Hong Kong Business (October to November 2015)

Display to 30 November 2015 HK$40

HK vs Singapore:

Who wins?

Yuan devaluation stales

dimsum bond market

Who’s winning the e-commerce wars?

hk Losing lustre for luxury items Plus:

Asia gears up for another

1997-style crisis MICA(P) 244/07/2011 KDM No: PPS1645/3/2008

+ranking

20 largest banks

HONG KONG

BUSINESS

FROM THE EDITOR

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

For our annual property issue, we talked to analysts and industry consultants and found out that administrative measures meant to cool the market have only managed to reduce supply in the secondary market and strengthen demand for smaller apartments.

Publisher & EDITOR-IN-CHIEF Tim Charlton associate publisher Louis Shek production EDITOR Roxanne Primo Uy art director Bryan Barrameda editorial assistant Ephraim Bie

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

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

Can we help?

Analysts view this phenomenon to be worrisome because of the deteriorating affordability of homes. Find out more about the recent trends in the property market as you read through our comprehensive report.

We also delved into the city’s retail industry and discovered how e-commerce is changing the way businesses operate. Retail brands are fighting to keep their share of wallets through detailed customisation and convenient e-commerce shopping.

We also report on how the yuan devaluation is staling Hong Kong’s dim sum bond market, the possibility of Hong Kong losing to Singapore as the largest financial centre in the world by 2025, and many more.

Enjoy the issue!

Tim Charlton

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We will however take the gains.

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

Interest rate strategy

CNH: Will Qianhai jeopardize Hong Kong’s position?

DBS Group Research

6 Sep 2013

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

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

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

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

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

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

Manufacturing 25%

Service (rhs)

85%

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

5% 0%

65% 1980

1984

1988

1992

1996

2000

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

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

HONG KONG BUSINESS | NOVEMBER 2015 1

CONTENTS

BRIEFING Who’s winning in Hong Kong’s 22 INDUSTRY e-commerce wars?

CoVER STORY

Demand for smaller flats soars as home 24 prices hit record high in Hong Kong

FIRST 06 Hong Kong loses its lustre for luxury items

07 Will HK home prices correct?

08 Singapore to overtake

Hong Kong by 2025

another meltdown?

OPINION

REGULAR

44 Ian Perkin: Searching for the

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

10 Will Hong Kong convenience

Mainland influence

46 Tim Hamlett: On the wrong track 48 Hemlock: The economic price of CCP security

RANKING

stores’ omni-channel strategy work?

12 Hong Kong’s 8 newly-opened hotels

40 ANALYSIS Is Asia headed for

28 HK banks must juggle

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 2015 262 Des Voeux Road Central, Hong Kong

tradition and technology

For the latest business news from Hong Kong visit the website

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

AVIATION

These 7 charts about air travel will prove your recession fears wrong There are rising concerns over the global economic slowdown and the dreaded ‘Recession’ word, but Maybank Kim Eng has a different view. By looking at the air traffic growth recently, the team led by analyst Monshin Aziz, is quick to conclude that there is no imminent threat of a global recession.

According to Aziz, there is an innate correlation between air travel growth and GDP.

COMMERCIAL PROPERTY

Analysts warn against rift between HK’s physical property, stock prices The Rating and Valuation Department has released property statistics for July 2015 that show home went 0.8% m/m and rents up 0.5% m/m.

This takes the housing price and rent increases to 9.1% and 4.9%.

HR & EDUCATION

Job hunters urged not to add interviewers on LinkedIn, Facebook A prospective employee may want to stand out and make a good impression in the next job interview, but recruiting firm Hays in Hong Kong warns that sending a LinkedIn connection or Facebook friend request to the interviewer is not the way to do it.

Social media is an important networking and researching tool, but there are boundaries that jobseekers need to be aware of.

TELECOM & INTERNET

Why an apparent lack of price hikes in iPhone 6s plans is disappointing From its store visits, Barclays conclude that tariff plans for the iPhone 6s and 6s Plus look very much the same as those for the iPhone 6/6 Plus.

This assists ongoing subscribers’ migration to higher tariff plans.

COMMERCIAL PROPERTY

Mainland financial firms power HK office market’s leasing demand According to Knight Frank’s Asia Pacific Prime Office Rental Index, sectors empowered by technology such as online peer-to-peer financial services in Shanghai and e-commerce in India, are driving leasing demand.

Hong Kong and Taipei continued to enjoy moderate rental growth.

Leasing demand in the former was generated by Mainland financial institutions, such as fund houses.

FINANCIAL SERVICES

BEA launches SupremeGold promo with rewards up to $14,500 BEA announces exclusive rewards of up to HK$14,500 for customers who open a new SupremeGold Account.

New SupremeGold customers who maintain the designated Average Daily Relationship Balance will be rewarded up to HK$8,000 in credit.

FIRST offer discount in renewing leases.

“Most brands will still strive to secure flagship premises in strategic locations with prominent addresses and good visibility. Retailers can consider to upgrade their best locations by renovating their most profitable shops,” he adds.

“While sales declined, it does not mean these stores are loss-making.

They might close one or two stores but they definitely won’t leave Hong Kong,” reckons Fischer.

WORKING AT HOME

Working from home may not be as fun and flexible as it appears to be. Seven out of 10 Hong Kong home workers report feeling stale and getting the urge to schedule trips outside of the house, higher than the global average, according to a survey by Regus.

Almost half (47%) of Hong Kongers who choose to work at home also report getting lonely, while 67% report missing interactions with co-workers. The lack of physical activity is also bothering home workers, as 38% admit to being worried of gaining weight and getting fat while they work from home.

Meanwhile, other issues which plague home workers include being resented by family members for taking up space at home, while others don’t get their work taken seriously by their relatives. Unwanted distractions are also major concerns, since home workers have more flexibility and more control of their own time.

Maintain morale and well-being According to John Henderson, chief financial officer at Regus Asia-Pacific, working from home isn’t necessarily the be-all and end-all solution for flexible workers.

“Flexible workers need a professional and fully equipped environment to thrive and be productive, and working from home clearly isn’t the answer.

When working remotely it is important for professionals to get out of their pyjamas, and out of the house to maintain their morale and wellbeing,” says Henderson.

“Working from a fully-functional environment, instead of a makeshift space within the family home, can offer professionals who work remotely the chance to mix with fellow business people and keep in the swing,” he adds.

6 HONG KONG BUSINESS | NOVEMBER 2015

A Louis Vuitton store at The Landmark, Central, Hong Kong

Hong Kong loses its lustre for luxury items

G

one are the days when Hong Kong is the number one goto place for cheaper luxury items. Hong Kong is slowly losing attractiveness among tourists, and one of the reasons is non-competitive prices. For instance, a Louis Vuitton Speedy 30 bag is now 40% cheaper in Europe and 20% cheaper in Japan than in Hong Kong. Many tourists are finding it more rewarding to go to other shopping hubs in Europe or Japan because of more exciting tourist attractions and cheaper luxury goods.

“If prices in Hong Kong remain higher compared to other markets, the retail market will suffer,” says Aaron Fischer, head of consumer and gaming research at CLSA. He adds that the strength of the USD is contributing to their negative outlook on HK retail.

The oversupply of stores in Hong Kong is not helping the sector either.

According to Fischer, some luxury brands such as Gucci, Prada, Louis Vuitton have an average of 10 stores in Hong Kong but he believes this should be trimmed down by 20-30% for profitability to be maximised.

But for Joe Lin, executive director of retail services at CBRE Hong Kong, retailers need not shut down the stores if landlords are willing to

A Louis Vuitton Speedy 30 bag is now 40% cheaper in Europe and 20% cheaper in Japan than in Hong Kong.

Shifting trends and patterns Lin notes that the retail market in Hong Kong is at the stage of structural change with three major trends in the next five years: the main driver of demand for retail space are shifting from high-end consumer goods to mid-market brands; local demand will gradually regain a bigger share in total retail sales compared with tourist spending, and; decentralized areas will provide a significant proportion of new retail space, offering more leasing options.

He reckons that despite the slowdown in luxury spending, Chinese tourists still see Hong Kong as a major destination for shopping. They are merely shifting their consumption pattern from luxury to mid-range products, which means mid-tier brands will benefit from this trend.

“We would recommend luxury retailers to introduce new products of their secondary lines at accessible prices or the so called ‘affordable luxury goods,’ in response to the structural shift in demand from luxury goods to mid-range items.

They should target young consumers with a growing demand for midmarket products,” says Lin.

Price checks for Louis Vuitton Speedy 30 bag

Source: CLSA

FIRST What if home prices were to return to 2012 levels?

Source: Centa-City Leading Index, Barclays Research

Housing prices look like the odd man out

Will HK home prices correct?

A

s home prices in Hong Kong continue to soar, property experts appear to be offering clashing explanations and predictions. Some analysts are drawing upon historical data, and are painting the possibility of a sharp correction due to a perceived strong correlation between Hong Kong’s housing, office and retail markets.

“Hong Kong’s housing, office and retail markets have historically been highly correlated but this relationship has become increasingly strained in recent years. With Central Grade A office rents having corrected 15.2% from the 2011 peak

and discretionary retail sales having started to drop, Hong Kong’s housing market is increasingly looking like the odd man out,” says Paul Louie, analyst at Barclays.

“Over the past six months, Central Grade A office rents and discretionary retail sales have both retraced back to 2012 levels. While some may argue that the housing market should be different, if home prices behave in the same way as discretionary retail sales and Grade A office rents, a retracement back to the CCL home price index’s average 2012 level of 105.14 suggests home prices could pull back by 27.4%.”

Over the past six months, Central Grade A office rents and discretionary retail sales have both retraced back to 2012 levels.

Other analysts disagree with this view of high correlation between the housing, office and retail markets, and predict instead that home prices will remain elevated in the near term due to low supply and interest rates.

“There is no direct relationship between the office and residential markets. And the correlation between the retail market and residential market is not considered strong,” says David Ji, director and head of research & consultancy of Greater China at Knight Frank.“At the moment there is a shortage of supply and the low interest rate so house prices are not coming down any time soon.”

Simon Smith, regional head of research HK at Savills, says that while recent government measures have significantly lowered the volume of Mainland buyers and hit prices, low interest rates and limited new supply have capped any downside.

The Chartist: The effect of RMB weakness on Hong Kong trade Hong Kong’s trade channel is also influenced by the RMB’s weakness. Hang Seng Bank says a weaker RMB may boost the Mainland’s net exports, which in in turn may lead to a rise in Hong Kong’s re-exports from the Mainland but a decline in Hong Kong’s domestic exports and re-exports to the Mainland. The net effect, while uncertain, is likely to be positive.

“The economic benefits would be even greater if we consider that the profit margins generated from re-exports from the Mainland are higher than those generated from re-exports to the Mainland.

Figures in previous years show that the former had consistently been more than double the latter and thus we can safely assume that this is still more or less true.”

Re-export margins (by origin of country)

Hong Kong’s trade with mainland China

Source: Census and Stat. dept., HKMA, Hang Seng Bank

Source: Macrobond, Hang Seng Bank

HONG KONG BUSINESS | NOVEMBER 2015 7

FIRST

Singapore to overtake Hong Kong by 2025

Survey

Shifting investments

S

ingapore and Hong Kong have been in a constant rivalry when it comes to being Asia’s top financial hub. Early this year, Hong Kong overtook Singapore and was ranked as the third most important city in global finance at the Global Financial Cities Index. However, analysts say there is so much more to be told in this tale of two cities, and that Singapore may just have its own share of a happy ending.

Asheefa Sarangi, senior banks analyst at CLSA, predicts that Singapore will overtake Hong Kong to become the third largest financial centre in the world behind New York and London by 2025. She notes that assets under management could increase almost five-fold to S$10 trillion, and that digital capabilities could help banks lure more new money to Singapore to establish it as the premier wealth hub in Asia.

Millionaires in Hong Kong But Hong Kong will definitely put up a good fight. According to WealthInsight, Hong Kong’s millionaire population is expected to grow strongly over the next five years, with figures forecasting a growth rate of 15.6%, to reach over 230,000 million-

HK to see more millionaires

aires by 2019. Moreover, the number of billionaires in the country is also expected to increase. Between 2010 and 2014 the number of billionaires rose from 34 to 53 – a figure which is expected to increase by a further 11 in the next five years.

“Looking to the future, one constant remains: the rise of the Asian powerhouse cities, the relative decline of the European centres and the tussle between the two global behemoths – New York and London, with New York expected to be the most important city for global UHNWIs in 2025,” says David Ji of Knight Frank.

Hong Kong’s millionaire population is expected to grow strongly over the next five years.

Retail watch

Fook Lam Moon Fine Foods’ first gourmet shop in Wanchai Fook Lam Moon Fine Foods, which was launched as a new product business division in 2013 to celebrate the 65th anniversary of the iconic Fook Lam Moon, opened its first-ever gourmet shop in Wanchai.

Fook Lam Moon Fine Foods prides itself on having built the first gourmet store established by the restaurant brand. The new shop features a secret garden design for discerning gourmands and is created to match the needs of sophisticated shoppers who are looking for fine gift items.

The store offers a wide range of gourmet products that could formerly only be tasted at the restaurant. These include signature XO sauce, cashews and walnuts. A fine selection of Chinese premium dried delicacies, and Fook Lam Moon’s popular series of festive mooncakes are already up for grabs in the new shop as well.

8 HONG KONG BUSINESS | NOVEMBER 2015

FLMFF Interior

FLMFF Blend Coffee

Although economic conditions in Europe are picking up, Hong Kong’s millionaires are opting to move their investments outside the old continent, according to WealthInsight. Hong Kong HNWI allocations to Europe decreased sharply compared to other regions, going from 11.7% in 2010 to 7.2% in 2014.

WealthInsight expects millionaires to further reduce their level of investment in Europe over the next few years, to reach 4.9% of foreign HNWI assets by 2019. By contrast, the faith of Hong Kong millionaires in the Latin American and Africa markets increased recently.

Rising foreign asset holdings The Asia-Pacific region accounted for nearly 60% of Hong Kong HNWIs’ foreign assets in 2014, followed by North America with 17%, Latin America with 11.5%, Europe with 7.2%, Africa with 3.1% and the Middle East with 2.7%.

According to WealthInsight, foreign asset holdings are expected to reach US$546.1 billion by 2019, accounting for 38.2% of the country’s total HNWI assets.

“Similar to China, HNWIs in Hong Kong prefer to keep their investments closer to home with nearly 60% of their foreign assets invested in Asia Pacific in 2014, largely in financial services sector. However, with a rather grim regional economic outlook as the Chinese economy continues to slow down and the impact of Shanghai stock market crash is taking its toll widely than expected, local investors are now forced to ‘diversify’ and ‘select’ where they want to invest,” comments Dr Roselyn Lekdee, economist at WealthInsight.

FIRST

Will Hong Kong convenience stores’ omni-channel strategy work?

T

he ever-increasing competition in Hong Kong’s retail space has spurred some operators to go beyond their format’s convention.In addition to pressure... the development of E-tailing has raised customer expectations to demand access to whatever they want, whenever and wherever they want it.

In line with this, fast-growing retailer 759 Store recently sealed a joint venture with similarly-expanding express delivery service S.F. express. This new concept “Heike”, is an offline-to-online equipped store that offers customers both physical shopping and instore online shopping. Under the agreement, S.F. express operates the store while 759 Store is responsible for designing the retail area and providing physical goods to be sold on consignment, with the two sharing revenue on a pro-rata basis.

This new “community store” concept strives to provide customers delivery options and a product portfolio which incumbents will be hard pressed to match. In addition to shopping in the store, customers can pre-order online and pick up in-store, or do the reverse by purchasing merchandise in the store to be delivered to the customer’s home via in-store online shopping. This unconventional setup of a store serving as both a physical and online retail channel

can provide an operator with a very distinct advantage over purely physical retailers.

First of all, having a number of stockkeeping units (SKU’s) available via the in-store online channel allows the operator to keep fewer overall SKU’s in the store, reducing inventory levels and therefore working capital requirements. Secondly, this allows the retailer to expand its product offerings beyond what is traditionally offered in a convenience store. For the longest time, convenience stores have been offering simply premiumpriced, fast-moving items.

The more focused product selection and smaller store size cuts down the total time of a shopping trip while the greater number of locations increases the chances of a store being within close proximity to a customer.

This “top-up shopping” theme is something that C-store retailers have been missing out on due to the traditional norms of their format.

“As this convenience store concept is still developing, a successful business model will take time to be fine-tuned. It is another good example of technology really moving quickly, having great impact on mortar and brick shops, and all being related to me and you,” reckons Sunny Lam Kwok-tai, a retail professional specialising in Hong Kong.

CBRE Hong Kong executive director for

SF Express convenience store x

Retail Services Joe Lin believes that this will be an effective business model given the recent trends in retailing. However, he feels that profitability may be a challenge given the profit sharing arrangement in combination with the razor-thin margins inherent for retail.

He notes that maintaining the level of service, which is the main selling point of this business model, will be key in sustaining the volumes crucial to making this low-margin setup sustainable in the long term.

hotel WATCH

Poppets is the new name to call your hotel staff

For travellers popping into Tsim Sha Tsui in Hong Kong, you may want to visit the new city-chic 63-room hotel called The Popway Hotel, which recently opened in October.

Owned and personally managed by David Lau, a local Hong Kong entrepreneur, the POPWAY Hotel stands for Passion Of Poppets Will Amaze You. ‘Poppets’ is the new way to address the hotel’s staff at Popway. According to David, it describes in one word all the feelings of warmth, comfort, kindness, generosity, honesty and strength of character you feel every time you are with your family.

The Popway Hotel offers five room types which includes Superior Room, Deluxe Room, Studio Deluxe Room, Balcony Deluxe Room and the Popway Suite. As it bills itself as being different and unique, hotel guests are welcomed with its signature popcorn upon arrival.

10 HONG KONG BUSINESS | NOVEMBER 2015

Popway Hotel-Uptop crew

PopwayHotel-Exterior(night)

PopwayHotel-Studio deluxe room

Sky Deck bar

FIRST sophistication and convenience. Each room boasts of soothing earth tones in its modern design, complemented by wood fixtures, ambient lighting, and photographs of iconic Hong Kong cityscapes adorning its walls.

The 50-room hotel features ‘The Access’ which is the hotel’s communal lounge to facilitate casual business, social meetings, or just for relaxing.

Hong Kong’s 8 newly-opened hotels

I

n a recent report, average occupancy rate in Hong Kong generally stayed high in recent years, and it reached 90% in 2014 and 85% in the first half of 2015. As at October 2015 Hong Kong has seen 254 hotels launches with a total of 74,230 room.

Meanwhile, more hotel projects are being held in order to meet the increasing numbers of overnight visitors to Hong Kong, particularly from Mainland China.

1 Hotel sáv As part of sáv Hospitality, Hotel sáv challenges the status quo of hospitality experience by giving their guests more with 388 rooms to offer. Founded by Edwin Chuang, chief executive officer of sáv Hospitality, sáv which stands for Style, Attitude and Vision, bills to reflect a new era of hospitality decorated in an array of seven hues enabling color therapy to take effect.

Aside from its bright floor-to-ceiling windows offering city and harbor views, Hotel sáv boasts of being the first hotel in Hong Kong to layer arts and culture with charity, in a pioneering campaign for guests booking rooms.

2 Inn Hotel Hong Kong With 199 rooms, Inn Hotel Hong Kong launched a new hotel conveniently located around the shopping and dining district at Portland Street in Kowloon.

Inn Hotel is a new hotel brand by Emperor Hotels Group wherein Inn Hotel Macau is its first location.. Inn Hotel 12 HONG KONG BUSINESS | NOVEMBER 2015

Mongkok features chic and modern guestrooms with contemporary ambience.

3 Holiday Inn Express Hong Kong (Mongkok) Located at Mongkok, this 148-room Holiday Inn Express Hong Kong offers a location for travelers that is very close to Hong Kong attractions which include Tung Choi Street (Ladies Market) which is 800 meters away from the hotel, Temple Street which is 900 meters away, while Hong Kong International Airport is just 24 km away.

The hotel is decorated in marble to bring comfort and elegance. The hotel’s non-smoking rooms are provided with 32-inch LCD TV with cable channels, air conditioning and ironing facilities.

4 One Minden Hotel One Minden Hotel, a new boutique hotel in Tsim Sha Tsui offers 76 rooms furnished with modern decor, offering guests a touch of Asian hospitality.

This new boutique hotel boasts style, convenience, and an excellent location.

Each room is decorated in soothing shades of apricot and each unit offers ample natural light. It comes with cable TV, minibar and refrigerator. The private bathroom has a hairdryer, free toiletries and shower facilities.

5 The Perkin Hotel The Perkin Hotel is yet another stylish boutique hotel at Tsim Sha Tsui offering luxury urban vibe for travelers seeking

6 Popway Hotel The Popway Hotel is a city-chic 63 room hotel located in the heart of the Kowloon district, in Tsim Sha Tsui. Owned and personally managed by Mr. David Lau, a local Hong Kong entrepreneur, the hotel prides itself on service standards and the art of hospitality.

The hotel offers five room types which include Superior Room, Deluxe Room, Studio Deluxe Room, Balcony Deluxe Room and the Popway Suite. Popcorn is a signature of the hotel, and guests are treated to the hotel’s signature varieties on arrival, as well as in the complimentary mini bar in each room.

7 Hotel Pravo Hong Kong Hotel Pravo Hong Kong can be found in Tsim Sha Tsui, Hong Kong. The hotel offers 92 deluxe rooms and suites featuring a décor modelled after themes like rock-and-roll black, mysterious purple, pastels and classy gold. Each room also boasts of a spacious living area and well-equipped bathrooms, the property also comes with fitness facilities, highspeed WiFi and 24-hour security.

Hotel Pravo Hong Kong is a brand under The Ascott Limited’s serviced residences in over 80 cities in Asia Pacific, Europe and the Gulf region.

8 TUVE Located in Tsim Sha Tsui, TUVE is another boutique hotel offering a 66-room accommodation. Developed by Bonds Group of Companies and managed by The Ascott Limited, TUVE highlights a minimalistic and timeless architecture in Hong Kong.

TUVE claims to offer an inspiring approach to hospitality in Hong Kongfrom the high quality of comfort and service, to the sophisticated art and design philosophy of the space.

As it is located in the east of Victoria Park, the location offers a calm, local neighbourhood.

startups

Get unlimited access to group fitness classes at ClassCruiser

A

re you looking for group fitness classes but hate being tied to contracts?

ClassCruiser may be for you. Unlike traditional gym memberships, ClassCruiser offers free access at any one of of its over 60 partner studios in Hong Kong. It also allows its members unlimited classes allowing members to build a completely unique routine with a mix of different types of workouts.

27-year old founder Rosh Pritman argues that with this flexibility, people no longer have to waste HK$1000 or more every month for a gym membership they can never use because they are either out of town or

injured. “With the no-commitment, cancel anytime aspect, the flexibility is unparalleled,” he says. Rosh, who has a degree in business focusing in finance strategy at the University of Southern California, aims to build a close-knit community of fitness lovers who are looking to live an active and healthy lifestyle.

Some of their partners include Aerial Arts Academy, Barre 2 Barre, Bodywize, CrossFit 852 and Flex Studio. ClassCruiser benefits not only its members but also their fitness studio partners. The platform boasts of its cost savings advantage.

He explains that ClassCruiser’s membership costs $899 per month only, compared to the average $300 drop-in class rates or $2500/monthly rates at most of the trendy gyms in Hong Kong.

As for their studio partners, ClassCruiser helps them fill excess capacity. Rosh notes that on average, most studios in Hong Kong only operate at about 60% capacity, and they help them fill the unused spaces in their classes. Currently, ClassCruiser has USD5M total funding and they are planning to expand to other markets in SEA.

TingPark’s up-to-date, real time data for parking

Born out of frustration of having to go round the city to find a parking spot, TingPark is focused on making real time parking availability accessible to anyone via smartphones.

Founded by Jason Zeall, 29, Robert Parcus, 28 and Zoe Yu, 30, TingPark provides a channel for drivers and parking space providers to connect.

Through the channel, drivers can 14 HONG KONG BUSINESS | NOVEMBER 2015

easily check and be notified of space availability while space providers can maximise their parking space occupancy.

These three polyglot co-founders argue that it is about time to make parking space availability accessible to all, with prevalence of smartphones, IoT technology and Asia’s habitual need for efficiency.

According to Jason, the business idea has long been on the minds of all the co-founders, but they did not meet until winning a hackathon with the same idea in mind.

Currently, TingPark is in seed stage and just received a seed grant from Cyberport. It has US$14000 in funding at the moment and plans to work with Infiniti-Nest Accelerator. They are also looking at co-launching the product on iOS and Android and a predictive algorithm of the city on its parking space availability is being pursued.

Omate’s standalone smartwatches

Being the owner of what he prides to be the largest Internet of Things (IoT) professional group on LinkedIn with over 23,000 members, French entrepreneur Laurent Le Pen understands the need of tech community for standalone gears like smartwatch. He explains that while other smartwatches need to be connected to the smartphone to become “smart”, the company’s product, Omate TrueSmart can push information by itself as a standalone device connected to the telecom network.

Laurent adds that the product can also be used as a GoPro remote display and can run any Android apps especially sport apps for outdoor activities.

Omate TrueSmart, he said, doesn’t need to run with the user’s smartphone tapped on their arm.

World’s first Android smartwatch Omate is a tech platform ecosystem for the IoT and wearables allowing fashion and jewelry brands to design their own wearables. This company based in Hong Kong operates a vertically integrated Wearable Design Manufacturer. 32-year old founder and CEO Laurent registered the company on July 1, 2013.

The company’s flagship product, the TrueSmart, is a smartwatch 2.0 which has been funded through Kickstarter. It became the fifth most funded project of the Design category in September 2013.

“We come from the mobile phone design industry and we reused our legitimacy as mobile engineers to create the world’s first standalone Android smartwatch,” says Laurent.

Laurent is a 500startups alum and has been involved in the Mobile Phone Design industry since 2005. He is also a mentor at Acceleratech, StartupGring and StartupSalad, and Laurent spends his time between Omate facilities in Hong Kong, Shenzhen and Mountain View.

Omate raised over a million USD on Kickstarter two years ago while it was a two-month-old startup.

Since then, the company has achieved $7m in revenue and teamed up with numerous distributors worldwide and set up strategic partnerships with the world’s largest jewelry company - Richline Group – a wholly owned Berkshire Hathaway company and French Haute Couture fashion House – Emmanuel Ungaro. The company enters 500startups (Batch 13 – Mountain View California) as part of its investors in the Silicon Valley.

co-published Corporate profile

Bose’s next-generation wireless systems Every SoundTouch system now has built-in Bluetooth and Wi-Fi.

Perfect for multi-room listening

The new Bose SoundTouch family of speakers

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ith millions of people streaming music every day, Bose ushers in a new era for playing it all at home with its next-generation SoundTouch wireless music systems. Now, every SoundTouch system – including the new little SoundTouch 10 speaker – all have Bluetooth and Wi-Fi built right in for the best of both worlds, perfect for instant music and multi-room listening.

Bose also announces two wireless music system “firsts” with Spotify, available soon: In addition to Spotify Connect – which lets you control any SoundTouch system from the Spotify app – Spotify will also be integrated in the SoundTouch app.

And Bose.com will offer ReadySet with Spotify, a way to preload any SoundTouch system with Spotify playlists.

“SoundTouch has always been about the experience – what listening to streaming music at home should be like,” said John Roselli, general manager of Bose Wireless Speakers. “We engineered everything around that simple idea. So, SoundTouch systems are easier to use 16 HONG KONG BUSINESS | NOVEMBER 2015

• The new SoundTouch 10 wireless speaker measures just 8.34” H x 5.56” W x 3.43” D. It combines Bose’s digital signal processing with the new Unidome transducer, a 2.5” powerhouse that produces the highest excursion for any transducer of its size in Bose history. The resulting performance is remarkable. The SoundTouch 10 plays cleaner, deeper, and louder than any single speaker of its stature.

• The new SoundTouch 20 and 30 Series III speakers are the updated big brothers to the SoundTouch 10 speaker.

The SoundTouch 30 Series III is Bose’s best-performing one-piece solution, and the SoundTouch 20 Series III delivers rich, room-filling sound from a more compact enclosure.

• New SoundTouch soundbars and home theater systems are also available, including two soundbars, the SoundTouch 120 and 130 systems; and a 5.1 system, the SoundTouch 520 home theater system. They’re all immersive for movies and TV and double as wireless music systems.

SoundTouch takes you outside, too.

A new, more efficient SoundTouch SA-5 amplifier powers weatherproof speakers for patios, balconies, and backyards.

than anything else available, they sound incredible, and now they let you listen to anything from your phone or tablet in as many rooms as you want. There’s nothing Pricing and availability else like it, and the SoundTouch 10 is a The new Bose SoundTouch 10 wireless great way to get started.” music system is HK$1,680, and the new SoundTouch 20 Series III system The little SoundTouch 10 speaker joins and SoundTouch 30 Series III system are growing family available for HK$3,200 and HK$4,580, The SoundTouch family of products is the respectively. Bose SoundTouch home most comprehensive in the industry, and theater systems are available starting at today it welcomes the new SoundTouch HK$9,980.

10 speaker. It’s ideal on its own, you can All new SoundTouch systems are now add more over time, or mix and match available at Bose retail stores and select with other SoundTouch systems. The authorized Bose dealers. Early next year, SoundTouch 10 speaker joins the new in-app Spotify integration will be included SoundTouch 20 and 30 Series III speakers, in new systems and available to existing new SoundTouch soundbars, and new SoundTouch customers via a free software SoundTouch home theater systems. upgrade; and ReadySet with Spotify They’re all friendly and compatible, will be available at Bose.com with any they all talk to each other through walls SoundTouch purchase. For the full line and ceilings, and now they all include of SoundTouch systems and prices, Bluetooth and Wi-Fi. visit Bose.com.hk.

“SoundTouch has always been about the experience – what listening to music at home should be like.”

FINANCIAL INSIGHT: debt capital markets

Some issuers lose appetite for offshore financings

Yuan devaluation stales dim sum bond market

Offshore yuan bonds are no longer as scrumptious as they used to be--no thanks to the delicious alternatives from the onshore market

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hen the yuan devaluation began in August, the currency’s value plummeted together with confidence in the offshore yuan, or dim sum, bond market in Hong Kong. Not only was the market facing an exodus of Chinese issuers who were beginning to look onshore for financing, but it was also feeling pressure from the rising popularity of the US dollar and Euro as issuing currencies.

“While Asia’s bond markets have proved somewhat resilient compared with the equities markets, the devaluation of the yuan in early August did not leave Hong Kong’s bonds market unscathed,” says Ashok Lalwani, head of Asia Pacific capital markets group at Baker & McKenzie. “Although the recent turmoil in the Chinese stock

18 HONG KONG BUSINESS | NOVEMBER 2015

The dim sum bond market has significantly slowed down over the past 12 months primarily as a result of the changed expectation of renminbi (RMB) appreciation.

market might have prompted investors to turn to bonds, the offshore yuan bond market in Hong Kong is suffering as Chinese companies that used to be dominant issuers have left.”

Lalwani says Chinese companies are starting to flock to the onshore market where funding costs are declining due, in part, to the Chinese central bank’s moves to depreciate the yuan. The onshore market has also become more attractive after the China Securities Regulatory Commission began allowing unlisted companies to issue corporate bonds on exchanges this year.

“The dim sum bond market has significantly slowed down over the past 12 months primarily as a result of the changed expectation of renminbi (RMB) appreciation,”

says Hao Zhou, partner at King & Wood Mallesons. “Most People’s Republic of China (PRC) corporate issuers have opted for issuances denominated in US dollar or Euro instead.”

PRC issuers used to widely prefer offshore yuan borrowings, says Zhou, but the cost of onshore borrowings is becoming lower as the Chinese central bank is expected to continue to cut lending interest rates. “Now, some PRC issuers are beginning to lose appetite for offshore financings as these are no longer necessarily cheaper,” says Zhou.

High yield issuances, in particular, have been subdued, according to Zhou, with some of the deals having failed to launch due to heightened investor caution. Some high yield issuers have even had to fund their financing needs through alternative and faster channels such as private club deals or traditional bank loans due to the lack of investor interest.

But despite some of the uncertainties in the market, Zhou reckons there will continue to be a large pipeline of investment-

FINANCIAL INSIGHT: debt capital markets grade issuances by debut PRC state-owned enterprise issuers, particularly at the provincial or municipal city levels.

Keepwell deals As the offshore yuan bond market suffers some weakness, keepwell supported deals could gain strength as a preferred option among issuers.

“Many PRC issuers continue to use alternative credit enhancement structure with keepwell undertakings to tap the international bond markets in order to remit funds back to China subsequently. Since keepwell is not technically a guarantee, the ratings agencies typically will notch down the issue ratings from the issuer’s corporate ratings due to potential subordination in case of windingup or insolvency,” says Zhou.

“We are currently working on some transactions which we hope, by implementing some additional credit protection features in the structure, will satisfy the rating agencies in a way that they could treat keepwell supported deals almost equal to those guaranteed deals credit wise. If successful, we expect many, if not all future keepwell structure will follow and more issuers will turn to such structure due to the flexibility of transferring proceeds back onshore,” adds Zhou.

Tale of two regions The Hong Kong dim sum bond market’s tarnished appeal comes amid a surge in the wider Asian debt capital markets (DCM).

Offshore renminbi bonds

Source: Thomson Reuters

Bond issuance and bank loans offered to corporates are seeing increased activity, especially for merger and acquisition deals, according to Girish Sahajwalla, managing director at PwC. Sahajwalla estimates on average about 80 bonds have been issued each year since 2011 in Asia, resulting in approximately 350 debt capital markets transactions between 2011 and 2015. Greater China still accounts for half of the deals, and continues to see larger sized transactions relative to other parts of Asia.

But dissecting the growth of Asian DCM, a tale of two markets emerges with Greater China soaring and south and southeast Asia crashing, says David Johnson, Hong Kong based foreign legal consultant and partner at Norton Rose Fulbright Hong Kong.

“Those of us focussed on Greater China, by and large, have been pleased with overall transaction volumes, particularly since the first quarter. On the other hand, those of us focussed on south and southeast Asia have experienced a pronounced slowdown,” says Johnson.

Johnson attributes these divergent trends in Asian DCM to global concerns such as interest rate hikes, oil prices and Greece and the Eurozone, and factors pertinent to each particular jurisdiction such as weakening currencies, regulatory impediments, stronger domestic markets and the cooling of sectors that have historically driven transaction volumes.

singapore view

Who’s struggling to raise funds?

When market volatility hit Asia this year, Singapore DCM investors responded with a level of cool: Pick high-grade bonds and ride out the current economic roller coaster until they land at cushy payday. Local bond investors have been displaying patience for long-term plays despite the spooky financial headlines and stock market declines, says Ashok Lalwani, head of Asia Pacific capital markets group at Baker & McKenzie.

“The local bond market has remained strong even with the current stock market rout. A key contributing factor could be that local bond investors tend to be individuals who have holding power, and who are familiar with the issuers,” says Lalwani. “This means they are more likely to hold on to their Singapore dollar (SGD) bonds even when market conditions become uncertain, which in turn translates into less panic and less volatility.”

But Lalwani notes that while bonds from high quality issuers have been relatively resilient, weaker issuers have experienced a bigger sell off. Given this behavior among issuers, the Singapore DCM market has not been too kind on flailing industries. Issuers in the offshore marine sectors and the oil and gas sectors, for example, are finding it very difficult to raise funds in the DCM markets this year, says Sin Teck Lim, partner at Morgan Lewis Stamford.

Lim reckons that the Singapore DCM market has also seen lower demand for new issues partly due to the increasing interest-rate environment, which makes it more expensive to issue new debt securities.

Given this investing backdrop, three major trends are emerging in the Singapore DCM. Three big trends The first is the launch of the Singapore Savings Bonds or SSBs, a new type of Singapore Government Securities which should attract a lot of retail investors when it begins to be issued starting October this year. “The SSBs provide retail investors in Singapore with a much-needed alternative DCM product, and we expect this to be very popular among retail investors,” says Lim. The second major trend in Singapore DCM is the rising role of Singapore-based lenders in providing structured financing for Southeast Asian SMEs. “In Southeast Asia, besides conventional corporate lending, there has been an increase in the structured financing from Singapore-based lenders to help unlock value in subsidiaries or operations located outside Singapore. This is a growing trend among small and medium-sized enterprises that are becoming increasingly more comfortable with financing regional market expansion with bank debt,” says Girish Sahajwalla, managing director at PwC. The third trend is the stronger influx of foreign companies tapping the SGD bond market. “In the past, the SGD bonds were mainly through standalone issuances. However, in 2015, we are increasingly seeing Singapore Medium Term Note programmes being established or guaranteed by foreign issuers or guarantors,” says Lim. HONG KONG BUSINESS | NOVEMBER 2015 19

economic INSIGHT: external threats

Brace for tough times for the remainder of 2015

Headwinds ahead for HK

The economy will face headwinds from tepid external demand, lingering uncertainty in the euro area and a strong Hong Kong dollar.

T

he slowdown in Hong Kong’s economy is seen to persist for the rest of the year, as the region takes a beating from a less than ideal combination of internal and external factors threatening growth.

“Overall, we expect a rough ride for Hong Kong in the next several quarters. The economy will face headwinds from tepid external demand, lingering uncertainty in the euro area and a strong Hong Kong dollar, as well as the potential liftoff in US policy rates,” senior economist Ryan Lam of Hang Seng Bank says.

Lam says that achieving 3% growth over the next two quarters appears somewhat challenging. “We continue to project growth around 2.5% for the second half. That would put our GDP growth for the full year at 2.4%, broadly in line with the 2.5% growth recorded in 2014,” he says.

Dim outlook Taimur Baig, chief economist at Deutsche Bank says the outlook 20 HONG KONG BUSINESS | NOVEMBER 2015

The number of sales and purchase agreements for residential property fell 37% year-onyear in August to a 17-month low of 4,042 contracts.

for the property market has turned sharply negative since the bursting of the Chinese equity bubble and a sharp decline in property sales in August.

“While we agree that the outlook is likely to be less robust than the recent past, the fundamentals do not suggest a major correction in prices is likely.

Sentiment, however, is fragile and could overwhelm the fundamentals,” he says.

Deutsche Bank data show that the number of sales and purchase agree-

ments for residential property fell 37% year-on-year in August to a 17-month low of 4,042 contracts. This is far from previous extremes but well below average for the past few years.

“But even another 20% decline, to previous cyclical lows over the past 20 years need not necessarily be a disaster.

Major declines in turnover in 2005, 2008, 2011 and 2013 were associated with periods of stable to mild (less than 5%) declines in prices,” Baig says.

Baig explains that property prices have been supported in recent years by record low interest rates, although the market absorbed a decline in activity from 2005 to 2006 when interest rates were much higher than they are today.

Positive real GDP growth in every year but 2009 over the past 17 years has been the main driver of property price inflation. And in 2009, the property price index fell only 17% over a period of six months despite real GDP falling 7.8% year-on-year in the first quarter of 2009. By contrast, the Asian Financial Crisis saw a 45% drop in prices over the year from October 1997 and a cumulative 66% decline by mid-2003.

Two structural features of the market have attracted attention in recent years, Baig says. First, the sharp decline in new supply after 2002 and the emergence of mainland Chinese buyers. Housing construction peaked at 96,234 units in 2001 and by 2007 this had fallen to 17,276.

“In that year, a major real estate broker estimates that mainland Chinese buyers accounted for just under 7% of all property sales by value. In 2011, that rose to 20% with these investors being particularly prominent at the luxury end of the market,” Baig says.

Over the past five years, housing

Q2’15 y-o-y GDP growth picked up, driven by robust private consumption

Source: Census and Statistics Department, HSBC

economic INSIGHT: external threats completions have averaged only about 23,000 units while the importance of mainland buyers has waned to about 9% of sales over the past year.

While it is common to hear complaints about the influence of these buyers, they may have been a stabilizing force, with their influence speaking in 2011 during a period of low turnover and very slightly falling prices, Baig adds.

Hope in consumption Consumption looks set to play the main role in underpinning the economy of the region this year, says Lam. “A steady rise in home prices and stable employment conditions could provide some lift to consumer purchasing power in the near term,” he says.

Meanwhile, the recent correction in the stock market has brought the adverse wealth effect into sharper focus, but Lam believes there are several reasons why this is of limited concern.

“Even after the recent correction, the stock market is still up compared with the start of the year. We also take comfort from the fact that only 25% of stock trades are undertaken by local retail investors, suggesting that the wealth effect may not be as big as might be assumed,” he says.

Lam adds that another important question to ask is what is driving the correction. Hong Kong’s recent stock retreat was mainly driven by liquidity concerns in mainland China, and had little to do with labour income prospects in Hong Kong.

“In fact, the relatively stable income situation in Hong Kong means that local consumers have not yet dramatically altered their spending behaviour.

On balance, we estimate that the

stock market correction will not place a significant drag on the Hong Kong economy,” Lam says.

He clarifies, however, that this is not to suggest that the growth rate of household spending will continue to rise. The high base created by strong sales of consumer durables in the second half of last year will likely weigh on the headline consumption growth from the third quarter onwards. Lower revenues generated from trade activities will also cap the growth of private consumption.

“As such, we see only a very gradual increase in consumption this year. Our forecast is that consumption growth will average around 3.5% for 2015, a mild uptick from the 3.2% growth in 2014,” Lam says.

Beyond domestic demand A key question for the growth outlook is whether the export disappointment so far was noisy data or a signal of deeper changes in Asia export linkages, Lam says.

Data from OCBC Bank show that exports (-6.1% year-on-year) and imports (-7.4% year-on-year) growth may remain tepid amid China’s slowdown and soft global demand.

“The weakness in global growth and the slowdown in China continue to pose headwinds to the economy and net exports are unlikely to make a positive contribution,” says economist John Zhu of HSBC. Zhu adds that the uncertain external environment is likely to constrain export performance in the near term.

However, while there is a tendency to link all changes in trade performance to cyclical conditions in Hong Kong’s major trading partners, Hang Seng’s study suggests that Hong Kong’s

Hong Kong property prices (overall index, 1999=100)

Source: Macrobond, Hang Seng Bank

What do the export disappointments mean?

Over the past five years, housing completions have averaged only about 23,000 units while the importance of mainland buyers has waned to about 9% of sales over the past year.

export growth is to a large extend dragged down by structural factors.

“There are competing explanations for the emergence of structural impediments, we are of the view that the desire of manufacturers to gain a greater level of control over the production process weighs on regional trade flows,” Lam says.

The need for quality control leads to a spatial concentration in production.

This regional fragmentation reduces the volume of trade for every dollar spent on final goods and services, he adds.

Moreover the recent turmoil surrounding Greece and mainland China’s recent stock market turbulence could also keep Hong Kong’s trade growth under pressure.

“Risks surrounding Greece have diminished somewhat in recent days, but there will be continuing doubts over the Greek government’s willingness to implement reforms under the bailout agreement. Second-quarter GDP growth on the mainland surprised on the upside, but we see downside risk to growth ahead. Even if US demand improves, the upside to Hong Kong exports would be modest,” Lam explains.

Total exports of goods (%YoY)

Source: Macroband, Hang Seng Bank

HONG KONG BUSINESS | NOVEMBER 2015 21

Analysis: e-commerce in RETAIL out memorable omni-channel campaigns.

Pedder Red’s new retail store in Hong Kong

Who’s winning in Hong Kong’s e-commerce wars?

Retail sales are down in Hong Kong but brands have pinpointed two strategies to help them roll with the punches.

W

hen headlines blared that Hong Kong tourist spending was on a downward spiral, fashion brand, Pedder Red put together a two-pronged plan focussing on product customisation and e-commerce to help it weather the retail sales slump.

The brand collaborated with Korean designer, KYE to create an exclusive line launching in October to entice mainland tourists that were preferring to shop in Japan and Europe, and launched its website www. pedderred.com to expand its customer reach.

Total retail sales are down 1.6% for the first half of 2015 compared with the same period in 2014, according to Colliers International. Luxury gifts, jewellery and watches took a

22 HONG KONG BUSINESS | NOVEMBER 2015

Depreciating currencies in Japan, South Korea and the Eurozone have accelerated the move away from Hong Kong, as more adventurous Chinese tourists fly further afield in search of discounts.

15.9% decline, but other subsectors such as fashion and furniture are feeling the pinch as well.

Analysts blame the retail sales dip on changing buying behaviour among mainland consumers and the recent yuan depreciation which has made it more appealing to visit and shop in Europe and Japan.

Armed with market research and agile product development processes, retail brands are fighting to keep their share of wallet through detailed customisation and convenient e-commerce shopping. Some, like furniture brand Reddie have developed online design tools to allow customers to create more than 1,000 different furniture designs, while Pedder Red is building a website powerful enough to sell its products and also push

Product customisation Hong Kong’s retail woes stem from the shifting attitudes of the all-important mainland tourist market when it comes to shopping in the territory. Their increased affluence, maturing taste and the yuan’s dipping value are convincing them to fly to Europe and Japan, instead of Hong Kong, to shop for luxury goods. “The declining appetite for luxury items has already hurt sales of many big-ticket items, which resulted in weaker retail sales overall,” says Joanne Lee, senior manager of research at Colliers International in Hong Kong.

“The restriction on visits

by Shenzhen residents comes on top of structural changes stemming from the mainland’s anti-corruption campaign, a shift in consumption patterns by mainlanders, and declining tourist arrivals from the mainland into Hong Kong. It is our view that the hiccups in the retail market are caused primarily by those structural changes, not the restriction on multiple entries.”

“Depreciating currencies in Japan, South Korea and the Eurozone have accelerated the move away from Hong Kong, as more adventurous Chinese tourists fly further afield in search of discounts. Hong Kong is losing competitiveness because of easier visa application processes in foreign destinations.

Hong Kong’s retail sales are expected to post a mild singledigit decline in 2015,” adds Lee. For Pedder Red, the proper response to these retail headwinds is to leverage on loyalty and exclusivity through the creation of customised products lines. “Consumer’s spending levels in Hong Kong are being challenged by traffic numbers, it has been well reported in the Hong Kong press of the reduced level of spending

Analysis: e-commerce in RETAIL as a consequence of visitor numbers. Multiple factors such as a weaker Euro and Yen potentially make Europe and Japan more attractive shopping destinations,” says Peter Harris, president at Pedder Red. Furniture maker Reddie, which offers more than 1,000 customised designs online, also established a finely tuned supply and production chain. “The customer can customise their furniture designs online using our responsive design tool. Our online design tool allows customers to get a live and updated preview of their designs on screen.

Therefore each client can find something that is completely unique and complements their style,” says Caroline Olah, founder of Reddie.

“At Reddie, we design, manufacture, and distribute our products. Each item is made-toorder, and handmade in Central Java, using solid teak and metal.

Because Reddie manages the entire process from beginning to end, with no middle man, we are able to offer our products at an attainable price,” she adds.

Reddie also worked hard to find a factory that would be able to handle their concept of allowing customers to build customised furniture online. “It was very difficult to find a factory. Most commercial factories are not willing to produce one order at a time, and with Reddie, each item is made-to-order. So when we pitched this idea to factory managers in China, we were basically told ‘No’ and ‘Impossible’ many, many times. And, of course, if they were willing to produce per item, it came with an astronomical price tag, at prices higher than what we currently offer,” says Olah.

“Deflated but not defeated, we then explored Indonesia, and happily discovered that Indonesia had talented craftsmen who meticulously make all of their pieces by hand, which was much more suited to a made-to-order concept. After an in-depth search, we found a factory in Central Java with whom we currently work. It

Joanna Lee

Caroline Olah

Peter Harris

was also a great advantage that I have an Indonesian background, and speak the local language of Bahasa, fluently,” she adds.

Despite the dismal headlines of declining retail sales, Olah says she founded Reddie in Hong Kong after spotting a lucrative opportunity, especially for producers of one-of-a-kind products for which customers will be willing to pay a premium. “It is extremely easy to set up a business and run a business here. With its central location as a global hub, Hong Kong is also one flight away from many major cities, which will be beneficial for when we plan to expand,” she adds.

“It is also an exciting time in this region for online retail and new brands. Since moving here, I have met many entrepreneurs and design entrepreneurs that are producing unique products and have chosen to base their businesses in Hong Kong.”

E-commerce imperative Retail brands that look to survive the harsher HK landscape are also turning to e-commerce in order to broaden their customer reach beyond mainland customers. “The decision to launch pedderred.com in Spring/Summer 2015 was to extend the brand access from our store network to the wider world of omni-channel, connecting with the existing and reaching a new audience,” says Harris.

“E-Commerce allows us not only a platform of selling but also

a strong tool to communicate and engage with our customers,” he adds. “With pedderred.com, the omni-channel business strategy continues to make us remain competitive within the industry sector, providing new channels of customer reach.”

Retailers have to evolve and embrace e-commerce to remain competitive, says Simon Lo, executive director of Asia Research and Advisory at Colliers International.

“Looking at the bigger picture, the e-commerce and online shopping boom are bringing challenges and opportunities to the retail market. The online-tooffline platform widens the retail market dimensions and allows a further and deeper global reach of products,” he says.

“In order to compete, retailers need a new dimension of thinking around innovation and technology to ensure that opportunities created by the rise of e-commerce are fully captured,” adds Lo. While e-commerce will not completely replace physical stores and the experience of seeing displays and touching products, e-commerce does provide an alternative shopping channel for consumers, says Linda Lin, director of Shenzhen Retail Services at Colliers International.

Lin points to the example of Hong Kong’s neighbouring city of Shenzhen, where online sales have been supplementing the performance of physical stores.

Reddie’s unique furniture

HONG KONG BUSINESS | NOVEMBER 2015 23

COVER STORY

Affordability of homes deteriorates

Demand for smaller flats soars as home prices hit record high in Hong Kong Measures meant to cool the sector have only managed to reduce supply in the secondary market.

I

n Hong Kong, home prices have taken on the visage of Superman: zooming in the air and seemingly invulnerable to any danger or drag. Home prices hit record highs in the first half of the year and still continue to show strength despite government cooling measures and recent stock market declines. But analysts reckon that home prices in the island should experience a correction, if later rather than sooner, and it might be quite a doozy.

“Home prices continue to rise despite repeated attempts by the government to keep them in check,” says Antonio Wu, deputy managing director at Colliers International in Hong Kong, pointing to the sustained surge in both mass market and luxury home prices in 2015.

Wu attributes the surge in home prices to the strong response of homebuyers to new launches, especially in the primary market. He describes the prospective property buyers in the market as “financially strong” and far more resilient that the weak homebuyers that were scared off the market when the tougher borrowing measures were imposed.

According to Wu, mass residential prices climbed 14% in 2014, escalated a further 4% in first quarter of 2015 (1Q15) and another 2% in the second quarter of 2015 (2Q15), while luxury prices witnessed growth of 2% in

24 HONG KONG BUSINESS | NOVEMBER 2015

2014, edged up 3% in 1Q15 and another 1% in 2Q15.

The increase in mass residential prices was a result of increased demand for primary launches after the government implemented a policy on loan-to-value ratios requiring a 40% down payment for property valued at less than HK$7.0 million, says Simon Smith, senior director, Asia Pacific at Savills Research.

“Demand was generated by different types of end users, such as pent-up demand, first time buyers and spinoff families. Due to the strong demand in the primary market, developers reduced rebates of Buyer’s Stamp Duty and Double Stamp Duty,” says Smith.

Meanwhile, primary luxury launches became the headline of the residential market story in 2Q15 as primary sales value reaching an historical high, says Smith.

Smith notes that luxury apartment prices rebounded by around 6% in 2Q15 with the concentration of transactions reported in prime areas. The most notable transaction this quarter was the sale of G-1/F of Opus Hong Kong, The Peak for HK$479.9 million, which set a record as Asia’s most expensive flat. The townhouse market also grew by 4% in 2Q15.

Territory trends Analysing the price trends per territory, primary sales

“Mass residential prices climbed 14% in 2014, escalated a further 4% in first quarter of 2015 and another 2% in the second quarter of 2015.”

COVER STORY value in the HK Island residential sales market reached an historical high in 2Q15 due, in part, to the sale of a duplex unit in Opus Hong Kong as well as the aftereffects of stock market volatility earlier this year, “The wild stock market ride in HK and China during 1Q15 not only benefited investors but also played a major role in affecting the luxury apartment market both in terms of transaction volumes as well as pricing,” says Smith.

“Some areas on HK Island posted particularly strong price growth, lifted by the buoyant sentiment, but it is unlikely that we will see this repeated during the remainder of the year.” says Smith.

Meanwhile, the Kowloon and New Territories luxury residential markets have also been posting strong gains but are generally more stable compared to the HK Island market, says Smith.

Prices in Kowloon Station and Ho Man Tin rose by 4.1% and 0.5% respectively. A notable launch was the Ultima, Ho Man Tin, which drew a strong market demand from both end users and investors. 2Q15 also saw significant transactions such as the sale of unit C on 26/F (1,581 sq ft saleable) of Tower 7, Ultima Phase 1 for HK$62.251 million and unit A on 10/F (1,875 sq ft saleable) of Tower 7, One Mayfair in Kowloon Tong which sold for HK$81.774 million.

Impact of rising home prices Wu reckons that administrative measures meant to cool the market have only managed to reduce supply in the secondary market and strengthen demand for smaller apartments. This phenomenon may prove worrisome, in his view, because of the deteriorating affordability of homes.

“Ever-rising mass home prices have limited buyer affordability and spurred demand for smaller flats, thus pushing up prices for tiny apartments. The potential of the first interest-rate increase essentially poses little threat to the fundamentals of Hong Kong’s housing market. Inadequate housing will continue to drive up prices.

To have a healthy real estate industry, a vibrant secondary market with upgraders is vital,” says Wu. Wu does not rule out further cooling measures if property prices continue to grow by another 5% to 10% this year, and he says these new measures may include lowering the maximum loan-to-value ratios and tightenPotential supply vs actual launches from developers

Source: Jefferies, Ricacorp

ing requirements on second mortgages.

Denis Ma

Simon Smith

Slowdown in second half of 2015?

Smith says the price gains seen in 2Q15 will not likely be sustained for the rest for the year. “Stock market exuberance resulted in some impressive price gains over the second quarter, something which is unlikely to be repeated over the second half,” he says.

Specifically for the luxury apartment market, Smith expects price growth in the region could hover between 0% to 5% for the remainder of the year. Transaction volumes though could take a hit amid increased unpredictability in the stock markets. “Both local and mainland investors can be expected to become a bit more circumspect until current volatility eases,” says Smith.

Some analysts also point to historical data to suggest that the high home prices are becoming quite an anomaly, and warn that a correction could be severe.

There is a historical high correlationship between the housing, office and retail markets, says Paul Louie, analyst, Asia ex-Japan real estate at Barclays, and only in recent years has this relationship been strained.

But if the property market’s direct correlations with the office and retail property markets re-assert themselves, this could mean a very sharp correction from its current record highs, says Louie.

Retail and office down...

“Over the past six months, Central Grade A office rents and discretionary retail sales have both retraced back to 2012 levels,” says Louie.”While some may argue that housing is different, if the trend holds and the CCL home price index were to retrace back to 2012’s average 105.14 level, this would suggest a 27.4% drop from here – some food for thought.”

Discretionary retail sales, which are correlated to the housing market, have already moderated to 2012 levels. In the first six months of 2015, Hong Kong’s retail sales have fallen by 1.6%. But in the discretionary sales category of jewellery, watches and valuable gifts as well as clothing and footwear, retail sales have fallen 11.1% yearon-year and have now retreated back to levels similar to 2012.

While the fall in sales of jewellery and watches narrowed, being down by 10.4% year-on-year in June from 14.9% year-on-year in May, visitors from mainland China continued to slow, says Denis Ma, head of research at Jones Lang LaSalle in Hong Kong.

Visitors from the mainland declined by 1.8% year-onyear in June compared with a 5.0% year-on-year increase in May, which Ma says can be partly attributed to the once-per-week cap imposed on multiple-entry permits issued to visitors from Shenzhen. Luxury retailers have been taking the brunt as seen in closures across the island. For example, Italian footwear retailer, Baldinini surrendered its lease on a 1,650 sq ft G/F shop at AON China Building in Central, having operated the shop for less than half a year.

The damage to HK retail and tourism is structural and will likely have long-term effects, says Venant Chiang, HONG KONG BUSINESS | NOVEMBER 2015 25

COVER STORY Hong Kong island luxury rental indices by district, Q1/2003-Q2/2015

Source: Savills research and consultancy

equity analyst at Jefferies. He points to the 4.7% growth of mainland tourist arrivals in first half of 2015 compared to 16% in 2014 and the decline in retail sales as possible early signs of unwinding HK retail and tourism strength. Colliers expects the retail rental index to fall another 10% decline in 2H15 after the 7% dip in 1H15.

“Given over 15%-20% of the HK working population is in the retail and tourism industry, the downtrend will gradually jeopardise household affordability,” says Chiang.

Similarly, Central Grade A office rents have also returned to levels seen in the third quarter of 2012.

“Versus the recent peak of the second quarter of 2011, over the past four years, Central Grade A office rents had retreated by 15.3% and are currently at the same level as 3Q 2012 despite tight vacancy of 1.7%,” says Louie.

Vacancy reached a two year low in June, according to Ma, as leasing continues to be dominated by Central PRC financial services and securities trading firms, accounting for about 45% of new lettings. For example, Bank of Shanghai expanded in-house at Citibank Plaza while another PRC bank leased a whole floor at AIA Central (13,600 sq ft) for its newly established investment banking division.

“Driven by expansion requirements from a handful of occupiers in the lower-end of the market, the Wanchai/ Causeway Bay occupier market recorded its strongest monthly growth in two years,” adds Ma. He considers one the best performing buildings in the market is International Commerce Centre in West Kowloon, which saw its vacancy rate decline from 6.1% to 3.2% in July after successfully securing several tenants from the financial services and I.T. sectors. ...Home prices up In contrast to the dipping retail and office markets, Louie notes that home prices have gone up 11.4% in 2014 and are up 9.5% in 2015-to-date, while housing rents have risen 11.5% in 2014 and added another 1.0% in 2015.

Luxury residential rents have seen quite a rally, with the recent Stock Connect scheme as well as the IPO pipeline likely to be behind the turnaround in sentiment, says Smith.

Overall luxury apartment rents rose by 3.6%, ahead of townhouse rents which recorded a rise of 1.8%, and well in front of serviced apartment rents which grew by a 26 HONG KONG BUSINESS | NOVEMBER 2015

“Overall luxury apartment rents rose by 3.6%, ahead of townhouse rents which recorded a rise of 1.8%.”

marginal 0.7% over the quarter, he adds.

The rising rents can be traced to a shifting tenant profile and renewed demand from financial services firms.

“We are seeing fewer ‘traditional’ western expatriates and more Asians, including Indians as well as mainland and Hong Kong returnees,” says Smith.

“In Southside, developments continue to attract tenants while Kowloon’s attraction lies in the new stock alongside its relative convenience. Sai Kung is seeing steady demand and rental rises there, previously so rapid, have slowed. In the serviced apartment market, demand has been consistent with budgets of HK$20,000 to HK$50,000 per month proving popular,” says Smith.

The central Mid-levels proved to be the most active market among all the core districts in 2Q15, while budgets of around HK$100,000 per month saw the fastest pick up, mostly from financial services firms such as insurers, hedge funds and asset managers, adds Smith.

The turnaround in luxury residential rents, which bottomed out last year, will likely result in a 10% pickup in 2015 and will be its strongest growth following the global financial crisis, says Wu. “Growth will be primarily driven by apartment buildings that have high occupancy. For that reason, landlords will be less willing to negotiate on rents, causing the rental-expectation gap between tenants and landlords to close. The banking and finance industry is not too eager to increase housing allowances considerably but we predict they will keep them steady,” adds Wu. Supply acceleration While there is expectation that home prices will correct somehow, home supply will not be letting up in the near term. “There is no denying that future supply is rising and the rate upcycle will come back soon,” says Chiang, pointing to how private units available in the next three to four years reached 83,000 as of end June, a new high. Ricacorp also estimates 20,000 out of 33,635 available units will likely be launched in 2015, reaching a 10-year high.

Central Grade A office rents retreated by 15.3%

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HONG KONG’S 20 LARGEST licensed BANKS

HSBC tops this year’s ranking

HK banks must juggle tradition and technology

Hong Kong’s banks face economic shifts and emerging tech developments.

W

hen the Shanghai-Hong Kong Stock Connect was launched in late 2014, it marked a substantial development which Citi Hong Kong quickly adopted, making them one of the first banks to offer updated services for both consumer and institutional clients. Being aware of the changes this would bring about to the traditional banking scheme, they took action to take the new development in their stride.

“As an industry, we should embrace this kind of technology and improve our products and services to better suit the needs of our clients,” says Weber Lo, Citi country officer & CEO for Hong Kong & Macau.

Hong Kong’s banking sector is prepared to adjust their programs in order to suit their market’s changing needs, and to 28 HONG KONG BUSINESS | NOVEMBER 2015

The more convenient the traditional banks can make the experience, the less likely they are to lose customers to alternatives.

resist other emerging forms of technology that could become direct competitors of traditional banking, such as bitcoin and peer-to-peer lending sites. Though Hong Kong, like Singapore, has the advantage of geographic location and population density as well as increasing generational wealth, ensuring that their services remain as relevant as ever to their clients is a must.

“The more convenient the traditional banks can make the experience, the less likely they are to lose customers to alternatives.

They need to keep investing to ensure they are not made obsolete.

Mobile payments and services will become critical in the short to medium term for the retail bank operations,” says Keith Pogson, senior partner at EY Financial Services.

The difficulty lies in maintaining

the brick-and-mortar assurance of traditional banking services during a time when customers are looking not only for convenience but also a sense of trust in a bank’s financial strength and overall security. However, the current generational trend is starting to shift towards a greater emphasis on multiple channels that can provide the same services at maximum accessibility – a need that also tends to risk undermining the importance of security.

“Whether it is ignorance or increasing risk tolerance is generally not well understood, but the one advantage that should and could be maintained by the banks is their position of security,” says Tim Pagett, national global financial services industry leader of Deloitte China. “The one certainty for traditional banks in Hong Kong is that they must change and evolve.”

Who made it to the list?

Generally speaking, the financial and banking sector of Hong Kong is shaking up. But it all seems that HSBC is not easy to tame as it once again topped the list of Hong Kong’s largest licensed banks of Hong Kong Business based on the total number of staff. With the bank’s recent undertaking of leaving London and returning to Hong Kong as its headquarters, the number of Hong Kong staff is expected to increase in the coming months.

The rest of the banks included in the top 5 maintained their positions last year. Bank of China, HSBC’s closest competitor, had a slight decrease with its total number of staff dropping to 14,000 this year from 14,467 last year. Hang Seng Bank on the third spot increased its number from 7,932 to 8,206 this year. Meanwhile, Standard Chartered Bank and Bank of East Asia have 6,000 and 5,803 staff, respectively.

HONG KONG’S 20 LARGEST licensed BANKS RANKINGS 2015

BANK

RANKINGS 2014

Number of Employees 2015

Number of Employees 2014

CEO/ Country Head

1

Hongkong and Shanghai

1

21,153

20,189

Helen Wong

Banking Corporation* 2

Bank of China

2

14,000

14,467

Yue Yi

3

Hang Seng Bank

3

8,206

7,932

Rose Lee Wai Mun

4

Standard Chartered Bank

4

6,000

6,000

May Tan

5

Bank of East Asia

5

5,803

5,757

David K.P. Li

6

Citibank

6

5,000

5,000

Weber Lo

7

DBS Bank

7

4,000

4,000

Sebastian Paredes

8

Dah Sing Bank*

9

2,482

2,254

Gary Wang

9

China Construction Bank

8

2,387

2,400

Mao Yumin

(Asia) Corporation** 10

OCBC Wing Hang Bank*

10

2,165

2,200

Dr FUNG Yuk Bun Patrick JP

11

Industrial and Commercial

11

2,071

1,957

Chen Aiping

Bank of China (Asia) 12

Wing Lung Bank

12

>1,800

1,700

Zhu Qi

12

China CITIC Bank International

14

>1800

1,500

Zhang Xiaowei

14

Shanghai Commercial Bank

13

1,495

1,649

David Sek-Chi Kwok

15

Fubon Bank

15

901

899

Raymond Wing Hung LEE

16

Chiyu Banking corporation*

17

600

600

man-kung ng

17

Public Bank

16

580

652

Tan Yoke Kong

18

Standard Bank*

18

200

200

A Pang

19

Tai Sang Bank*

19

100

100

Patrick Ching-Hang MA

20

Tai Yau Bank*

20

15

15

Arthur Ko

78,276

76,317

TOTAL

Data provided by companies. Survey period: June-July 2015. *Data obtained from media reports, annual reports, and/or estimates. **China Construction Bank (Macau) was separated from China Construction Bank (Asia) in current year but it was part of China Construction Bank (Asia) before June 2014.

HONG KONG BUSINESS | NOVEMBER 2015 29

Legal briefing

Troubleshoot contractor payment woes

Hong Kong looks to adopt a security of payment legislation to reduce longstanding headaches.

F

or every project that Hong Kong contractors take on, they pray to high heaven that no payment delays and disputes crop up since current legislation offers them little protection from such occurrences. But a newly proposed Security of Payment legislation (SOPL) is seeking to provide some reprieve when these frustrating scenarios arise.

What problem areas does the proposed SOPL try to address?

The provisions of SOPL are mainly designed to help contractors receive payments faster and lessen their burdens during payment disputes. “The SOPL is a long-awaited legislation that is aimed at fixing some of the systemic problems that have been vexing the construction industry worldwide for a long time,”says Alfred Wu, partner at Norton Rose Fulbright.

“These problems include contractors not getting paid quickly enough and the dispute resolution processes being too slow and costly.”

“The implementation of a security of payment regime in Hong Kong is overdue and will be a welcome relief to participants in Hong Kong’s construction industry whose cash flow and profitability have long been impacted by delayed and disputed payments,” says Bree Miechel, of counsel, energy and infrastructure at Simmons & Simmons.

Miechel cites an industry survey undertaken by the Development Bureau and Construction Industry

Under the SOPL, contractors will also be entitled to suspend all or part of their works in the event of non-payment.

Council back in 2011 which revealed that payment problems were viewed by relevant stakeholders as ‘very serious or serious,” and that parties were annually out of pocket by up to 12% of total business receipts.

What are the key provisions of the proposed SOPL and their implications?

Key provisions of SOPL that try to address problems in payment delays and disputes include prohibiting certain payment terms in construction contracts that are considered unfair, says Edmund Wan, partner at King & Wood Mallesons.

“Payment terms would be unenforceable to the extent that they provide for payment periods of longer than 60 days (for interim payments) and 120 days (for final payments),” says Wan. “‘Pay when paid’ clauses would also be unenforceable,” he adds.

Wan notes that these clauses typically state that 30 HONG KONG BUSINESS | NOVEMBER 2015

Edmund Wan

Alfred Wu

Bree Miechel

a subcontractor will only be paid once the head contractor is paid. Under the SOPL, contractors will also be entitled to suspend all or part of their works or reduce the rate of progress in the event of nonpayment,” he adds.

He also highlights the introduction of adjudication to rapidly resolve disputes arising under construction contracts. A typical adjudication would be resolved within 60 working days, which will be much quicker than a typical construction arbitration, which usually takes over a year to resolve.

Wan emphasizes as well that the introduction of adjudication in other jurisdictions such as Australia, Singapore and United Kingdom has led to significant decrease in litigation and arbitration, indicating the parties often accept the adjudicator’s decision.

For Miechel, the right of parties to refer payment (and time) disputes for binding interim adjudication makes SOPL a “real game changer.”

“Under current Hong Kong contract terms, parties typically have to wait until completion of the works (or contract termination) to bring arbitral proceedings (or pursue litigation)”says Miechel.

“Adjudication meanwhile would provide an avenue for relatively quick redress and at low risk with each party responsible for their own legal costs. Any resulting decision of an adjudicator is to be enforceable in court in the same manner as a judgment of the court.”

What are potential areas of concern when SOPL is legislated?

Analysts raise concerns about how fast SOPL can be implemented, as well as the effectivity of the adjudication process when applied in the Hong Kong legal setting.

Wu says that with SOPL having just completed its public consultation process, it is unlikely that the legislation will come into effect before late 2017. “If the industry is to benefit from this new legislation, the earlier it comes into effect the better,” he says.

Meanwhile, Wan expresses concern on how well parties can prepare for the significantly faster proceedings of adjudication.

“While adjudication resolves disputes quickly, the tight timeframe means that parties have limited time to prepare relevant documents. For this reason, adjudication is often said to provide ‘rough justice,’” says Wan. Miechel adds that parties within the construction industry are worried that there will not be adequately trained adequately trained adjudicators following the implementation of SOPL. With an expected spike in adjudications, a lack of adjudicators to take on this workload could mean failure to meet the timeframes for delivering decisions under the proposed SOPL.

CMO Briefing

How to reach Gen Y and Z consumers

As Millennials gain buying power, marketing professionals strive to be relevant to their demographic.

W

hen marketers first started taking note of the tech-centric lifestyle of Gen Y and the emerging generation of young consumers, it forced businesses everywhere to adapt entirely new marketing schemes to reach this particular demographic. One admirable example of this is Oreo, a brand which quickly took to social media to engage with consumers directly, creating a personal relationship with them by using humour and fun – both of which are part of Oreo’s brand identity – to draw in the audience.

This instance alone shows just how much change marketing strategies have gone through, in the span of mere decades. Print ads and billboards were once sufficient to build brand awareness; today they are simply glossed over by most consumers, particularly the tech-savvy generation.

How different are millenials?

According to Jeremy Walker, managing director at integrated communications agency, Golin, Millennials are not radically different from any generation before them. “It’s just that technology has enabled content to be consumed faster, more directly and in many more ways than before.”

Walker notes that Millennials are also the first generation to curate their own content, designing their own news feeds and content for consumption.

“With over 90% of consumers trusting recommendations from friends above all other marketing methods, this socialisation of content inevitably creates barriers to traditional marketers who now need to find more creative and subtle ways for their message to be propagated by the network.”

“One of the key challenges in reaching the new

32 HONG KONG BUSINESS | NOVEMBER 2015

One of the key challenges in reaching the new generation is their short attention span.

generation who have grown up with the Internet, is their short attention span (12 seconds in 2000 to 8 seconds only in 2013), some say slightly better than a goldfish. Marketers must find creative ways to reach this audience with compelling content at the moment of relevance,” says Peter Greenberger, director of sales, emerging markets in Russia and Greater China for Twitter.

“Sharing and engaging with Millennials on social media is key, rather than selling [to] them. The content has to be carefully crafted and curated to engage with them,” he adds.

“Identifying the common interest that consumers have could potentially create the linkage to the brand’s interest, culture and character that you want to promote is very important – this is where social strategy comes in,” says Kiki Fan, managing director, Nielsen China.

How can the Millenials’ attention be captured?

Younger consumers have become smarter: they resist hard selling marketing techniques and prefer to engage directly with a brand, usually through social media. “To capture their attention, marketers need to create content, not advertising, that’s genuine and speaks the language of the 20-something but yet is able to bring out the brand’s messages,” says Kevin Huang, co-founder and chief executive officer of Pixels.

Mobile users in particular are more inclined to engage with video content, quickly making it a viable channel for brands who can adapt to the trend quickly enough.“Mobile video consumption is on the rise globally and it is one of the best ways to reach Millennials and beyond,” says Greenberger, adding that Hong Kong in particular topped the list of users who watched mobile videos.

Many brands and individuals have exploded in popularity thanks to a video that went viral on social media. But here lies the real difficulty of marketing to the younger demographic – what is viral and hip today may be completely boring and lame tomorrow, and there’s no predicting that the next “in” thing could be.

Fan notes that rather than focusing on shifting the brand’s advertising from one media to another, marketers need to think carefully about how to reach the target audience in a more efficient way. Far more than the number of clicks and videos available on the internet, brands have to think about how they can make an impact to the consumers through communicating the real culture of the brand.

“Marketers are having a tough time because they have been setting the trends for so long and they now have to keep up with them. The truth is, whatever your age, you are always less advanced than the new generations,” says Julien Rio, director of marketing & communication APAC of lalamove.

The main challenge is to work double time to keep up with the increasing speed of the Millennial pace.

co-published Corporate profile

CityU MBA: Shaping well-formed business leaders The City University of Hong Kong goes the extra mile in preparing MBA candidates for leadership roles.

W

hen the demand for higher education began to see a major surge globally, Hong Kong’s educational institutions rose to the occasion as locals and internationals alike evaluated their growing options for postgraduate studies. Today, Hong Kong is known for providing high quality education in various fields of study, particularly in business management. In City University of Hong Kong, innovation in developing their MBA programme is a high priority in order to suit the needs of the rapidly evolving market.

“In 2015, CityU MBA has introduced a new programme curriculum in response to the ever-changing business requirements for postgraduate education. Starting from this fall, potential students can choose from the General MBA, a single concentration MBA or a double concentration MBA, and they can also decide if they want to enrol as a part-time or full-time student,” says Professor Kevin Chiang, MBA Programme Director of the City University of Hong Kong, emphasizing that their students are provided a tailor-made curriculum, given that these students come from various industries, each with its unique needs.

Special concentration areas MBA candidates can opt to specialize in five different concentration areas depending on their preferred career path or field of expertise: Accounting, Finance, Information Management, Marketing and Supply Chain Management. “The programme is offered in intensive mode, with consideration of the

needs of our mature students in terms of their work and personal commitments, in a sense that it really provides a great deal of flexibility,” he says. “Throughout the CityU MBA programme, our career services will provide a variety of services to our students to prepare them with the skills needed to entering into different professional sectors with recommendations and referrals, if necessary, based on our existing vital corporate relationships,” he continues.

The City University of Hong Kong offers a series of mentoring supports and services to its MBA candidates, which include coaching, utilizing career management tools and resources to name a few. This programme plays a major part in assisting students in evaluating and refining their career options and goals, and how they can navigate their way to success.

As Hong Kong is a global trading hub, it is particularly important for MBA students to be given as much exposure as possible to the international workplace that they will be joining upon completing the programme.

“We are providing international exchange programmes, corporate and enterprise diagnostic trips, and summer residential workshops at UC Berkeley just to name a few, and many others corporate engagement functions to broaden the networks of our MBA students,” says Professor Chiang, noting that the MBA programme of the City University of Hong Kong is continuously being

Professor Kevin Chiang MBA Programme Director City University of Hong Kong evolved and developed in order to maintain the high quality of education being given to their students.

A holistic development What makes the City University of Hong Kong’s MBA programme one of a kind is that they also encourage students to participate in community life outside of the business world and the rigors of the academe. “The CityU MBA students and alumni have been active in participating student activities and serving the community. It is not all about studying. We encourage our students to join competitions and develop their student clubs in building their interest and network,” he says.

Students can be a part of many different extracurricular activities that allow them to expand their network as they continue their education. “The CityU MBA Community Service Club has also been helping a number of charity associations for fundraising and delivering love to the unfortunate ones throughout the year.”

“Working and improving on the strategic commitment of SHARP continues to be the programme focus in the coming year.

While world class Software, state-of-the-art Hardware, and well connected Alumni help to boost global talents Recruitment and power them to achieve a career advancing Placement, we believe that these five elements go hand-in-hand for the future success of the programme,” he adds.

“The CityU MBA programme offers a series of mentoring supports and services.”

HONG KONG BUSINESS | NOVEMBER 2015 33

analysis: financial market turmoil

Thailand had high current account deficits in 1997

Asia gears up for another 1997-style crisis While almost two decades have passed since the Asian financial crisis, analysts warn that the region must be prepared as the financial turmoil in East Asia closely rhymes the grim past.

T

he on-going financial market turmoil affecting East Asian emerging economies, particularly Indonesia and Malaysia, has revived grim memories of the 1997 Asian financial crisis (AFC) amongst investors.

The AFC was triggered by macroeconomic imbalances coupled with structural and policy distortions in ASEAN economies. Fragile initial conditions exacerbated the initial financial turmoil, leading to a plunge across asset classes while significantly hurting economic growth.

In a symptomatically similar reaction, exchange rates and equity markets have hit multi-year lows across major emerging market economies in East Asia today, dragged by the on-going financial market turmoil triggered by slowing global growth, the imminent Fed rate hike and most importantly concerns over financial fragilities and a sharp real economic slowdown in China. In this economic watch, we assess the state of ASEAN economies across two time frames, in 1997, during the Asian Financial Crisis, and in the present context.

In particular, we evaluate key structural factors - monetary, fiscal and exchange rate policy stance, political stability, growth inflation dynamics, investment efficiency, external balances, foreign indebtedness, banking system health and liquidity outlook – to ascertain if a repeat of the 1997 Asian Financial Crisis is in the offing for East Asian emerging market economies (EMEs) or is the economic block better placed this time to withstand challenges.

34 HONG KONG BUSINESS | NOVEMBER 2015

“Weak regulatory oversight, lax lending standards, issues of graft, and unhealthy relations between banks and firms led to tainted balance sheets of domestic banks and a rise in nonperforming loans.”

Southeast Asia’s ‘moral hazard’ problem At heart of the crisis was the ‘moral hazard’ problem in South East Asia, which exacerbated financial vulnerability in the region and magnified the impact of external shocks during the crisis. The moral hazard problem manifested itself across multiple levels. First, the corporate sector where public guarantees to private projects with several instances of favouritism and crony capitalism led to firms overlooking riskiness of underlying investment projects, lax credit risk standards, and a false presumption amongst corporates and investors that most private sector investments were insured by the government against shocks.

This led to a foreign debt overhang with underlying investment projects whose returns were substantially inflated. During this time, the Japanese zero interest rate policy aimed at tackling domestic deflation fuelled carry trades, in turn triggering huge capital inflows into ASEAN economies despite incipient signs of weakness in earnings growth and declining profitability for corporates in the region.

Second, a thrust on financial intermediation as domestic banks borrowed heavily from abroad to lend across domestic projects while overlooking their viability. Weak regulatory oversight, lax lending standards, issues of graft, and unhealthy relations between banks and firms led to tainted balance sheets of domestic banks and a rise in non-performing loans. To aid the supply of low cost

analysis: financial market turmoil capital inflows and boost economic growth, policymakers in East Asian EMEs initiated rapid capital account liberalization. Concomitant monetary policy accommodation led to excessive credit growth in the banking system during the pre-crisis years, which translated into a pile up of non-performing loans as banks down played credit risk.

Meanwhile, most followed a rigid exchange rate framework, with domestic currencies pegged closely to the US dollar, which helped them keep the risk premium on US dollar denominated debt low.

Third, international banks overlooked prudent risk assessment in their lending to domestic financial institutions. A pile up of short term unhedged foreign currency denominated liabilities jumped manifold for East Asian EMEs. Short term external debt to foreign exchange reserves surpassed 100% for Indonesia and Thailand.

A concomitant economic slowdown in Japan weighed on exports from Asia, in turn worsening trade balances while a sharp appreciation of US dollar against the yen made Asian currencies – which were pegged to the US dollar – uncompetitive. Political instability in key economies such as Indonesia coupled with the lack of structural reforms by domestic authorities and poor banking supervision further undermined investor confidence in the region. Amid heightened macro-instability, in 1997, real estate and equity markets in the region fell sharply, which triggered a contagion. The rapid reversal of foreign capital flows led to a collapse of currencies across the region, starting with the Thai Baht, and spreading on to Philippines, Indonesia, and Malaysia, which manifested itself into a broad-based liquidity and solvency crisis with chronic macroeconomic effects. Falling asset prices spiralled into a wave of corporate and banking sector defaults, which led to asset price deflation and undermined government’s ability to provide explicit guarantees, in turn triggering a vicious cycle of default, debt and depression.

Focus on quality of improvement During the early 1990s East Asian EMEs which allowed their current account deficits to balloon in excess of 3% worsened their ability to withstand rapid capital reversals and exacerbated devaluation expectations. In 1997, sharp currency depreciation pressures against the US dollar were seen across economies with high current account deficits such as Indonesia, Malaysia, Philippines, Thailand and Korea while others such as China, Hong Kong, Singapore Investment efficiency levels need to improve

Source: IMF, BBVA Research

The Philippines showed increased efficiency in resource use

“In the run up to the Asian Financial Crisis, between 1990 to 1997, Incremental Capital Output Ratios – a crude measure of productivity – had risen in several East Asian countries.”

and Taiwan saw relatively muted currency declines given their smaller deficits or surpluses. Reassuringly, we see a meaningful improvement in current account balances of the former economies in 2015.

That said, the notion of a sustainable level of current account deficit, can vary across economies and time period; and depends on a host of factors such as the stability of the foreign debt to GDP ratio over the long run, the rate and nature of economic growth, which can explain whether the fall in savings is transitory or permanent, and the level of investment efficiency as measured by the incremental capital output ratio (ICOR).

Ironically, mid 1990s saw robust GDP growth rates for most East Asian economies, averaging above 6% y/y. In contrast, these economies are growing at a much slower pace this year at an average 4% y/y.

Interestingly, investment rates in 1997 were above 30% of GDP for all economies in the region except Philippines (24%). However, bulk of these investments represented unproductive capital accumulation. In the run up to the Asian Financial Crisis, between 1990 to 1997, Incremental Capital Output Ratios – a crude measure of productivity – had risen in several East Asian countries such as Indonesia, Malaysia, Thailand and Korea, which indicated declines in the efficiency of investment. Comparing with recent estimates of ICOR by the IMF, Indonesia, Philippines and Malaysia have seen increase in the efficiency of resource use; while efficiency levels have declined in Thailand, Vietnam and Korea.

The risky combination Greater export orientation enhances an economy’s ability to service its debt by generating higher foreign currency receipts. On the flipside, however, it also makes the economy more vulnerable to a slowdown in its trading partners, deceleration in global growth, and other external shocks such as restrictive trade policies in foreign countries and geopolitical risks. Trade openness across East Asian economies was already significantly high in 1997.

Measured as the share of exports and imports as a % HONG KONG BUSINESS | NOVEMBER 2015 35

analysis: financial market turmoil of GDP, Malaysia’s trade openness was the highest in the region at 94%, followed by Philippines (54%), Thailand (47%) and Indonesia (28%).

While these economies still remain highly open, their export dependence on China has increased considerably over the past decade compared to the early 1990s. Closer trade links to China makes East Asian economies a lot more vulnerable to a sharp slowdown in the Chinese economy. 23% of Philippines exports are to China, which this figure stands at roughly 12% each for Indonesia, Malaysia, Thailand and Vietnam. Beyond China, bulk of the exports for East Asian emerging economies is intraregional. For instance, key export destinations of Indonesia are Japan (13% of exports), China (10%), Singapore (9.5%) and the US (9.4%). In addition, a huge negative terms of trade shock has also hit economies in the region today through the slump in commodity prices including crude oil, coal, iron ore, rubber, and palm oil, which has hit trade realizations. Compared to the 1997 crisis, trade gains have eluded East Asian economies for a lot longer in the present context, with a painful protracted slowdown in exports since 2010.

Exchange rate frameworks are no longer rigid, willing to bend but won’t break. A rigid exchange rate policy pegged against the US dollar was one of the key contributing factors towards destabilizing macro balances in East Asian economies during the early 1990s. The Thai baht and Philippines peso were effectively fixed to the US dollar; Indonesia followed a real exchange rate targeting policy while the Malaysian ringgit moved in a 10% range to the US dollar. The policy of effective peg against US dollar was followed by East Asian countries so as to enable external financing of domestic projects through lower borrowing costs and a reduction in currency risk premium.

From a longer time frame since 1990 to end 1996, the real appreciation was much sharper at 23% in Philippines, 19% in Malaysia, 12% in Thailand and 8% in Indonesia. The misaligned exchange rates led to a loss of trade competitiveness in the region, aggravated current account imbalances and heightened pressure on policymakers to maintain currency stability; and ultimately leading to a collapse in currencies. Unlike 1997, emerging Asian economies have today adopted a managed float of its currency, which accords greater independence to monetary policy in achieving price stability and sustainable growth.

The flexible exchange rate would continue to help cushion GDP growth is visibly slower compared to 1997

Source: BBVA Research, Haver Analytics

36 HONG KONG BUSINESS | NOVEMBER 2015

Exchange rates hit multi-year lows in emerging Asia

Since 1990 to end 1996, the real appreciation was much sharper at 23% in Philippines, 19% in Malaysia, 12% in Thailand and 8% in Indonesia.

vulnerability of these economies to external shocks leading to shifts in investor sentiments.

Lesson learned?

On-going global economic turbulence affecting East Asian economies depicts peculiar similarities to the mid- 1990s in terms of external shocks. A less protracted yet significant slowdown in export growth was seen in 1997 for the region weighed by stagnation in the Japanese economy.

Japan’s growth slowdown was exacerbated by a consumption tax hike in 1997, and a slump in demand for semiconductors hit East Asian EMEs. The devaluation of the Chinese Yuan in 1994 added to competitiveness pressure on regional currencies while in mid-1997 expectations of a US monetary policy tightening further unnerved investor confidence across the region.

So are East Asian EMEs better placed to withstand the ongoing financial and macro-economic turbulence compared to 1997? We believe they have learnt their lessons.

However, governments’ in these economies still need to plug key economic gaps.

The spillover effects on East Asian EMEs from a spike in global financial market volatility are inevitable going forward given the disruptive effects of China’s economic transformation, US monetary tightening, lingering geopolitical risks and commodity currency interplay. Its impact across the region is likely to be disparate depending on respective state of economic fundamentals, depth of external linkages and domestic policy frameworks. As a group, these economies have seen a surge in long term foreign direct investments over the past decade, which echoes rising confidence of strategic investors, who look beyond shorter term shocks that trigger speculative capital outflows, while playing a key role in upholding the economy’s credit profile during times of extreme stress. By Sumedh Deorukhkar and Le Xia, analysts at BBVA Research

co-published Corporate profile

Why investors shouldn’t ignore Astana’s allure Astana, the capital of Kazakhstan, starts to make a convincing case as an attractive destination for investors.

W

hen investors scan Asia for the cities that will bring them their next pot of gold, the glittering metros of Shanghai and Tokyo present themselves as obvious choices, but in the northwest lies Kazakhstan and its city of Astana, which proponents believe is an investment diamond in the making.

Brisk economic and infrastructure development, not to mention a strategic location in the crossroads of Europe and Asia are raising the status of Astana among investors. The government is also rolling out an assortment of investor perks to further boost confidence in Kazakhstan and Astana.

“Kazakhstan is a country which creates the most favourable conditions for investors,” says Marat Tleubayev, director at the “Locomotive Kurastyruzauyty” JSC, a company operating a plant in Astana’s special economic zone and produces fifth generation diesel locomotives. One of main partners of Lokomotive Kurastyruzauyty is General Electric company.

“The stable political system makes doing business easy, protects investors and creates tax incentives. In Kazakhstan investors in priority sectors are exempt from corporate income tax, land tax for 10 years and property taxes,” adds Mr Tleubayev.

“The government has made a special decision to compensate for up to 30% of

the capital costs after commissioning. You can also involve foreign labour force for the entire duration of the project without any quotas or permits. In our opinion, these are the best conditions that not every country can offer. That is why we can assure all foreign investors that doing business in Kazakhstan is profitable and enjoyable,” adds Mr Marat.

Favourable investor conditions The government also continues to listen to the needs of investors to make sure that their needs are met. “Every year the government of Kazakhstan improves the investment climate,” says Torres Duarte Pascal, director at “Tulpar-Talgo,” one of Kazakhstan’s main plants that produces high-speed trains. “In my opinion, every investor, who is now working in Astana, can say with confidence that today there are all conditions necessary for new projects. The Government exempts investors from many taxes, thus they can use the saved money in production,” adds Pascal.

Investors looking into long-term plays in Kazakhstan should appreciate Astana’s strategic location in the middle of Kazakhstan, a vast land-locked territory that makes the country the 9th biggest in the world. “The perfect blend of political power, futuristic cityscape and growth outlooks of the nation concentrated in this once small

“Brisk economic development and a strategic location in the crossroads of Europe and Asia are raising the status of Astana among investors.”

38 HONG KONG BUSINESS | NOVEMBER 2015

Nurali Aliyev Deputy Mayor of Astana

provincial capital makes Astana the magnet for investors and entrepreneurs,” says Nurali Aliyev, Deputy Mayor of Astana.

The government is rolling out transportation upgrades to help Astana keep up with its exploding population and economic expansion, as seen in the city population’s eightfold growth in the last 15 years and nominal gross regional product expanding by 24 times in the same period.

Rising international financial center Investors looking to dip into the Astana market can ride along as the city transforms into the preeminent international financial center in Kazakhstan. Astana is attracting a host of heavyweights in the financial services industry, and will see a landmark building rise in its skyline.

“Astana is becoming the nation’s most important financial center as several major banks are moving their head offices from Almaty,” says Mr Aliyev. “This progress is going to be accelerated after the establishment of International Financial Center which will be founded in the way Dubai International Financial Center was created.”

Mr Aliyev also reckons that Astana as an international financial center holds a special advantage for investors due to its time zone which offers a smoother handover of the global markets trading hours between Hong Kong and major Eastern European financial centres.

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analysis: Triangulating Asian Angst

Gatot Subroto Street in Jakarta, Indonesia

Is Asia headed for another meltdown?

DBS fears that the signs are all present for another full-blown crack-up as China weakens, rates go down, the rest of Asia is caught in the middle, and investors getting flashbacks of 1997.

A

t the end of the day, or maybe the start of it, most financial market turmoil owes to real economy factors and / or fears thereof. The 14-month ‘collapse’ in Asian currencies, the miniscule 2% devaluation of the RMB, the rout in global equity markets it wrought and the inevitable fears of another Asian financial crisis of 1997 – all owe to real economy fears and illusions. China is ‘weak’ and rates there are going down. The rest of Asia is caught in the middle and it’s 1997 all over again, should investors want out.

How weak is China? And how much does the rest of Asia today resemble the Asia of 1997? Our answers are straightforward: not very strong, not very weak and not very much. In China, the 50% crash in equity markets since June doesn’t reflect a crumbling economy any more than the 100% rise earlier this year reflected a booming one. Markets and the economy have never marched to same drum in China and they are no more correlated today. The economy has slowed to be sure. But the big downshift came three years ago. Since then, it’s run more sideways than downwards. Consumption (retail sales) continues to grow at a 12%-13% pace and, with inflation down by 2 percentage points in 2 years, it may have accelerated in real terms.

Measured against a simple basket of dollars, euros and yen – the only way that makes sense given the soaring dollar – China’s exports continue to grow at the same

40 HONG KONG BUSINESS | NOVEMBER 2015

Consumption continues to grow at a 12%13% pace and, with inflation down by 2 percentage points in 2 years, it may have accelerated in real terms.

10% pace they have since early-2011. Real wages? They continue to grow at an 8% YoY pace. That’s down from the 10% pace of 2009-2011 but it’s consistent with today’s slower GDP growth and hardly suggests crisis. I’d be tickled pink by an 8% raise every year, after inflation, and suspect you would be too. What has slowed in China are fixed asset investment and industrial production.

How China deals with the bad debt – or, more precisely, how and whether it prevents such episodes from happening again – will have a direct impact on the quantity and quality of China’s longer-term growth. In the short-term, the debt is largely irrelevant. It will be written off – much of it paid for by the central bank – and fiscal policy will be expanded to take up whatever slack the government feels needs to be taken up. The main difference from before is that, in the short-run, fiscal expenditures will be driven centrally, from Beijing, rather than from / by local governments.

A 3% currency move and a 1.25% interest rate move are inadequate to stimulate anything. The moves are simply reasonable if all-too-modest responses to the prevailing macro environment. Ask yourself two questions: Faced with a debt overhang and falling inflation, does it make more sense to raise interest rates, leave them alone or lower them? Faced with a 15% trade-weighted currency appreciation in one year, does it make more sense to nudge the RMB back towards where it ought to be or to

analysis: Triangulating Asian Angst forget about it? The answers are plain. The authorities did little more than what policymakers anywhere else in the world would do. China’s probably did less. As always, when global risk comes off the table, investors want to know who’s vulnerable in Asia.

More often than not the question continues: is this 1997 again? The question was posed in 2008 when Lehman went down, in 2011 when Europe went down, in 2013 when QE taper tantrums first struck and it is being asked again today. The short answer is Asia looks less like 1997 every time the question comes up.

The main reason has to do with external balances. For the 10 years leading up to 1997, Asia ran large current account deficits – it borrowed a lot of money from abroad.

As most are aware, the money wasn’t all invested wisely and when it became apparent that some were not going to get their money back, everyone ran for the door and the rest is history. But here’s the thing. When the bubble blew in 1997, Asia’s big deficits turned immediately into big surpluses. Asia began paying down the debt built up prior to the crisis. For the last 18 years, all Asian countries, save for Indonesia and India, have continued to run large surpluses. Foreign debt has continued to fall.

In India and the Philippines, it has fallen top 6% of GDP from 35% in 1997. Even this understates the improvement in most countries’ external position, because “external debt” is a narrow term for a country in the same way that “automobile debt” is a narrow term for an individual. An individual may owe a lot on her car but have a high ‘networth’ because she owns four houses. Similarly, a country can have a high external debt that is offset by other foreign assets, leaving a large ‘net international investment position’ as the IMF prefers to call it.

While these latter data do not exist for most countries as far back as 1997, the improvement in external ‘net-wealth’ since 2001 has been even greater than the improvement in external debt per se, as discussed below. At the end of the day, though, it’s not about the current account surpluses or the external debt or any other statistic that says risk today is lower than it used to be.

The 1997 question is first and foremost a question of cyclical dynamics – ups and downs, inflows and outflows, inflation and deflation. Are economies careening ever faster towards a point of no return? Or are they quietly pulling back from one? From this perspective, the cycle is clear: for the past four years Asia’s economies, includAsia- current account balance % of GDP, simple avg

Source: DBS

In the Crisis-4 countries (TH, MY, ID, KR), external debt (less FX reserves) has dropped to 11% of GDP from 60% back in 1997.

ing China’s, have been backing away from the edge, not accelerating towards it. Risks remain, but the odds of 1997-style implosion are lower than they were four years ago, not higher.

Inflation The missteps continue. At the Fed’s Jackson Hole conference at end-August, Vice Chairman Fischer said there was “no clear evidence” of core inflation rising over the past two years. That’s because it’s been falling for 3.5 years. The Fed’s favorite inflation gauge – core PCE inflation – fell to 1.2% YoY in July. Six months ago it was 1.4%.

Six months before that, it was 1.7%. A year before that it was 2%. In all, core PCE inflation has been falling steadily since January 2012. Most officials blame low inflation on low oil prices. This is nonsense. The reason they call it ‘core’ inflation and a big reason why the Fed prefers it is because there’s no oil in it. The fact that it’s been falling for 3.5 years – while oil prices have been falling for only one – is another inconvenient truth that officials (and most analysts) prefer to ignore. Were Yellen grading exam papers at Harvard, Fed explanations for why inflation is low would get a D. There are two reasons why core PCE inflation is falling. First, the goods portion of it – representing onequarter of core consumption and 17% of GDP – has been in outright deflation for the past 2.5 years.

Durable goods like household furniture, recreation goods, computers and jewelry; non-durable goods like clothing and household supplies – all have experienced outright price declines of between 1.5%-8% per year since Jan-2013. That’s a lot of deflation. It has nothing to do with oil. And the Fed hasn’t mentioned it once. But falling core inflation isn’t just about goods. The service sector is now dis-inflating too. A year ago, services inflation was running at 2.4% YoY. Since then it’s fallen to 1.8% and it doesn’t matter whether one strips the few drops of oil out of the series or not. Until mid-2014, services had been propping up core PCE inflation. Today they are adding to the fall.

Fiscal spending and debt Truth be told, short-term cyclical growth has slowed by more than the authorities wished. And greater fiscal spending is likely on the cards. Doesn’t that just mean more debt and bigger problems down the road? It might.

Like any country, capitalist or otherwise, China needs to be careful how it cleans up its bad debt.

If it doesn’t take steps to prevent a recurrence, the quality and quantity of its long-term income growth will be impacted. In the short-run, however, the bad debt is largely irrelevant – it’s spilled milk, gone and best forgotten. The debt will be written off, paid for in part by bottom-fishing investors and in part by the central bank, which seems destined to take onto its books a large number of the CNY3.2 trn of bonds issued by local governments to clean up their books.

At the end of the day – at least from a technical perspective – fixing a debt problem is a simple task: you carve out the bad debt, you make someone pay for it and you fire the management. China has already carved out the bad debt HONG KONG BUSINESS | NOVEMBER 2015 41

analysis: Triangulating Asian Angst happy they have. Officials are now tinkering with forward restrictions to prevent the RMB from barking so loudly the next time they free it up. Whether they succeed remains to be seen. The point is plain: the road to reform is never as quick or as easy as one might hope. Unintended consequences lurk behind most corners. Nothing is more important to the growth outlook than reform and structural change. Because it is so important yet so difficult, this is where the risks lie. If you want to worry about China, look here, not at last month’s PMI and whether it’s 47 or 57. Focus on the long-term -- that’s what the authorities are doing.

Asia- net foreign debt as % of GDP ext debt (public + priv) less FX reserves as % of GDP

Source: DBS

and the central bank will likely pay for most of it. Firing the management is all that’s left – and Xi Jinping’s anticorruption drive has already proved so vigorous that many think he’s over-stepping his bounds. Time will tell. What’s abundantly clear right now is that China has no intention of letting a simple debt problem hold back growth for 25 years like it did in Japan, or for 7 years like it has so far in the US. Fiscal investment spending will rise modestly over the coming year, filling in the cracks that officials and analysts had hoped might be filled by higher private consumption.

The main difference with the past few years is that the spending will be driven centrally from Beijing rather than by local governments. Local debts are still being written off and local management is still being fired. It will be a year, perhaps longer, before local governments regain their fiscal footing and if Xi Jinping’s anti-corruption drive is successful, they will look and operate differently when they have.

The real risk Short-term cyclical risks have been over-blown. That does not mean risks do not exist. There are plenty of things to worry about but most of them are long-term risks related to structural change and reform. Rooting out corruption and reforming investment incentives that led to debt problem discussed above are but one example. Even at a 6% or 7% growth rate, China is growing by leaps and bounds.

At this rate, it creates an entire Germany every 4.5 years. If this is to continue, much reform and structural change is required. The to-do list is long and wide. It entails macro reforms, micro reforms, the real sector, the financial sector, labor markets, insurance markets -- you name it, it’s on the list. The last time China attempted a reform program of this scale was in 1978, when Deng Xiaoping moved to free agriculture, and later industry, from state control.

But China today is 30 times larger than it was in 1978 and in a very real sense, that makes reform and structural 30 times harder to implement. Lots could go wrong. Take the simple change to the RMB fixing two weeks ago. The move was a trivial one, meant to give the market more say over the value of the RMB and was absolutely the right thing to do from a reform perspective. But when the market “devalued” the currency by 2% (a very small amount), the world went into convulsions. Since then, the authorities have put the clamps back on and most everyone seems 42 HONG KONG BUSINESS | NOVEMBER 2015

For the past 18 years, the Asia-10 countries have run surpluses averaging 6% of GDP.

Asia-vu?

Whenever Asia’s currencies weaken the question gets asked: are we looking at 1997 all over again? What’s changed? What hasn’t? So it is today, where the short answer is, almost everything has changed. Asia doesn’t look much like 1997, if at all. Most Asian currencies aren’t down against anything but the US dollar. When the euro plunged and the yen plunged, Asia’s currencies did precisely what you would want them to do: they swam down the middle -- they fell against the dollar, to be sure, but they rose against the euro and yen. ‘Swimming down the middle’ kept Asia’s currencies stable when dollar-euro and dollar-yen ran all over the road.

Capital outflow and current account surpluses But it’s true there have been significant capital outflows over the past year. Why haven’t Asia’s currencies fallen?

The biggest reason is all Asian countries, save for India and Indonesia, run current account surpluses today instead of deficits like they did back in 1988-1997. Those surpluses have offset much of the capital outflow and reserves have fallen by far less than the capital outflow per se. In the second quarter of 2015, net flows – current account surpluses less capital outflows – in the Asia-10 were

Jalan Tuanku Abdul Rahman in Kuala Lumpur, Malaysia

analysis: Triangulating Asian Angst square. But that doesn’t sell papers. The Asian crisis of 1997 was indeed an Asian crisis. The currency moves then were Asia moves. Today’s currency moves are not Asia moves, they are dollar moves. Asia-vu this isn’t.

Current account surpluses and external debt Current account balances are the real-economy measure of whether a country is borrowing or lending in international markets. If you’re exporting more than importing, you’re lending the difference to foreigners, or paying down old debts from an earlier time. No surprise then that the 1997 crisis owed first and foremost to having run large C/A deficits for a good many years. Asia borrowed a lot of money, it wasn’t all invested wisely, when it became clear that some investors weren’t going to get their money back, everyone ran for the door and that was that.

When the crisis hit, Asia swung from running deficits to running surpluses – overnight. At the drop of a hat, or maybe a baht, Asia flipped from deep red to deep black and never looked back. For the past 18 years, the Asia10 countries have run surpluses averaging 6% of GDP. These surpluses add up to 4.5 trillion dollars – an amount equivalent to one third of US GDP. This money was either lent outright to foreign countries or used to pay down old debts, or both.

Countries like Singapore, Hong Kong, Taiwan and China, which were mostly surplus countries to begin with, built up claims on the rest of the world equivalent to between 20% and 300% of a year’s GDP. The deficit countries, which had built up significant external debt by 1997, used their surpluses to pay down large portions of it. If one offsets external debt with holdings of foreign reserves, the ‘net external debt’ of Korea dropped to 3% of GDP from 29% back in 1997.

Indonesia’s net debt fell to 23% of GDP from 57% in 1997. Current account surpluses lowered the Philippines’ net external debt to 6% of GDP from 45% in 1997. And

Asia currency values versus US dollar - 1997 crisis and today increase = appreciation, crisis - 4 countries (TH, MY, KR, ID)

Source: DBS

Malaysia has run some of Asia’s largest current account surpluses since 1997 – 11% of GDP, on average – and those surpluses have wiped its overall liabilities clean.

Thailand, the symbol of it all? Reserves there now exceed gross debt; net external debt is negative. Malaysia’s numbers are interesting and show how external debt statistics can mislead. Just as an individual may have a large automobile debt that is offset by the ownership of 4-5 houses, a country may have a large foreign debt that is offset by ownership of other foreign assets (e.g., companies, stocks, US Treasury holdings). Malaysia’s net external debt has risen to 32% of GDP from 27% back in 1997. But Malaysia has run some of Asia’s largest current account surpluses since 1997 – 11% of GDP, on average – and those surpluses have wiped its overall liabilities clean.

Today, Malaysia holds as many claims on foreigners as foreigners hold on it. True external ‘debt’ is zero, or very nearly so. Korea’s is a net creditor in global markets when all assets and liabilities are counted rather than just ‘debt’.

The US? It’s in hock to foreigners to the tune of 45% of a year’s GDP. That’s more than any country in the Asia-10, save for Indonesia. And even there it’s close. In some sense, a country’s net international investment position, as the IMF calls it, tells you how solvent it is when an external debt problem may simply be a shortterm liquidity problem. Of course markets don’t always distinguish between the two when sentiment turns sour. The good news is that, by either measure, 18 years of current account surpluses have turned Asia into a vastly different place from what it was in 1997.

His story Except for in the very short-run, where emotion dominates sense and sensibility and no one speaks with authority, the amount of capital that does or doesn’t flow out of Asia in the weeks ahead will depend on three things: the strength of the US, the weakness of China and how much Asia today resembles the Asia of 1997.

Fear not. The US is not as strong as many believe, China is not as weak. And Asia today looks nothing like 1997.

Outflows, therefore, should not be significant. And while past performance does not guarantee future results, it is worth considering what sort of capital flowed out of Asia during the last two Fed tightening cycles. In 1994, when the Fed embarked on its infamous tightening cycle, capital didn’t fly out of Asia, it flooded in like never before. Those inflows, in fact, were a large part of the liquidity bubble that culminated in the 1997 crisis. By David Carbon, DBS Group Research

ECONOMICs

Ian Perkin

Searching for the Mainland influence

I

n this era of big data and instant communications, a “quarterly economic report” seems like a throwback to another era. It deals with (relatively) few numbers, comes with a (considerable) delay and is (essentially) backward looking in its approach. Yet when the Hong Kong Government’s economic report for the September quarter is issued on November 13 - 44 days after the end of the quarter – it will be one of the most anxiously awaited and forensically analysed quarterly reports to be issued since the return of sovereignty in 1997.

Back then the concerns were not so much about the economic effects of the mid-year handover of sovereignty to the mainland, but the impact the Asian financial crisis was having on the local economy in the final six months of the year and the early months of 1998. Back then, too, it was the strength of the mainland economy (together with the fiscal and monetary strength of the Hong Kong economy) that was seen as an important factor in seeing the HKSAR economy through the regional crisis.

At the time, the government’s quarterly reports were being monitored closely to assess how the local economy was coping with the existential threat to it from the financial turmoil in the rest of the region. For the forthcoming September quarter report the situation will be the reverse, with local businesses and investors worried not so much about the global or regional situation, but any impact from the mainland.

As the first quarter commentary to emerge since the collapse in the Shanghai share market in July (see previous column) and the emergence of global concerns about the slowdown in the mainland economy, the 2015 third quarter report will be closely watched for signs of how the uncertainties north of the border might be impacting the SAR economy.

At the time of writing there was not much to go on. The Hong Kong share market clearly followed the Shanghai market lower, of course, and has since stabilised and improved somewhat in line with Shanghai. Hard economic data for the HKSAR, however, has been in short supply, with most not scheduled to be issued until just before the third quarter report itself in early to mid-November.

What has been available suggests that some sectors of the local economy have weakened. In the property market, for example, sale and purchase agreements in August were down 29.2% on July and 34. 2% on August last year and total consideration for these was $38.1 billion, down 31.2% on July and 27.3% on August a year ago.

Mortgage loans approved in July also weakened, being down 8.8% compared with June to HK$27.2 billion. Mortgage loans financing primary market transactions decreased by 24.6% to HK$6.5 billion and those financing secondary market transactions increased by 0.6% to HK$15.9 billion.

Retail sales were slightly weaker in July at $37.6 billion, down 2.8% on the same month last year (on top of a 0.4% fall in June), although in volume terms sales were slightly higher. Year-to-date retail sales 44 HONG KONG BUSINESS | NOVEMBER 2015

IAN PERKIN Independent Economic Consultant perkin888@hotmail.com Hong Kong GDP Growth 2015-2014 (% change year-on-year) 2015 Q1

2015 Q2

2015

2016

Real

2.4

2.8

3.3

3.8

Nominal

7.0

7.7

2.1

2.4

Deflator

4.4

4.7

2.5

3.0

CPI

4.4

3.0

1.5

1.7

Japan

1.6

-0.1

0.8

1.2

UK

1.7

2.9

2.4

2.2

Emerging economies

5.0

4.6

4.2

4.7

Asia

7.0

6.8

6.6

6.4

China

7.7

7.4

6.8

6.3

India

6.9

7.3

7.5

7.5

ASEAN 5

5.1

4.6

4.7

5.1

Source: HKSAR Government

were down 1.8%. The biggest falls were in higher valued items, suggesting that weaker spending by mainland tourists continued to have an impact (partly a result of the economic weakness and the crackdown on corruption on the mainland).

These very limited and preliminary numbers suggest the HKSAR economy in the third quarter would be slower than the 2.4% and 2.8% respectively in the first two quarters of the year (see Table 2).

Growth in the third quarter of this year will also be coming off faster growth in the same three months last year. This, together with any fallout from the mainland uncertainties, will make maintaining first half growth difficult.

Expect then, growth between 1% and 2% for the third quarter of the year and perhaps a little higher than that in the final three months of the year. That should fit in with annual growth at the lower end of the 2-to-3% forecast by the government.

Budget watch The budgetary implications of any further slowing of the local economy will be significant, but the HKSAR government is, as always, in a healthy financial position (see Table 1). Revenue in the four months to July this year was up 13.1%, but expenditure grew faster at 18.6%, leaving a budget deficit of $31,662.2 million for the period.

This was in line with the $31, 912.2 million deficit in the same period last year, but last year’s figure included a debt repayment of $9,687.8 million. There was no debt repayment in the first four months of the current year. Tax receipts are far greater in the final months of the financial year (to March 31, 2016) and the overall deficit will diminish as the year progresses. But the economic slowdown will make things a little tougher.

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OPINION

tim hamlett

On the wrong track

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

A

distressing thought popped into my head while watching the Secretary for Transport and Housing commenting on the latest update on the Express Rail Link. Well actually there were two distressing thoughts: the first one was that two different and very important matters should not have been combined in one bureau, an arrangement which pretty effectively guarantees that everyone concerned will spend at least half his time considering matters he knows nothing about.

The more immediately bothersome thing was that the Secretary concerned, Mr Anthony Cheung, did not seem to have grasped what was going on. The government would, he said, consider who was to blame for the extra spending now demanded and seek payment from the MTRC as appropriate. This shows a lamentable inability to comprehend the true seriousness of the situation. Big projects which go adrift do not just require minor adjustments.

They commonly run totally out of control, adding a decade or two to the completion time and multiplying originally estimated costs by whole numbers. We are in the presence here, folks, not of some minor glitch in a kitchen improvement project, but of a major epic demonstration of the “sunk cost” fallacy. Even at the prices currently projected, the express link is a hole in the ground waiting to soak up money. But there is no reason to suppose that the currently quoted cost will be the final cost, or indeed that the currently quoted completion date will be the final completion date.

Going back to basics It is instructive, at this stage, to look at the original justification for the project. It is now expected, unofficially, that the new line will cost $90 billion and many of us will find it surprising if it does not cost more.

The paper originally presented to Legco did consider the question of possible losses, and noted that high speed rail projects elsewhere had been financial catastrophes. However, it said, “A major reason for reporting net losses is the burden to make huge interest payments arising from loans for financing the construction costs.

The construction of the Hong Kong section of the XRL is proposed to be a public works project to be funded by the Capital Works Reserved Fund, not by loans. There will not be huge interest expenses incurred during the operation phase; and hence recurrent cash subsidy from the Government will be very unlikely.”

In other words, the railway can still make a profit, folks, because the taxpayers’ money is costless. This is an impeccable piece of accountancy but does not really answer the question which is now at issue, which is whether the whole project is still worth it. After all, the billions of dollars could have been spent on something else.

We must, however, wonder if the railway will make a profit, even on this congenial basis.

The problem here is that no passenger will travel only on the link. In all cases the revenue will be shared with the mainland operators of the rest of the line, on a mileage basis, and 46 HONG KONG BUSINESS | NOVEMBER 2015

the fare structure will be agreed between the two. The suggestion supplied to Legco was that the Hong Kong section would get $31 from a passenger who travelled to Shenzhen, or $45 for those who went to Dongguan or Guangzhou. This would produce an operating profit of $300 million or so in the first year, rising, it was hoped, with increasing use. But the fare income figures will be rather inflexible, because an increase will require the consent of the Chinese side, who will take most of the resulting money.

Making the trip to Shenzhen much more expensive is not an attractive option because there are many other alternatives and the time saving will be nothing to write home about. So it seems the railway will have a lot riding on the prediction that 100,000 people a year will use it.

I suspect that in a perfectly rational world this would be the time to pull the plug on the whole thing, or as one columnist suggested, convert it into an underground shopping mall.

Clearly the express rail link is not going to make a profit, and its costs will easily exceed the “economic benefit” held out to justify the original decision to go ahead. True, we were offered intangible benefits as well. Unfortunately they have not done very well in the ensuing five years. Integration with the Pearl River Delta now seems a dubious benefit and bringing more mainland tourists to Hong Kong might be more of a threat than a promise.

Will the railway make a profit?

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Hemlock

The economic price of CCP security

L

ike Hong Kong’s pre-1990s British administrators, but with extra added paranoia, China’s Communist Party took care to co-opt business and other interests as a support base in its new colony. To Beijing, it seems, loyalty bought from supposed ‘elites’ is essential to ensure control over the foreign-infested city.

The alternative – winning local hearts and minds through enlightened governance – is too alien and perhaps anarchic for a one-party state to contemplate.

One result is that Beijing sees the population beyond its United Front network as hostile. This means the central government appoints senior Hong Kong officials only from the narrow and shallow pool of people it deems trustworthy. This inevitably reduces the amount of talent available; the resulting poor governance increases public hostility, which drives Beijing to rely on an even more-select group of inept loyalists – and so on in a saga of plummeting quality, the next ghastly chapter of which will be Whoever They Choose After CY Leung.

Effects on the economy Such favouritism is also affecting the economy.

We all know that the property tycoons are a caste apart, with a Beijing-granted right to skim off a fat percentage of the wealth Hong Kong people create. The luxury projects they build serve as stores of wealth for corrupt money-laundering mainland officials. The tycoons further prosper from the influx of tourists that just so happens to wear away Hong Kong’s unique identity. Other interests, from import-export to toys to banking, get perks, protection or just flattery in return for obeisance to the Communist Party.

No doubt following the examples of the Phoenicians, Romans and Mongols, the British in 1950s-60s Hong Kong groomed dependable supporters among Shanghai industrialists.

Cantonese businessmen were a bit suspect, having perhaps collaborated with the Japanese or possibly having links with the Communists. The colonial government granted these Shanghainese precious textiles quotas for selling garments to Western countries. The lucky recipients got rich without getting their hands dirty by selling the quotas on to actual manufacturers.

Which brings us to taxi licences and Uber. The holders of taxi licences, currently valued at HK$7 48 HONG KONG BUSINESS | NOVEMBER 2015

million apiece, having been co-opted by the Communist Party, are immune from competition and the 21st Century.

The Hong Kong taxi licence holder is the beneficiary of a rigged system. He has bought a bit of paper that allows him to rent a taxi out to drivers. The government keeps these pieces of paper artificially scarce, so he makes a ton of money gouging the drivers and seeing his speculative investment rise in value – while sitting back and not lifting a finger. Our landlords are in a similar position. You could call them parasites. Economists call it rent-seeking. The Communist Party calls them patriots who love the motherland.

So here’s the deal in Hong Kong today: an economic activity must be protected from change, innovators must be denied opportunities, and consumers must be denied better service/value, just so a totalitarian one-party regime can relax and think it has some friends.

Meanwhile, the Hong Kong government is obediently protecting the co-opted taxi licence guys at all costs, arresting Uber staff and angering citizens who want a choice. Maybe this is how it’s going to be. If you’re an outsider like Ricky Wong who wants to start a TV station, you can’t; but if you’re a property tycoon and gambling scion, who knows? Maybe when sonof-CY takes office, if you’re a patriot who loves the motherland and you want to store tons of sodium cyanide next to Taikoo Shing, you’ll be able to do that too.

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

What does it take to keep the CCP feeling secure?