dim hiring intentions and a gloomy economic outlook,” he adds. “With more tenants downgrading to units commanding smaller lump sums, rentals remained under pressure.”

In 2Q16, leasing demand for luxury residential properties from the banking and financial services industry showed signs of weakness, while non-banking corporations continued to contribute to the ongoing decline in vacancy rates for high-end properties, says Smith from Colliers International.

Flats with monthly rents between HK$40,000 and HK$80,000 remained the most active, while there were fewer tenants seeking flats with monthly rents between HK$80,000 and HK$100,000. “Leasing activity in the top-end segment continues to suffer from a limited pool of high-budget tenants with monthly income of HK$150,000 and above. Multinational companies remained tight on housing allowance budgets, while some had been considering to reduce housing allowances,” Smith adds.

co-published Corporate profile

Suncity Group sponsors the Macau Grand Prix for the third time this year

Find out how the dedication and commitment of Suncity Group contributes largely to what makes the magic of the Macau Grand Prix happen.

Shanghai Chinese F1 Grand Prix in April and in Wuhan in May. “The Grand Prix is again benefitting from the strong support of the Macau Government Tourism Office (MGTO) and, since April this year, has already featured in numerous promotional events in Mainland China, Chinese Taipei, Korea, Australia, France and the USA,” a press release by the Macau Grand Prix says.

Additionally, more promotional events are in store for Grand Prix aficionados, as there will be more happenings in Shenyang, Zhaoqing, Shenzhen, Hong Kong and Nanjing between now and October. “Once again, a number of educational visits to the Macau Grand Prix Building are being held, with students from several local schools Suncity Racing Team will compete again in this year’s Macau Grand Prix visiting between March and July,” Macau Grand Prix adds.

Intense action on the Guia Circuit kicks nly a few racing events can match the Prix says. “This year, the Macau Grand Prix intensity, appeal, and adrenaline rush will be run by a new Organizing Committee off with two practice and qualifying days, with races held on the weekend of brought about by the Macau Grand which will continuously coordinate the November 19 and 20. Tickets will range Prix, and this year, the sun is scheduled to preparatory work of other departments, rise on the much anticipated event. Officially partners and individuals to ensure exciting from MOP50 (USD6.50) for practice days up to MOP900.00 (USD115.00) for a spectator named the Suncity Group 63rd Macau Grand and thrilling races for audiences.” seat at the Lisboa Stand for each race day.

Prix, this year’s event will be sponsored by The dedication and commitment of the Suncity Group for the third time in a row, Suncity Group contributes largely to what and will be off to the races from November makes the magic of the Macau Grand Prix 17-20. happen. Alvin Chau, Chief Executive Officer The Suncity Group Macau Grand Prix also and Director of Suncity Group, recently continues to increase in velocity each year, reiterated his organisation’s full support and the Suncity Group sponsorship is a large of the development of local sporting boost. The 62nd running of the event alone events and cultural creativity. He also last year generated revenues of MOP53m, noted that the group is looking forward to filling stands and seats with more than collaborating with the prestigious event.

80,000 spectators along with 1,000 media “The long history of the race and the representatives from 19 countries for over legendary stories behind it are a fascinating 200 news organisations. The Grand Prix was part of Macau’s history, and we are proud also broadcasted virtually everywhere with a to make our humble effort to pass on this television or computer screen. It was telecast Macanese legacy,” Chau says. “Suncity in 934 separate broadcasts for a combined Group has long supported developments total of 752 hours to countless millions like local sports events, and promoted around the world. the culture and creative spirit of Macau, which we believe goes hand in hand with Spirit of competition the diversification of the city’s economic Since its inception, the Macau Grand Prix development,” he adds. has been warmly welcomed by local and international competitors alike, championing Promotions and lead-up intense competition and camaraderie among Meanwhile, the lead-up promotions to the For the third consecutive year, Suncity Group participants, fans, and visitors from all over event has also been in full throttle, with is the title sponsor of Macau Grand Prix. the world. the Macau Grand Prix roadshow at the “Over the years, the success of this international event has relied upon the vital “The Suncity Group Macau Grand Prix also support and cooperation by Macao SAR Government departments and professional continues to increase in velocity each year, and the associations,” a press release for the Grand Suncity Group sponsorship is a large boost.”

O

HONG KONG BUSINESS | NOVEMBER 2016 31

Jiang Yisheng CEO ICBC (Asia)

32 HONG KONG BUSINESS | NOVEMBER 2016

CEO INTERVIEW

ICBC (Asia) CEO reveals plans to capitalise on China’s Belt and Road Initiative Jiang Yisheng wants to fully tap Hong Kong’s potential as a “super connector.”

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nalysts predict that Hong Kong banks’ asset quality will continue to deteriorate due to a number of factors such as rising delinquencies, weak growth in global demand, and higher borrowing costs owing to further monetary tightening in the US. Jiang Yisheng, CEO of ICBC (Asia), says that amidst the economic uncertainties, the bank has implemented some measures aimed at strengthening its capability to control both risks and asset quality.

“Presently, ICBC (Asia) maintains its non-performing loan ratio at a reasonable level and will endeavour to improve its credit risk management system unceasingly.

For instance, the bank has enhanced the due diligence for its lending, the procedure for reviewing and approving loan applications as well as post-loan management,” he adds.

Jiang was appointed as CEO in December 2015. After almost a year into the position, he reveals his views of Hong Kong’s current banking sector and his future plans for ICBC (Asia) in an exclusive interview with Hong Kong Business.

HKB: What are your key business philosophies?

I believe that a commercial bank should always adhere to the principle that “the financial sector serves the needs of real economy,” that is, a commercial bank should grow together with a nation and enterprises through cooperation, by adapting itself to the changes in economic environment, by capturing opportunities and by fitting in with the national strategies and policies.

Under the present circumstances, ICBC (Asia) will fit in firmly with China’s national strategies such as the Belt and Road Initiative and the internationalisation of the renminbi. It will also actively capitalise on the increasing connectivity between the financial markets of mainland China and Hong Kong and speed up the consolidation of the resources in Asia Pacific so as to build a framework for a cross-market, comprehensive and integrated business.

This will enable the bank to provide a comprehensive range of financial services (such as financing, services for mergers and acquisitions and settlement, etc.) for the countries and enterprises in Asia Pacific and those covered by the Belt and Road Initiative. This is one of the ways for ICBC (Asia) to contribute to the economy and prosperity of both mainland China and Hong Kong.

HKB: What are the biggest challenges facing Hong Kong banks today?

Nowadays, the global economy is extremely complicated and the financial markets fluctuate more wildly. Some companies have operational difficulties which are structural in nature.

In such circumstances, I think the banks in Hong Kong are facing a number of major challenges, namely; how to enhance the capability to control the asset quality and withstand risks; how to raise the standards of business management and how to strengthen the overall capability to serve customers.

HKB: You were appointed as CEO in December 2015.

Ten months into the position, what changes have you implemented and what are your future plans?

Since I assumed the office of the CEO of ICBC (Asia) in December 2015, I’ve been faced with a market where Hong Kong’s banking sector has shifted down a gear from rapid growth in the past. After having grown its business by leaps and bounds in the past several years, ICBC (Asia) has now entered a period for consolidating its businesses. It now has to meet new requirements to cope with a new situation which is marked by adjustments in organic growth and optimisation of organisational structure.

To prepare for that, we have decided to actively develop cross-regions businesses, speed up the transformation of the bank’s business model and the implementation of its strategy for comprehensive development. Such endeavours have already yielded good results. In the first half of 2016, ICBC (Asia) achieved double-digit percentage growth in both the scale of business and profit.

In the first half of 2016, ICBC (Asia) achieved double-digit percentage growth in both the scale of business and profit.

HKB: What three goals are you focussed on in the next 12 months?

Firstly, we aim to facilitate development by thoroughly enhancing the quality and efficiency of the operation of the core business. ICBC (Asia) will reinforce its foothold in Hong Kong, capitalise on the growth momentum of mainland China and extend its footprint to Asia Pacific.

It will also enhance its capability to coordinate the developments of the businesses within the ICBC Group and to operate cross-region businesses.

We aim to enhance the quality of development while maintaining steady growth in the scale of assets as we are shifting the focus from “building a large company” to “building a strong enterprise.”

Secondly, we will adjust the structure by forming a framework for sustainable business development which is driven by diverse operations. ICBC (Asia) will further adjust and optimise the operation structure. Specifically, the bank will speed up its transformation from a sizeable asset operation bank into a large asset management bank as well as its transformation from a conventional commercial bank into a comprehensive financial group.

Thirdly, we will step up risk control to reinforce the foundation for sustainable and steady development. ICBC (Asia) will further improve the overall risk management system. It will enhance its capability to prejudge and manage credit risks, market risks, and operational risks so as to minimise these risks and ensure that the risks to the overall operation are manageable.

HONG KONG BUSINESS | NOVEMBER 2016 33

Vendor View: atm fraud

Could your bank be the next victim?

How can your bank outsmart malicious ATM hackers?

High-profile ATM attacks in Thailand and Taiwan have shone a spotlight on an array of security cracks.

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hen Thailand’s Government Savings Bank suffered from a malware attack that enabled a cyber gang to steal millions of baht from its ATMs in August, the bank was forced to deactivate more than 3,300 of its ATMs nationwide to prevent further unauthorised cash-outs.

Analysts note that this incident, along with a sophisticated ATM attack in Taiwan, suggest gaping vulnerabilities in these cash machines and the need for banks to bolster security protocols to deter attacks.

“Two recent ATM attacks - one in Bangkok and one in Taiwan - are the most outrageous,” says Naveen Bhat, managing director at Ixia Asia Pacific. “Both these attacks were similar, where the attackers, believed to be East European, introduced malware into the ATM via cards.

Several million dollars have been reported stolen, and the theft was 34 HONG KONG BUSINESS | NOVEMBER 2016

detected as ATMs became slower and money was missing,” he adds.

Bhat says there are three ways to attack ATMs. First is by skimming and recording devices which are external to the ATM, second is by infecting the internals of an ATM via malware introduced through chips and cards, and third is by attacking the back end network that the ATM is connected to.

The first method of skimming devices is the easiest to pull off, provided that the attackers obtain physical access to the ATM. Still, a combination of the second and the third enabled the recent Bangkok incident, so there is concern that ATM attacks are becoming cleverer.

“Without physical access, attackers need to find a way to break into the network which is usually protected by VPN (Virtual Private Networks). Breaking into a private VPN is an intensive and complicated

As attackers get more sophisticated, breaking into the secure network will become more common.

procedure,” explains Bhat. “However, as attackers get more sophisticated, breaking into the secure network will become more common.”

Four problems If banks want to thwart future attacks, they will have to address four major security problems associated with ATMs, says Ryan Flores, senior manager, Future Threat Research TrendLabs at Trend Micro Asia Pacific. The first problem is that many ATMs run on older operating systems that could be vulnerable to security threats. Flores says that ATM manufacturers shipped most of their machines with Windows in the previous decade, but Microsoft was no longer releasing security patches for Windows XP as of 2014.

“Security experts warned that at least 95% of banks ran the risk of being infected by OS-specific malware due to XP’s dominance in

Vendor View: atm fraud the ATM market. On the slightly brighter side, Microsoft worked with banks from 2007 on preparation for XP’s end of life,” says Flores.

A second related problem is the outdated infrastructure of ATMs in Asia. Flores says even if PCs and mobile devices have shed legacy ports, many ATM designs have not kept up with the times, sporting optical disc drives and older USB connections, both of which can help facilitate rogue network access by cybercriminals.

A third concern for ATMs is their network vulnerability, stemming from poor standards in, if not a complete lack of, encryption security.

Once attackers bypass the initial safeguards, there is little else that will hamper their theft. “An ATM network is a closed-loop system; accordingly, encryption is often not implemented, leaving gaps for cybercriminals to steal data and, in lieu of an encrypted hard drive, boot the system using a Linux distribution to gain full access,” he says.

The fourth and final issue with ATMs is that many have been built for multiple vendors, which makes their security easier to crack.

“Cybercriminals don’t have to be an ATM expert or have inside knowledge to generate or code malware for ATMs,” says Flores.

“Standardisation benefits hackers,” concurs Joerg Reuter, software engagement manager at Diebold Nixdorf. “To allow for easier interoperability and to reduce costs, the ATM industry has either created new, or is adopting existing standards to a large extent. These standards are publicly documented, making it easier to take advantage of them.”

Major security problems in ATMs

Foo Siang-Tse

Jeorg Reuter

Naveen Bhat

Ryan Flores

As if the multitude of attack vulnerabilities inherent to ATMs were not enough, cybercriminals are becoming even more cunning.

Reuter cites as an example the recent malware or “jackpotting” attack in Taiwan, which he considers a harbinger of complex attacks that banks and ATMs will face in the future.

Taiwan attack Attackers in the Taiwan incident hacked into the banking network with the use of an internet-facing server system without any direct relationship to the self-service network as their entry point. Once the network was infiltrated, the attackers moved laterally until they were able to take over a file distribution server of the bank’s ATMs, which in turn was used to establish remote control of the ATMs. The final step to actually steal the cash in the ATMs was for an accomplice to visit an ATM and give the green light via a mobile phone, triggering a remote initiation of an unauthorised dispensation.

“Sophisticated as it was, the Taiwan hacking attack could have been stopped at various stages,” says Reuter, “with a stricter network security regime, by requiring additional authentication for the file distribution system, by preventing remote control of the ATM on a network level, and finally by ‘hardening’ the ATM against unsolicited software dispensing cash.”

He reckons that there is reason to believe that in the future, more criminal groups will attempt similar attacks as the one in Taiwan, which puts a lot of pressure on banks to refresh and shore up their ATM defences. “With the ever-evolving attack landscape and the long lifespan of a typical ATM, it is not sufficient however to deploy security measures once and forget about the topic thereafter. Security is a process, and regular reviews and adjustments of the countermeasures are paramount,” says Reuter.

With so many physical and cyber touch points through which attackers can gain illegal access to ATMs, banks need to adopt a holistic and proactive

approach to security, according to experts. “Protecting ATMs requires a holistic security approach that addresses both the physical security and cyber security aspects of the network,” says Foo Siang-tse, managing director at Quann.

Holistic and proactive approach When it comes to physical security, a key measure is proactive monitoring. ATM CCTVs need to be well maintained and monitored in real-time, if possible. Every ATM alarm activation also has to be taken seriously, a vulnerability which was abused recently when attackers triggered the alarm repeatedly so that when a real attack did take place, the alarm would be ignored.

As for cyber security, Foo says it is advisable that banks utilise the latest models of ATMs which boast of modular compartments that try to mitigate the vulnerabilities of multiple touch points. Each modular compartment is accessible by different parties only for the purpose of their job functions, so that a technician should not be able to access the cash and card compartments.

Banks should also become more aggressive in preventing attacks that could ruin their reputation and disrupt business operations, because it is always more difficult to play catch-up once a breach occurs.

Alexey Osipov, lead penetration testing expert, Kaspersky Lab, suggests forcing vendors to fix vulnerabilities in ATM software and hardware components, reviewing the XFS standard for security, implementing mutual authentication for “trusted dispenses,” and strengthening cryptography and integrity control over the data transmitted between the ATM hardware units and its computer.

“Keep in mind that proactive analyses of security issues is better, and often much cheaper, than forensics,” says Osipov, further recommending that banks conduct regular ATM security assessment and penetration testing to understand their vulnerabilities and improve security systems. “Security is not a once-a-year-audit but a permanent process,” he says.

HONG KONG BUSINESS | NOVEMBER 2016 35

CMO Briefing

it has become vital for CMOs to create a customer data control centre that allows brands to set up centralised profiles for a smoother screen switch experience.

“Today’s users expect to be able to pick up their journey wherever they left off on any device — or they very well may abandon it altogether,” says Ng Yew Hwee, Greater China managing director at Adobe Systems. “To accomplish this, marketers must gather information from all the places where customers might interact with your brand and create centralised profiles.”

Are you doing the cross screen approach right?

The onus is on marketers to make the experience personalised and seamless across different devices.

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rom cross screen campaigns to customer experience mapping, marketing leaders reveal key strategies and trends in a post-mobile, cloudpowered Asia. If your brand still rolls out single screen campaigns and your website does not allow users to pick up where they left off after logging into another device, then you may want to play catch-up.

Chief marketing officers in Asia reckon that the latest wave of technology trends – from motion and environmental sensing applications, ubiquitous cloud use, to affordable smartphone devices – require moving towards a cross screen approach, creating centralised user profiles and focussing on the customer buying journey.

How does the cross screen approach fare against single screen ones?

“The key trend we’re seeing today — particularly in Asia — is the shift into a post-mobile world. And a key feature of the post-mobile era is cross screen, where consumers move between all their screens, from smartphones to tablets and PCs, throughout their day,” says Caroline Hsu, CMO at Appier.

She says cross screen campaigns outperform single screen campaigns by a significant margin, and that while the mobile screen has become the primary way that marketers choose to reach Asian consumers, it can be foolish to forget about tablet and PC screens.

Appier data show that the number of mobile phones in Asia far surpasses the number of tablets and PCs. However, looking at usage per device type, PC generates more than 50% of the volume of usage of smartphones, despite representing only a fraction of the total unique reachable devices. “Truth is that mobile-first does not mean mobile only,” says Hsu. With users jumping between one screen to another, 36 HONG KONG BUSINESS | NOVEMBER 2016

The key trend we’re seeing today — particularly in Asia — is the shift into a post-mobile world.

How important is it for marketers to do customer journey mapping?

Customers go through a multitude of touchpoints and decision dilemmas before clicking the buy button, and they no longer have patience for brands that further complicate this already complex journey. “The key challenge is in making it easy for customers to find, research and purchase from the business given the many touch points they can use today,” says Ning Lim, marketing manager at Progress (Asia).

“Customers expect a seamless, secure, and consistent experience on the channels and devices that they prefer to use. They want quality content that fits their needs at any one point in time,” adds Lim. To determine exactly what customers want to see at different stages of their buying journey, CMOs need to build an adaptive, automated infrastructure to capture just enough of the right information, says Margaret Franco, vice president, APJ CSES Marketing at Dell.

Franco says a lot more user data can be gathered through the combination of Internet of Things sensors and cloud applications, and lead to just-in-time services such as refrigerators notifying consumers of which groceries to replenish.

With the overwhelming amount of collectible data enabled by the latest disruptive technology, customer experience mapping has become one of the most important tools in the CMO strategy toolbox, says Dana Teng, APAC marketing director at Unit4. “The focus should not be the disruptive technology or product, but the buyer experience,” says Teng. “No amount of disruptive technology will make a brand resonate with a customer if there is a lack of focus on buyer experience and understanding of pain points.”

Technology might be enlarging the scale of consumer intelligence with more than 25 different marketing technologies and almost 4,000 different companies in the market. But the purpose of consumer intelligence remains the same, and that is to get more people to buy a product, and marketers should not be bamboozled by the crush of gathered information, says Frederic Moraillon, vice president, Global Marketing at Akamai Technologies.

“With the ever increasing amount of data on prospects and customers, marketers need to question the data collected and constantly ask: ‘So what?’ The ability to decipher the deluge of data that is required to understand the relations between sell and buy is becoming an increasingly important skill.”

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Legal briefing

How the retail sector can fight corruption The Independent Commission Against Corruption‘s training guidebook was released this year.

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hen Hong Kong’s retail landscape turned for the worse, the territory also saw a deterioration of scruples. The government noted a rise of complaints relating to corrupt practices including supplier bribes and income embezzlement that brought undue financial advantage to individuals or their organisations.

In May, in an attempt to deter these unsavory and illegal practices, the Independent Commission Against Corruption (ICAC) published a training guidebook titled “Integrity & Quality: Shopper’s Paradise – Corruption Prevention Training Package for Retail Industry.”

Legal experts believe the guidebook can help companies put in place systems that curb graft and corruption and shield them from profit loss and prosecution, but it will also test their ability to handle whistle-blowers and resistant managers.

What are the implications of the guidebook?

The ICAC guidebook will serve as an aid to retailers and other organisations who are tackling the ever-increasing challenge of bribery and corruption in the workplace, says Pattie Walsh, partner at Bird & Bird. “While it does not amount to new law, it is an important new resource to understand and explain our current legal framework in Hong Kong with a practical approach to the steps needed to make the law a reality in practice,” says Walsh.

Peter Bullock, partner at King & Wood Mallesons reckons the guidebook reflects an increase in complaints received by the ICAC relating to corrupt practices in what is currently an increasingly competitive retail

“A top priority for corruption avoidance is to ensure that employment contracts, policies and guidelines are in place across the organisation requiring employees to avoid corrupt practices.” environment in Hong Kong. Corrupt retail practices include unauthorised reservation of goods in high demand, pilferage of premiums or samples, and abuse of staff discounted purchase schemes.

“As tourist numbers reduce and opportunities for parallel traders remain, those involved in retail supply chains, as well as those dealing directly with purchasers, may devise ways of supplementing their income at the expense of either their employers, shoppers or Hong Kong’s reputation as generally operating a fair and level playing field in the retail sector,” says Bullock.

As the new guidebook encourages companies to put in place systems conducive for whistleblowers to expose corrupt practices, Bullock reckons there are potentially significant implications.

38 HONG KONG BUSINESS | NOVEMBER 2016

Pattie Walsh

Peter Bullock

“This is likely to give rise to an increase of complaints coming to the attention of senior management, and the investigatory authorities, including the ICAC - which is likely to flow through to a spike in prosecution activity,” says Bullock.

Senior management will need to be able to act on such complaints by launching investigations and protecting whistleblowers from workplace retribution. “Guidelines and controls should be put in place and managers at all levels should not be seen to be condoning abuses when they are discovered,” says Bullock.

How should employers, specifically but not limited to the retail sector, prepare and brace for the guidebook?

Walsh reckons that while the guidebook is targeted at the retail industry, many of the examples in the guidance cited have broad applicability. “Misconduct such as accepting unauthorised rebates or advantages from suppliers or other business contacts in return for favours, embezzling income and inventory items of the employer, and conflicts of interest are challenges in many industries,” says Walsh.

Bullock reckons that a top priority for corruption avoidance is to ensure that employment contracts, policies and guidelines are in place across the organisation requiring employees to avoid corrupt practices.

“It is always helpful to place such orders in context by giving examples, and by reinforcing the messages through repeated staff training – the more interactive the better – and by adopting the appropriate ‘tone from the top’ by vocal endorsement from senior management,” says Bullock.

Do you see any challenges in implementing the updated guidelines?

For Walsh, the biggest challenge is usually not a legal one but rather ensuring that the culture and values of the business are embraced from the top to the bottom, and are reflected in all aspects of the enterprise. “Training and awareness help in establishing the formal framework required but culture requires much more than adhering to rules; it requires everyone involved to internalise the core values of the organisation and live by those values,” says Walsh.

Similarly, Bullock reckons changing the “hearts and minds” of both managers and frontline staff will be needed before the guidance can be implemented effectively. “Many people participating in the industry may be reluctant to alter practices because they have gone unchecked for so long and do not appear to be the reasons for the current downturn in the market. Such views may be secretly held by senior managers as well as those below them,” says Bullock. “To achieve a cultural shift in such circumstances is challenging, and requires commitment at board level and a significant dialling up of policies, procedures and education.”

event coverage: ITF 2016 summit

ITF Corporate Partnership Board family photo

Global transport takes one step towards decarbonisation in ITF 2016 Summit

What was once the dream of carbon-less transportation has now taken a large step towards becoming a reality as the transport sector collectively locks arms in the annual International Transport Forum summit.

W

hile the COP21 Paris Agreement has created a political path for global CO2 mitigation efforts, the herculean task of decarbonisation is now passed to the transport sector. This is why the International Transport Forum (ITF), the world-renowned intergovernmental think tank for transport policy, has launched its landmark Decarbonising Transport Project at the annual International Transport Forum 2016 Summit held at the Congress Center in Leipzig, Germany from May 18 to 20, 2016 with the theme “Green and Inclusive Transport.” This year’s Summit was attended by more than 1,000 delegates across 70 countries.

The Global Decarbonising Transport initiative of the ITF aims to achieve zero transport emissions by around 2050. Transport currently makes up 23% of all energy40 HONG KONG BUSINESS | NOVEMBER 2016

This is a very ambitious project. But ambition is what the world needs to stop climate change.

related emissions. “This is a very ambitious project. But ambition is what the world needs to stop climate change. Ambition is also something that has characterised the transport sector throughout its long history of innovation. Our challenge is to reduce transport CO2 without sacrificing the access and opportunities offered by transport, keeping our societies together and making our economies turn,” said ITF secretary-general José Viegas at the inauguration event during the summit.

Examining transport policies Christiana Figueres, executive secretary of the United Nations Framework Convention on Climate Change (UNFCCC) applauded the Decarbonising Transport initiative, saying, “Governments must have the tools to understand whether or

not policy is working as intended, and robust, responsive tools give policymakers a better sense of what can be accomplished.”

Figueres added that the common assessment tool should unite the transport sector worldwide in its push towards climate neutrality.

The move was also lauded by European Commissioner Maroš Šefčovič, vice president of the Energy Union, noting how the current generation will be hailed as the one who made the giant leap in clean transport. “The European Commission is driving the transition to a low-carbon mobility system, and I warmly welcome the support of the International Transport forum in this undertaking,” he said. “The transition to clean energy and mobility is in full swing, we should move fast. On the road to decarbonisation of transport there is no speed limit.”

event coverage: ITF 2016 summit Regulation of for-hire passenger transport is necessary but it needs to become more flexible to allow innovation.

JB Straubel addresses the audience

The project’s preliminary results will be presented at the next ITF Summit in May 2017, while the work will be completed by 2018/2019, in time for the first round of reviews of the COP21 decarbonisation targets in 2020.

Another highlight of the event is an open ministerial roundtable event where transport ministers discussed the framework, challenges, and trade-offs for governments to support green and inclusive transport. The discussion was joined

by Laurent Troger, president of Bombardier and JB Straubel, chief technical officer of Tesla Motors.

In the ministerial event, UN climate head Figueres called upon attending ministers to “unite the transport sector worldwide in the push towards climate neutrality” and connect “the patchwork of policies we can expect from at least 189 different national climate action plans designed for different national circumstances.”

Ride-hailing apps Ride-hailing apps and taxis, along with their regulation, was also a hot topic in the Summit. In a session entitled “App-based ride and taxi services: How should governments regulate,” ITF economist Philippe Crist shared the findings of the ITF report “App-Based Ride and Taxi Services: Principles for Regulation.” Crist said app-based transport services need tailor-made regulations which provide room for tech disruptions in the sector in order to provide better experiences for customers. “The government has to sit around the table and think

what fair policies we need to have.

Existing taxi regulations aren’t state of the art. We can do better for the whole sector,” Crist said. The report explains how taxi market shares are effectively linked to household incomes, the relative costs of car ownership, and the availability of alternative or complimentary modes of transport. To illustrate, it noted that taxi trips represent 11% of all trips in Guangzhou in 2011, 7% of all trips in Seoul in 2013 and Singapore in 2012, and 6% of trips in Beijing in 2012 and Hong Kong in 2011.

Meanwhile, this number is much less in other key cities, comprising 3% of all trips in Bogota in 2008, 2% in Taipei in 2013 and 1% or less in cities like Chicago and London.

Additionally, the report noted that the popularity of the new commercial transport apps with consumers and the conflicts their market entry engendered with established transport providers have created a case for re-examining the regulatory frameworks in place today for for-hire passenger transport services. “Regulation of for-hire passenger transport is necessary - but it needs to become more flexible to allow innovation,” the report said.

The future of the car Meanwhile, Tesla CTO Straubel also talked about the emergence of electric vehicles and its massive potential towards a decarbonised future. “All vehicles are migrating towards electric,” he said. He added that new batteries will be better and cheaper, exhibiting more energy in the same volume of materials.

“On the technical side that comes in terms of energy storage research; chemistry research, material science to make better batteries, and improve materials and reduce the cost. There’s a lot of room to improve there. It’s nowhere near the fundamental ceiling or physics limits yet.”

On the topic of driverless cars, Straubel predicted that trends are irreversible. “We’re not going to see them slow down or stop, and, full autonomy will be achievable from a hardware capability point of view much sooner than most people expect in a matter of years, not decades,” he said. Claire Martin, vice president for corporate social responsibility, MD Renault Foundation, also noted in a session how the car has a long way to go in terms of meeting global challenges.

For instance, she noted how car manufacturers comprise 15% of all greenhouse gas emissions, while the global average consumption per day per person for car owners is 2 liters of oil.

Cutting emissions for aviation The task of cutting greenhouse gas emissions is not only for land transport, but also for aviation. In a session entitled “Aviation’s big year for climate agreements,” Michael Gill, executive directorof the crossindustry Air Transport Action Group, briefed attendees about how the global aviation industry calls for the support of governments in capping greenhouse gas emissions from 2020 onward.

“What we are trying to achieve is a balance between allowing the industry to grow and providing an economic and social benefit to society,” Gill said.

Tony Tyler, director general and chief executive officer of the International Air Transport Association, also explained in a plenary session entitled “The Transport We Want: Green, Efficient, and Inclusive” how international aviation and shipping needs its own Paris Agreement.

“The International Civil Aviation Organization had made significant progress on dealing with aviation emissions,” Tyler said.

HONG KONG BUSINESS | NOVEMBER 2016 41

EVENT COVERAGE: GLOBAL PRESS & ANALYST SUMMIT

Data deluge got everyone panicking

Why the IoT got everyone panicking about security

It’s a huge opportunity, but a rather scary one as well, and service providers, carriers, and the cloud industry must keep calm and carry on.

T

he Internet of Things (IoT) is a $1.46 trillion market opportunity and specifically, the United States and Western Europe are leading the pack, followed by Japan and Asia Pacific.

Almost 150,000 devices will start connecting almost every minute by the year 2025. Currently, almost 5000 devices are connecting every minute, and experts predict it’ll give birth to a massive shift in the next eight to nine years.

“All the devices we have now are going to generate data and that’s going to result to a data deluge,” Sathya Atreyam, research manager at IDC’s Worldwide Mobile and Internet of Things (IoT ) says at the NetEvents’ Global Press & Analyst Summit 2016 held in Saratoga, California. “Almost 3.8% of the data which will be generated is IoT relevant and IoT actionable. That is actually 8.6 times of the actual data which is currently being generated. In total, we are looking at almost 180 zettabytes by the year 2025. It’s definitely a huge amount of data 42 HONG KONG BUSINESS | NOVEMBER 2016

All the devices we have now are going to generate data and that’s going to result to a data deluge.

coming in,” he adds.

The internet is about to be taken away from human users, their web browsers, and will be turned over to things. Human users are going to be outnumbered a hundred to one in the use of the Internet.

Is the Internet that we now have designed for and useful in that kind of arrangement?

A sense of panic Glenn Ricart, founder and CEO of government initiative US Ignite, says that most of the effect users will feel once the data deluge is rolling out is just “local impact.”

“We’re going to see the rise of something called edge computing or local cloud computing. It will be elastic just like cloud computing. A lot of the cloud computing matters will still apply, but it’s going to be local. That means that we’re going to need to have a new structure for the Internet to support the Internet of Things in our communities,” he says. Frank Wiener, vice president for marketing, Wedge Networks, says “When you’re thinking about

the connectivity of the Internet of Things, the key thing is if you’re going to bring the Internet of Things and allow the innovation that it offers to come to life, the security officers in the enterprise have to allow it to happen.”

But where will this shroud of security come? Milind Pansare answers that with IoT, security is an interesting issue because traditionally what Wi-Fi security has been about is users have enterprise authentication 21X. “You come in, you authenticate yourself to the network and then what happens with devices that are now on these wireless LANS, they put them on PSKs, on a single shared PSK often on a single SSID. That’s what happens even, strangely enough, on guest networks in the enterprise.”

How open is the system?

The firms who are providing network access ought to provide the ability to do softwaredefined programming of their networks, according to Ricart.

“But you can’t allow everyone to do software-define the carriers’ network right, that would be crazy--unless you put it in a slice.

Maybe you can programme your own slice, so software-defined networking for your slice of the carriers’ network. So then you’re ending up paying the carrier for the slice and then you are managing softwaredefined networking within that slice. That creates an ecosystem which is open.” Pansare couldn’t agree more as he adds that open Application Programming Interface (APIs) are happening right now. But Wiener warns that in terms of innovating and allowing firms to come together, it is important to address the security that allows people to turn it on and use it. “The security aspects have to have incredibly low latency because some of these applications are not going to be very latency sensitive, but others are going to be extremely latency sensitive.”

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HONG KONG BUSINESS | NOVEMBER 2016 43

ECONOMICs

Ian Perkin

Economy withstands political headwinds

H

ong Kong’s economy grew 1.7% in the second quarter of this year (the June quarter being up 0.8% over the March three months) and the limited statistics available since then have been positive enough to suggest a sustained turnaround is imminent. More impressively, the overall improvement has occurred despite ongoing external challenges and a distinct weakness in domestic demand that has adversely affected confidence in the broader economy.

Community attention was further diverted from economic matters in the current September quarter by campaigning in the lead-up to the Legislative Council (Legco) elections on September 4 and the fallout from the election results. Political concerns will continue to attract attention (and add to uncertainty) as the new make-up of the Legislative Council sorts itself out and the public focus turns to the elections for HKSAR Chief Executive scheduled for March next year. This is unusual territory for the HKSAR, which even in the run-up to the return of sovereignty to the mainland 20 years ago was being touted, especially by pro-Beijing voices, as “an economic city, not a political city”.

As the September election and the earlier street protests, including the Umbrella movement, have shown, the HKSAR is far more political (and politically diverse in its views) than many had thought.

Even so, it is hard to accept the credit rating agency Moody’s view that the outcome of the Legco election, with more dissenting voices amongst its members, is somehow a threat to the HKSAR economy and its global credit rating.

The Legco election’s outcome From a global perspective the successful conduct and outcome of the Legco election is more likely to be viewed as a positive democratic expression than as a threat to the economy and financial markets of a major global financial centre. As Moody’s observes, there is likely to be more debate (both inside and outside the Legco), but it is hardly likely to slow down law- and decision-making in a territory where decisions are Executive-driven, although reliant on Legco support on major issues.

No doubt much will remain uncertain through to the Chief Executive poll in March, especially with domestic confidence being tested by economic as well as political trends. In the meantime, the Government’s second quarter economic report, issued on August 12, gave reason for hope that the economy may have turned a corner, even if domestic activity disappointed somewhat.

While private domestic consumption was weak in the June three months (up only 0.6% year-on-year and 0.9% on the March quarter), government spending remained robust (up 3.4%) and the decline in investment (down 4.9%) slowed. More positively, external activity improved despite global problems, including slower world economic and trade growth, worries over monetary and interest rate policies, Britain’s “Brexit” vote, the US Presidential election, and ongoing

44 HONG KONG BUSINESS | NOVEMBER 2016

IAN PERKIN Independent Economic Consultant perkin888@hotmail.com

Hong Kong Visitor Arrivals 2016 July 2015

July 2016

Change %

Jan-Jul 2015

Jan-Jul 2016

Change %

Total

4,923,431

5,049,022

+2.6

34,250,671

32,209,296

-6.0

Mainland

3,845,273

3,930,526

+2.2

26,691,797

24,346,236

-8.8

Other

1,078,158

1,118,496

+3.7

7,558,874

7,863,060

+4.0

Overnight

2,325,690

2,452,898

+5.5

15,022,449

14,880,056

-8.9

Same Day

2,597,741

2,596,124

-0.1

19,228,222

17,329,240

-9.9

Country

Source: HK Tourism Board

problems in the Middle East.

The June quarter numbers showed merchandise trade picking up somewhat with goods exports up 2% year-on-year and 3.3% on the March quarter, and imports rose 0.2% over the year and 3.5% on the March three months. Exports of services, hit by weaker inbound tourism receipts in the first half year, were still down 0.2% in the June quarter and services imports had a modest 1.1% rise.

There was also a sign of better things to come in the travel and tourism sector with visitor arrivals up in July (see Table above), after several months of decline, especially out the mainland. As shown in the table, total arrivals in July rose 2.6% on a year earlier after yet another 1.7% decline in June and an overall decline of 7.4% in the first half of the year (including a 10.6% drop from the mainland).

Mainland visitor arrivals were up 2.2% in July (cutting the sevenmonth decline to 6%) and arrivals from elsewhere continued to improve, being 3.7% higher for the month. They are now up 4% for the opening seven months of the year.

The improvement in arrivals numbers, provided they continue through the second half of the year, should help to stem the recent decline in service export receipts. They were down just 0.2% quarteron-quarter in the July three months, after five successive quarters of decline before that.

In its second quarter economic report the Government maintained its forecast of 1-to-2% economic growth for the full year, a forecast that should now be easily achieved – and most likely at the upper end of that range. Certainly modest growth of around 1.8% seems achievable for the full year, down from 2.4% in 2015 and 2.7% in 2014.

But as the Government noted in its report, some global concerns remain. “Looking ahead,” the government economist says, “the global economy will likely continue to expand at a modest pace in the rest of the year, with the US economy regaining some steam and many Asian economies showing signs of improvement.” Apart from the Brexit fallout, he notes, “various external downside risks still persist and warrant close monitoring.”

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.

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HONG KONG BUSINESS | NOVEMBER 2016 45

OPINION

tim hamlett

Welcome to a new concept: Soft lobbying

T

he hot issue of the day is the growing row over a housing project in Wang Chau. We need not go into this in great detail. Indeed anything I say about it will probably be out of date in a matter of days if not hours. But the story goes more or less like this.

The government proposed to build a large public housing estate in Wang Chau, on a piece of land it already owns. Before proceeding with this there was a meeting of some kind with village heads, landowners, and gangsters (three categories which overlap considerably in this corner of Hong Kong) and the plan was then changed to a small housing estate on a different piece of land which is currently occupied by three villages.

Much suspicion, not to say ire, has been aroused by the discovery that one of the assembled heads, landowners, and gangsters was illegally occupying a large section of the proposed housing site, on which he was running a lucrative business.

The government account of the crucial meeting is that it was engaged in “soft lobbying” in advance of the project, whose final shape had not been decided. And what, we may well wonder, is soft lobbying? Lobbying we all understand. The word derives from the lobby of the House of Commons, which is the place where Members of Parliament meet visitors who are not members.

Lobbying vs soft lobbying Hence lobbying is the activity in which non-members try to persuade members to pass or not to pass legislation according to the non-members’ desire or interest. People who lobby are called lobbyists and there are plenty of them. So far so simple – a lobbyist is one who seeks to persuade a legislator to use his power in a way pleasing to the lobbyist or his employer.

“Soft lobbying,” at least in the US, apparently refers to an alternative procedure whereby the lobbyist supports and encourages a non-government organisation to exert pressure on his behalf.

Lobbyit.com gives the example of a campaign to require food manufacturers to divulge the amount of corn syrup in their products. This was waged by a voluntary organisation called Citizens for Health. But the healthy citizens were heavily subsidised and much encouraged by the sugar industry, which regards corn syrup as a major threat to its prospects.

Clearly this can hardly be what the government spokesman intended when using “soft lobbying” to describe a group of officials trekking off to distant corners of the NT to persuade local bigwigs of the merits of a housing project. I suppose he was looking for a plausible alternative to “public consultation”, which would not do in this case because the public consulted consisted only of the aforementioned village heads, landowners, and 46 HONG KONG BUSINESS | NOVEMBER 2016

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

gangsters.

Still the use of “lobbying” in this context is curious. Usually it means people without power, at least without legislative power, beseeching those with power to exercise it in a helpful way. Using it in this context seems to imply that any rural bigwig who is in illegal occupation of a large piece of government land must be cajoled and persuaded into giving it up by an otherwise helpless administration.

And if he refuses they have to think of something else.

This is a rather timid posture for our government, and indeed a marked contrast with its attitude to unlawful activities in other contexts. If you unlawfully enter the space in front of the Legco building which was originally designed as a public open space, you may be prosecuted. If you demonstrate peacefully in the road you may be tear-gassed. If you throw rocks at policemen in Mong Kok they are allowed to throw them back.

These phenomena demonstrate the government’s firm commitment to the rule of law. So what is demonstrated by allowing rural grandees to occupy government land for years, and then politely asking if they would please, if it’s not too much trouble, give it up for public purposes? And then taking “no” for an answer?

If I may make a practical suggestion, officials need to consider that where there is “soft lobbying” there should also be “hard lobbying,” and if the soft version fails it is their duty to move on to the more serious stuff. What would hard lobbying look like? Well, faced with an obdurate squatter on government land we could start by pointing out the legal ease with which we can not only throw him off it but also require payment of several years of unpaid rent.

What would hard lobbying look like?

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OPINION

Hemlock

HK’s next punishment: New cross-border revenue streams

H

ong Kong is urged to see the with envy because Beijing has declared plucky little obedient Macau the ‘Yuan clearing centre for the Portuguese-speaking world’. Lucky residents of the former enclave will be up to their knees in Renminbi gushing in from Cape Verde and Guinea-Bissau, while naughty rebellious ungrateful Hongkongers starve and their city fades into insignificance.

Meanwhile back on Planet Earth, Jake van der Kamp writes that Beijing’s anti-corruption clampdown has resulted in Macau’s casino-dominated economy shrinking by an incredible 35% since 2013. This is the sort of decline that resulted in starvation in North Korea in the 1990s, and something close to social breakdown in Greece over the last few years.

And yet… Everyone in Macau is pretty happy and carrying on as if nothing had happened. That’s because ordinary people there didn’t see many of the benefits when the gambling industry boomed earlier in the 2000s, pushing per-capita GDP above Hong Kong’s.

And they’re not experiencing much of a crunch as the bubble deflates. A similar phenomenon applies in Hong Kong, where a massive increase in tourist figures contributed to supposedly impressive GDP growth around 2003-13, while median household incomes remained level, and probably fell if you allow for inflation (let alone quality of life).

In short: mass-tourism is not only Hell, but bad economics.

So what a delight it is to read that the Hong Kong government has had the uncharacteristic sense to scrap plans to cover much of the old Kai Tak area with hotels, hotels, and more hotels for the MICE and selfie-stick pestilences, and actually build housing – some of which may even be available for local people rather than mainland money-launderers.

Sadly, this refreshing approach has not reached Kai Tak’s replacement out at Chek Lap Kok. The airport bosses have announced a ‘vision’ for a new destination going far beyond the traditional notion of a shopping mall – a retail-dining-entertainment hub-complex three times the size of Harbour City with ‘trendier concepts’ (plus mega-hotel, naturally). If that’s not depressing enough, they say the idea is to target ‘new cross-border revenue streams’ from free-trade zones like Nansha, Qianhai, and Hengqing.

These places are basically lame real-estate/arbitrage plays, but the officials presumably mention them because it sounds cool and gives face to mainland authorities. The ‘vision’ is yet another glitzy maze full of Louis Vuitton, Body Shop, Chow Sang Sang,

48 HONG KONG BUSINESS | NOVEMBER 2016

and McDonalds aimed at yet more zombie-shopper hordes from Zhuhai, Zhongshan, and Shenzhen.

If we are to have a gargantuan bridge linking Lantau to Zhuhai, and a third runway, we must have an exciting Destination Concept Theme-Hub to induce people to use them. We must cram more people in to justify the infrastructure. And the suitcase-dragging zombie-shopper mainlanders – last seen heading to Seoul or Paris or speculating on their fourth apartment in Ningbo – is the best that we can think of.

Such originality! Gold Bauhinia Medals all round!

Blowing in the wind Does Bob Dylan deserve a Nobel Prize for Literature?

My interpretation of this is that the Nobel Globally Important Institution Inc are feeling the heat from emerging-market competition – Hong Kong tycoons alone, shamelessly seeking to emulate Alfred’s immortality and reflected glory, have in recent years founded the Shaw and Lui Che-woo Awards for Amazingly Brilliant Genius.

After upsetting China by giving Liu Xiaobo the Peace Prize, the Nobel people tried to kiss and make up to the panda-with-hurt-feelings by giving the Literature award to the semi-obscure Mo Yan. This tarnished the brand among its traditional Western audience, so they are now trying to restore their reputation by honouring the hip and trendy American bard – perhaps over-compensating in the process, but in a well-meaning Scandinavian way.

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

Is mass tourism bad economics?