Hong Kong Business Magazine

Display to 30 November 2011

hk property:

on the edge Hong KONG’s

Vanishing shops

China on the verge

of a nervous breakdown

Richard branson:

the ceo is not always right

Game Changers: headhunt scalping

classified papers

tim hamlett:

Business intelligence?

fACEBOOK VS LINKEDIN

hong kong’s 5 best steakhouses

FROM THE EDITOR

HONG KONG

BUSINESS Established 1982 Editorial Enquiries: Charlton Media Group 19/F, Yat Chau Building, 262 Des Voeux Road Central Hong Kong. +852 3972 7166 Publisher & EDITOR-IN-CHIEF Associate Publisher Assistant Editor

Tim Charlton Louis Shek Jason Oliver

Art Director

Regina Goloy

Editorial Assistant

Queenie Chan

Media Assistant Editorial Assistant contributing Editor ADVERTISING CONTACTS

Daniela Gujilde Alex Wong Ajay Shamdasani Louis Shek +852 60999768 louis@hongkongbusiness.hk Laarni Salazar-Navida lanie@charltonmediamail.com Rochelle Romero rochelle@charltonmediamail.com

ADMINISTRATION

Estinnely B. Milan estinnely@charltonmediamail.com

Advertising Editorial

Would you leave your boat tied to a sinking ship?

World financial luminaries have again been calling on the Hong Kong government to do the sensible thing and de-peg the dollar. This is something this magazine has said needs to happen in our issue 12 months ago, and in that time there is even less sign that the US is getting its fiscal house in order.

advertising@hongkongbusiness.hk

Simply put, Hong Kong should no longer keep its fiscal lifeboat tethered to a sinking American Titanic.

Bill Ackman, who made his fortune in companies like JC Penny, has gone long the Hong Kong dollar and expects it will de-peg by 2015. Even HSBC’s CEO Stuart Gulliver reckons the Hong Kong dollar should float against a basket of currencies.

Just how long Hong Kong feels it must stay in this abusive relationship with the US dollar is anyone’s guess, but the high asset prices and inflation resulting from the policy are causing misery for millions of Hong Kongers.

Pegging the Hong Kong dollar to the US dollar is not set in stone nor the basic law, and it has been a feature only since 1983. In the eleven years before that it freely floated, and prior to that was pegged to the US dollar briefly and the Sterling.

editorial@hongkongbusiness.hk

SINGAPORE Charlton Media Group #06-09 E, Maxwell House 20 Maxwell Road Singapore 069113 +65 3152 0147 +65 6223 7660 www.charltonmedia.com PriNting Gear Printing Limited 1/F Express Ind Building 43 Heung Yip Road Aberdeen, Hong Kong

Can we help?

The point is that a peg must make sense for Hong Kong , and it is hard to see how the dramatic asset price swings in Hong Kong which are tied to American economic policy makes any sense. Now that the UK has announced QEII, and the US Federal reserve conducts operation twist, the pressure for Hong Kong to chart its own monetary policy must surely be growing. Don’t expect any changes before the election of the next CEO, but the issue of pegging the Hong Kong dollar is definitely on the agenda and gaining steam.

Tim Charlton

tim@charltonmedia.com

Hong Kong Business is available at the airport lounges or onboard the following airlines:

Editorial Enquiries If you have a story idea or just a press release please Email: editorial@hongkongbusiness.hk and our news editor will read it.

Media Partnerships Please Email: editorial@hongkongbusiness.hk and put “partnership” on the subject line and it will forward to the right person.

Subscriptions Email: subscriptions@charltonmedia.com Hong Kong Business is published by Charlton Media Group. All editorial is copyright and may not be reproduced without consent. Contributions are invited but copies of all work should be kept as Hong Kong Business can accept no responsibility for loss. We will however take the gains.

Sold on newstands in Hong Kong, Macau, Singapore, London and New York *If you’re reading the small print you may be missing the big picture 

  

HONG KONG BUSINESS | OCTOBER 2011 3

CONTENTS

26

feature Hong kong’s vanishing shops

RETAIL REPORT 26 Hong Kong’s vanishing shops Big international brands invade HK

FEATURE 24 Facebook vs LinkedIn: Who wins

44 HK Property: Brace for higher interest rates

Zarathustra explains what to expect from Hong Kong property investments now that its neighboring Asian country affects its monetary condition.

OPINION

in Hong Kong?

18 6 signs your top talent is about

Undeniably, almost everyone in the world has an account in either Facebook or LinkedIn, but how can companies best use these sites to their advantage?

20 Weathering a crisis and learning a

36 China on the verge of a nervous breakdown

Economic crisis threatens the upswing of Asia’s sleeping giant

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

to quit

lesson from HK’s experience

22 The CEO is not always right 30 How to keep the tops guy in your team

32 Business vs. Politics

30

How to keep your top guys on your team

36

China on the verge of a nervous breakdown

34 Is Hong Kong losing its

autonomy to Mainland China?

REGULAR 28 Numbers 48 Life and Style 50 Last Word

FIRST 13 No signs of commercial slowdown yet

16 HeadHunt scalping classified papers

For the latest business news from Hong Kong visit the website

REPORT www.hongkongbusiness.hk

News from hongkongbusiness.hk Daily news from Hong Kong Hong Kong -- more than a shopping hub most read Retail

Three reasons why mainland tourists shop in Hong Kong HSBC cites the reasons why mainland tourists have been flocking to the country to satisfy their shopping needs.

It’s mainly due to lower prices, quality assurance, and a wider and more exclusive range of products being offered with better service.

Telecom & Internet

Google to invest over $100m for Hong Kong data center The Internet search company plans to hire up to 20 personnel at data centers to be built in Hong Kong and Taiwan.

A Reuters report said Google is also planning to put up a data center in Singapore but details were not disclosed.

Meanwhile investment in the data centers in Hong Kong and Taiwan would exceed $100 million each. economy

Is Hong Kong heading into a recession?

HSBC says no as local consumption and tourist spending remains buoyant despite the country’s rising inflation.

There is also little evidence that rising prices have undermined household purchasing power as Hong Kong’s real retail sales are still expanding at roughly

Shopping in Hong Kong the same 25% rate as in 2Q11. economy

Overall inflation forecast to average 5.3% for 2011

financial services

Hong Kong ready to welcome HSBC back?

In the event HSBC leaves Will HSBC return to Hong Kong? the UK, Hong Kong’s HR & Education economy doors are said to be It would be the highest Labour chief to open. A Bloomberg since 1997.

HSBC: Minimise report said, “HSBC Hold“Inflation in Hong the impact of ings Plc has been told Kong has been surging What you need to retrenchment by regulators in Hong on the back of higher know about Hong The Labour & Welfare Kong that it would be food prices and housKong’s seemingly Bureau has expressed welcome if it decided to ing rentals, slowing bearish economy its concern with HSBC leave Britain and re-dogrowth might be a Growth has been falling following news that the micile, City AM reported, blessing in disguise as since September 2010 bank will cut 3,000 jobs without saying where it easing demand would and inflation reached in Hong Kong. got the information.” at least help alleviate 7.9% in July - what’s A report by Hong According to the domestically-generated next?

Kong’s Information report, the Hong Kong price pressures, though According to Royal Services Department Monetary Authority has imported inflation Bank of Scotland, Hong noted, “Mr Cheung said informed the bank that would keep consumer Kong growth is more he hopes the bank will it would be implicitly prices at relatively high closely aligned with the minimise the impact backed by the Chinese levels,” said Joanne Yim, US than with mainland of the redundancies, government if it returns Chief Economist at Hang China. noting it may shift some to the city.

Seng Bank. of the affected staff to other departments and provide employment referrals and counselling. He urged the bank to take the wishes of affected staff into full consideration.”

Secretary Matthew Cheung however pointed out that HSBC’s decision does not reflect a trend in the labour market, as it is booming along with the banking industry.

Hong Kong inflation worsens

6 HONG KONG BUSINESS | OCTOBER 2011

7.9%

News from hongkongbusiness.hk Daily news from Hong Kong Hong Kong--more than a shopping hub most read economy

Hong Kong’s GDP may only be 3.3% in 2012, warns analyst Continued deterioration in external demand is clouding UBS’ 12-month outlook for Hong Kong.

And for 2011, UBS’ GDP projection is also well below consensus at 4.5%.

Typhoon Nesat halts HK trading

market & investing

Trading resumes in Hong Kong Typhoon Nesat, which made Hong Kong issue the highest storm warning in two years, caused the stock exchange to halt trading on 29 September 2011.

A Bloomberg report said, “Typhoon Nesat, the strongest to hit China this year, forced the evacuation of 300,000 people, grounded flights and closed markets as it swept past Hong Kong, slammed into the Chinese island of Hainan and headed to Vietnam.” economy

Hong Kong M&A amount to a whopping $55.3b in 2011 The country accounts for 12% of the total M&A deal flow in Asia.

The deal values for Hong Kong M&A are driven by the record US$26 billion of outbound M&A activity, the highest M&A volume on record for a thirdquarter period, according to a report from Thomson Reuters.

market & investing

HSBC Global Research promotes and adds Equity Research team members David May is now based in Hong Kong as Head of Equity Research, Asia- Pacific. He will be responsible for developing and expanding the equity research franchise in Asia.

The Equity Research team added three members. Janice Tan joined as Regional Head of Consumer & Retail Equity Research, Asia-Pacific, and is responsible for developing and enhancing research products in the consumer and retail sector across Asia Pacific.

Steady HK’s airfares

8 HONG KONG BUSINESS | OCTOBER 2011

aviation

HK airfares greatly affected by low cost carriers

Acting Chief Executive Henry Tang Business discount fares decreased 3% as more economy financial services corporate customers are Henry Tang flying economy on the condemns protest short-haul routes within at public forum Asia.

Government to The Acting Chief Despite recent start next phase Executive criticised the volatility in global share of Scheme $6,000 protesters for “abusing markets, airfares in the Through this scheme, the rights of the forum Asia-Pacific region are a sum of HK$6,000 will participants and disruptcontinuing their steady be given to each holder ing what would have trend upwards accordof a valid Hong Kong been a fair and rational ing to the most recent Permanent Identity discussion”.

American Express BusiCard, aged 18 or above.

The public forum held ness Travel Monitor. Airat the Science Museum fares within the region was on arrangements are up three percent in for filling Legislative the second quarter of Council vacancies.

2011, and four percent A report by the Inforhigher compared to the mation Services Departsame period in 2011. ment said, “Protesters forced their way into the venue and threw objects at Secretary for Constitutional & Mainland Affairs Stephen Lam during the forum.”

According to the report, Mr. Tang said Hong Kong is a civilised society, and people should accept differing opinions and express themselves in a rational, peaceful and legal way.

$6,000

CO-PUBLISHED CORPORATE PROFILE

The global economy and Hong Kong – a positive future?

Benoit Ganzmann, Senior Underwriter - Atradius Hong Kong

H

ong Kong’s strong export trading links with China, the US, the EU and Japan not only places the country at the heart of the global economy, but also, inevitably, renders it susceptible to the changes in fortune of its key export markets.

The robust recovery since the global crisis, which has been echoed by other strong Asian markets, such as India and of course, China, have demonstrated that even under extreme external pressures, the Hong Kong economy has an almost inbuilt resilience.

Nevertheless, recent reports about the Hong Kong economy’s 0.5% contraction of GDP during Q2 not only underlines the influence of other key markets, but has already triggered speculation from some commentators that a recession might be imminent.

This view, however, is regarded as ‘overblown’ by some key economists due to the strong domestic demand. Yet it is also recognised that business and consumer confidence in the US and Europe is likely to hinder Hong Kong’s growth, although this could also have a calming effect on the growing inflation figure which reached 7.9% in July 2011.

So what exactly is the state of the global economy and what factors are likely to impact on Hong Kong? In broad terms, the economic developments that have taken place over the past seven months have been largely on track with previous expectations of a continued recovery in global activity. Global economic growth reached 4.0% in 2010, while business

activity improved and international trade volumes returned to pre-crisis levels.

Countries in Asia and Latin America have led the expansion and have continued the process that started more than 10 years ago, where emerging markets have been the driving force behind the global economy. However, the more established and advanced economies have continued to display much more muted rates of economic growth, giving rise to a ‘twospeed’ pattern of economic growth, with advanced markets lagging behind key emerging markets.

The policies adopted by emerging and advanced markets during the credit crisis have also shaped the current fortunes of these two groups. While advanced economies are characterised by high sovereign debt, low interest rates and real term depreciating currencies, for emerging countries, the situation is precisely the opposite with lower debt levels, higher interest rates and appreciating currencies.

Looking forward, this two-speed economic recovery is expected to continue and even though the pace of global growth is forecast to slow to 3.1% in 2011, the recovery in the global economy should gain a firmer footing in 2012.

However, this projection is not uniform across all countries or balanced in terms of risk.

While some emerging markets begin to show signs of overheating, other factors, such as high unemployment and declining confidence in advanced economies create an additional

obstacle to their protracted recovery processes.

In addition to the most recent spell of financial turmoil since July, where market volatility has increased sharply, the first half of 2011 was also characterised by a series of large-scale events that have significantly increased the uncertainty surrounding the future growth.

Aside from the upheaval in the Middle East & North Africa (MENA) and the devastating earthquake in Japan, the European sovereign debt crisis has intensified further and pressures are mounting on policy makers to find a credible solution.

A failure to do so could potentially have large-scale consequences for economic performance in the Eurozone, with global repercussions, which also presents the risk of slowing down growth across emerging markets.

In the US, the impact of its massive debt followed by the country’s downgrading by S&P and the apparent indecisiveness of the Whitehouse, have already rippled across world financial markets, giving an indication of what can happen when negative influences coincide or accumulate.

While the global economic situation will have an influence on Hong Kong, like any country, it can also influence its own future.

For example, government revenues are still dependent on income from land sales and investment of accumulated surpluses, which makes it vulnerable to economic cycles.

This situation has already prompted former secretary for commerce and economic development, Frederick Ma, to suggest recently that Hong Kong should pursue a more diversified economy with a focus on value-added industries and new technologies with less reliance on finance and real estate.

Whatever the future holds for Hong Kong, it is clear that the global economic environment has a significant influence on every aspect of its prosperity, so in some respects, it’s comforting to know that the main scenario for economic performance in the year ahead is still cautiously positive. However, this assumes that the imbalances that exist in advanced and emerging markets can be addressed by way of successful implementation of policy measures.

In order to find out more about the global economic outlook, a detailed report is available for download from our website.

CONTACT ATRADIUS CREDIT INSURANCE N.V. Tel: +852 3657 0700 E-mail: hongkong.enquiries@atradius.com www.atradius.com.hk

FIRST

No sign of a commercial slowdown - yet

19 September 2011 19 September 2011

Home prices on a knife edge

Focus charts Focus charts have had a huge effect on property

it will pose a direct competitive values. In 2008 during the height of force to the Hong Kong office mar5% 5% the last crisis, unemployment rose ket,” noted Leung. But as Ji notes, Singapore 5% 5% 0% dramatically from 3.2% to 5.7%0% 0% comparing Singapore and Shanghai up to-5%30%0% -5% and property values promptly -10% fell -5% with Hong Kong is also missing the -5% -10% cheaper -10% -10% 30%. So could history be repeating point as Hong Kong serves differ-15% -15% and Puxi in -15% -15% -20% -20% itself?

According to Leung, so long ent clients. “Would anyone want to Shanghai -20% -20% -25% -25% as China remains strong then there fly 5 hours from Singapore instead -25% -25% 70% -30% cheaper -30% -30% -30% should not be a rise in Hong Kong of walk over just across the border -35% -35% -35% unemployment and hence, fears of -35% from Hong Kong? Is Shanghai so -40% -40% capital falls are overblown. sophisticated now that it is the true Still, Hong Kong office space is international financial centre it expensive compared to regional boasts,” he asked.

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates options, with Singapore up to 30% Despite all the talk of worsenFigure 4: Investment property as % of total assets Figure 5: Implied asset yield—2012E Figure 4: Investment propertyand as %Puxi of totalin assets Figure 5: Implied asset yield—2012E cheaper Shanghai 70% ing external economy affecting the 10.5% 120% 10.5% cheaper. But no one is expecting office market,have missed out on 120% 100% 9.5% a mass exodus to either China or a crucial point, that is there is still 100% 9.5% 80% Singapore. In past years Singa-8.5% 8.5% very tight supply in the core busi80% 60% pore may have been an option 7.5% for ness areas of Central and Admiralty.

60% 40% truly regional operations, but these 7.5% (By the way, office market is not 40% 6.5% 6.5% 20% days, businesses need to be close, comparable with residential and 20% 5.5% although perhaps not in China. neither of them is “cold”) Rental is 0% 5.5% 0% “While the office rents in Singapore sustainable although there could be 4.5% 4.5% Champion Wharf Hysan ng Lung Hongkong Champion Wharf Hysan Ha ng Lung have started to decline due to the Hongkong some softening inSwiretheHaSwire negotiation Land REIT Prop Land REIT Prop abundant process.

Asian Economic Monitor 4 October 2011 supply, we do not believe Hang Lung Prop

Wharf Sino Land SHKP Hysan Sino Land MTRC Hysan Hang Lung Prop MTRC

Great Eagle SHKP

Swire Ke rry Properties

Champio n REIT Great Eagle Ke rry Properties Wharf

Cheung Kong Swire

Hongkong Land Champio n REIT

Cheung Kong

Hongkong Land

Hang Lung Prop

Ch ampion REIT

Ho ngkong La nd

Hang Lung Prop Hysan Hysan Ch ampion REIT

Hysan Sino Land

Ho ngkongSwire La nd

Sino Land Champion REIT

Wharf Hysan

SHKP Wharf

Hang Lung Prop Swire

SHKP Wharf

Champion REIT SHKP nd HangSino LungLaProp

Kerry Properties SHKP

Wharf Swire

MTRC Sino La nd

Cheu ng Kong MTRC

Great Eagle Kerry Properties

Cheu ng Kong

Great Eagle

Hongkong Land

Swire Hongkong Land

Figure 2: Implied decline in investment property value Figure 3: Current P/B discount to historical average P/B Figure 2: Implied decline in investment property value Figure 3: Current P/B discount to historical average P/B

Source: Company data, Credit Suisse Source: Company data, Creditestimates Suisse estimates

Source: Source: Company data, Credit Company data,Suisse Credit estimates Suisse estimates

Summary

Figurein 6: Drop6: inDrop officeinvalue on rise inunemployment unemployment 7:office HK office costs mitigated

by RMB appreciation Figure office value rise in unemployment Figure 7: HK officemitigated costs mitigated RMB appreciation Drop office value on rise inon HKFigure costs bybyRMB appreciation 120% 0.0 120% 0.0 Sharp fall in property transactions 100%

100%

1.0

80%

80%

2.0

Office capital value Y oY %

180

180

1.0

160

160

2.0

140

140

40

40

-40%

-40%

7.0

7.0

Unemployment rate %

What stands have recently fallen off the cliff. Monthly transactions amounted to 60% 60% out? Residential property transactions 120 3.0 120 3.0 40% 6,000-7,000 40% only in July and August, the4.0lowest4.0 since 1Q2009.

This is almost 50% lower than the average monthly 100 100 20% 20% volume seen in 2009 and 2010. As transaction typically leads price 5.0 80 5.0 80 movement by a quarter (Chart 2), is the sharp pull 0% 0% 6.0 property back volume a precursor to a long overdue price 60 correction?

6.0 60 -20% in -20% Unemployment rate %

Office capital value Y oY %

It has been a bad year for Hong Kong stocks and also a bad year for the city’s major office landlords who have seen their share prices equally hammered. But is the pessimism surrounding the office market overdone? Yes, according to Cusson Leung, an analyst at investment bank Credit Suisse who reckons there is real value to be found in the sector now and that fears of a massive decline in office values are way overblown.

Sure, the office market is not as cold as residential, but there are some well founded fears that seem to be driving valuations downwards. Office rents in Central are particularly expensive, and now average HK$105 psf, and the uncertainties in the global financial markets have many wondering if the banks, who support much of the rentals in Central, will begin cutting back. These fears are not unfounded - witness HSBC who announced at least 3,000 job cuts in Hong Kong in August. But David Ji, head of China research at DTZ said that despite all the talk of worsening external economy affecting the office market, there remains the crucial point that is there is still very tight supply in the core business areas of Central and Admiralty. “Rental is sustainable although there could be some softening in the negotiation process,” he added.

Historically unemployment rates

The macro outlook suggests8.0that this 20 be the 8.0 could well 20 case. Given heightened uncertainty in the global -60% deteriorating -60% -80% 9.0 0 recession -80% 9.0 0 economy and continued financial market turbulence, the risk of is rising in Hong Kong. These concerns drove 4Q- 1Q- 2QQ- 2Q2Q- 3Q- 2Q4Q- 3Q1Q- 4Q2Q- 1Q3Q- 2Q4Q- 3Q1Q- 4Q2Q- 1Q3Q- 2Q4Q- 3Q1Q- 4Q2Q- 1Q- 2Q4Q- 3Q1Q- 4Q2Q- 1Q3Q- 2Q4Q- 3Q1Q- 4Q2Q- 13Q4Q- 1 Q- 2Qour 1988 downgrade of199 Hong Kong’s 2012 growth to well below consensus at 3.3%y/y in 200 August (‘Asia: new numbers on 1991 199 3 1995 02 2004 2009 2200 0116 2009 2 011 1995 19961995 19 971996 1999192000 20012000 20022001 42002 2005200 2006 20072006 20092007 20102009 2010 1988 1991 1997 3 2000 1995 20 1997 2000 200 20 026 2004 97 1999 4 2005 growth, inflation, rates and FX’, 25 August). Yes, the labour market remained strong, for now, with the unemployment Capital valueCapital YoY%value (LHS)YoY% (LHS) rate (RHS) rate (RHS) Hong K ongHong K ong Puxi Pudong rate recently easing to onlyUnemployment 3.2%;Unemployment but this is already history. The labour market typically lagsPuxiPudong the economy by around 2-3Lang quarters (Chart 4). IfCEIC our view of a sharp slowdownSource: does pan out, Hong Kong’s unemployment rate will likely edge Source: Jones LaSalle, CEIC Source: Jones Lang LaSalle, Source: Jones Lang LaSalle, Credit Suisse estimates Source: Jones Lang LaSalle, CEIC Jones Lang LaSalle, Credit Suisse estimates Source: Jones Lang LaSalle, Credit Suisse estimates up, at least, to the 4-5 % range in 2012. Potential labour market deterioration, plus the dampening effects of falling equity prices on consumer wealth and confidence, should crimp cyclical demand for property, in our view.

Residential property sales have fallen off a cliff in Hong Kong leading many to wonder if prices will soon follow downwards.

July and August saw property sales slump by 50% to just 6,000 - 7,000 units, the worst performance since the first quarter of 2009. So what does this tell us about likely property prices going forward?

According to UBS, there is a very high correlation between property transaction volumes and prices. For example, during the financial crisis in

2008, property transactions slumped Chart 1:15,000 Property transactions plunging from down to 5,000 and at the same Units time, year-on-year property prices Property transactions 17,000slumped from 40% growth to -20%. also Property transactions, 3mma 15,000 If the same relationship holds, Hong 13,000 could well expect to see property Kong 11,000 drop 10 to 20%. prices 9,000 There are also some other worrying 7,000 headwinds for residential property, 5,000 chief of which is the potential for 3,000 unemployment to blow out to 5% by 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 if the economy tanks. According to UBS economist Source: CEIC and UBS calculations Silvia Liu, ”Potential labour market deterioration, plus Chart 3: Growth contracted sequentially in 2Q11 the dampening effects of falling equity prices on consumer wealth 15.0 15.0 12.0 confidence, should crimp cyclical 12.0 and 9.0 9.0 demand for property, in our view.” 6.0 6.0 3.0 0.0 -3.0 -6.0 -9.0 -12.0

3.0 0.0 -3.0 -6.0 -9.0 -12.0

2

2

Hong Kong Sector Property Sector Hong Kong Property

Property and prices Chart 2: Propertytransactions transactions and prices Units, 3mma (pushed fw d 1Q) 17,000 15,000

%YoY 50.0

Property transactions (LHS) Property prices* (RHS)

40.0 30.0

13,000

20.0

11,000

10.0

9,000

0.0

7,000

-10.0

5,000

-20.0

3,000

-30.0 200020012002200320042005200620072008200920102011

Source: CEIC and UBS calculations. Note: CCI leading index for Source: CEIC and UBS calculations. Note: CCI leading index for mass estates mass estates

Chart 4: Growth and the labour market %YoY 8.0

%YoY, pushed fw d 2Q 20.0

6.0

15.0

4.0

10.0

2.0 0.0 -2.0

5.0

HONG KONG BUSINESS | OCTOBER 2011 0.0 13 -5.0

coRporate profile

Outstanding medical plans

A

s a key business unit within the CIGNA family, CIGNA International delivers access to quality healthcare and related financial protection programs to employers, affinity groups and individuals around the globe.

The international health insurance market is a specialised area. It’s also an area of the business where quality and service is crucial as one is dealing with customers who have diverse languages, cultures, and ways of life.

Through local licenses and partnership agreements, CIGNA International has sales capability in 29 countries and jurisdictions, and services expatriates and global mobile individuals virtually everywhere in the world.

CIGNA, a global health service company, is dedicated to its mission of helping their customers improve their health, well-being and sense of security. CIGNA’s operating subsidiaries provide an integrated suite of medical, dental, behavioral health, pharmacy and vision care benefits, as well as group and individual

Clockwise: Senior Sales Manager Paul Chiu; Reception area at CIGNA; Medical insurance options at CIGNA

“CIGNA, a global health service company, is dedicated to its mission of helping their customers improve their health, well-being and sense of security.” life, accident and disability insurance, to millions of people throughout the United States and around the world.

CIGNA traces its roots from the U.S. cities of Philadelphia, Pennsylvania and Hartford, Connecticut. Today, the CIGNA companies maintain networks of sales and service offices in major markets around the globe, maintaining a staff of some 30,000 worldwide. CIGNA has approximately 66 million customer relationships around the globe.

The company now provides a new individual international private medical insurance plan called CIGNA Global Health Options. Designed for globally mobile individuals and available to Hong Kong nationals, it provides compre-

hensive cover and easy access to an unrivalled network of quality healthcare providers worldwide. The modular plan allows customers to tailor their cover to suit their personal needs: • International Medical Insurance – base module covering surgery, hospitalization, maternity • International Medical Insurance Plus – optional; covers outpatient treatment and medicines • Health and Well-being – optional; covers wellness exams and screenings • Vision and Dental – optional • Emergency Evacuation – optional; covers medical evacuation and repatriation

CONTACT CIGNA International Paul Chiu Senior Sales Manager, Hong Kong Tel: (+852) 2539 9209 www.cignaglobal.com

GAME CHANGERS

14 July

• : 6334 4771

sified Jobs 010 • Clas

Y GE98N3 - 2001)

(196

FEATURED JOBS

IN RY

UST

IND

From right: Jamie Yap, Joann Gor, Yang Yisi & Kenneth Tan

HKB: How did the idea for a weekly jobs newspaper kick off?

Jamie: The idea popped into my mind while I was looking at the different industries and although the media industry is dominated by the incumbent, certain segments like the classifieds section looked interesting. With the free print phenomena catching on globally and seeing how it had worked in the UK, we felt that it could be viable to setup a free recruitment publication.

This was against conventional wisdom as it seemed that employers were moving online. However, we felt that if we were able to provide a targeted recruitment print platform supplemented by a basic jobs portal in a cost effective manner, it would remain an attractive option to advertisers. This hunch proved correct as we are able to offer employers and recruiters a branding and recruitment platform that targets middle to senior level professionals.

HKB: Why did you choose print?

Joann: Despite being labelled as a sunset industry, we believe that print is alive as it has certain advantages over online. Being a free print publication, we were able to play to the strengths of both by providing clients a tangible platform for talent attraction and branding whilst at the same time reaching out to targeted readers with a free publication. The print has enabled us to establish 16 HONG KONG BUSINESS | OCTOBER 2011

HTS SIG ucation6 Ed

the earc Get utive S Exec

NDS TRE people7 HRt motivates p0 0•

/201

Fitness

ent - 2011

18-21 PageCar eer

Switch

: Are You Stuc Are you equip k in the Middle? ped with the experience and be considered ager a qualified candidate in your education required to desired caree r-field?

Page 15

iness Man P16 VP Bus Page 13

Page 11

HR

s Jobp11

p0

paper t recruitmen Spinelli, free a Polar, is OBriens, First,

s. executive targeting l Kiosks, Petro Shell

ISSUE

28 JULY

11

T fortnightly ’s Harry published is Shop, It Sandwich The

PY / NEX

FREE CO

and Bar,

available selected Fitness

MRT selected s & at Club Country

, Delifrance stations, hunt.com.sg. www.head

w.he

ww

3/11

) 11

A (P

MA S Gr Mone adu tary A

is a free recruitment First, OBriens paper targetin , Polar, Spinelli, g executives.

Shell Petrol It is Kiosks, The Sandwich Shop, published fortnightly and availabl The Soup e at selected Spoon, Harry’s MRT stati Bar, selected Country Clubs &

nt.c

adhu

MIC

.sge, Dom om

c l Strategi Regiona Manager Sourcing Page 07

IT

nal Operatio Manager

What is GM

AT? Face this daunt ing before considerin obstacle g your MBA

HONG KO JOBS

Page 04

...

TO t of an HOWmost ou h Firm8

Wha

p0

ager –

Bid Man

ing (Market Manager ications) Commun

Does it Matte king r?

The course, the fee, the alum How do you choose what’s ni or the ranking? best for you?

P8

P6 NG

ES NEWS BIT the dream - Chasing plex Aspirations and more com r yea longer pans get t in Singapore last lifes 1 eer 201 Car e in percen saw a rais w by 5.5 Wages gre g Kong employees ten Hon Seven in Risk

(1

X GEN5 - 1982)

P04

Jamie Yap and Joann Gor share their plans for a new free English language recruitment magazine in Hong Kong

. Your dream

Your passion

2011

Y BABMERS ) BOO(1946 - 1964

HeadHunt scalping classified papers

ion. . Your ambit

HeadHunt Supplem

st Augu

sues

R Is

ry H

pora

MBA Ran

S N O I T A R I P AS areer

Realising C

tem

e 83)

2011 (Issu

167/10/2

MICA (P)

Con

- 27 July

t.com.sg

dhun www.hea

HEADHUNT

HeadHunt as a credible player in the recruitment market and to create a strong brand name for ourselves.

Currently, the print run in Hong Kong is 25,000 copies and the distribution points are 600. With the print in place, we were able to launch into the competitive online recruitment space and create a niche for ourselves amongst working professionals.

HKB: How has the business grown through the Global Financial Crisis?

Joann: It has been a challenging and rewarding journey thus far. In the beginning, it was tough as we only had a product mock-up and a vision to share with clients. It is only after several pitches that we had our first breakthrough from a client that is still advertising with us today.

They saw our vision and were able to understand the value of advertising on HeadHunt. Once the first copies were launched, it was easier to share with clients as now they were able to visualise HeadHunt and see how we distribute to our target audience. On an average, the number of ads per issue now is about 75-90 middle to senior management roles. Our greatest challenge came in the form of the global financial crisis. We had a double whammy as recruitment almost came to a standstill and clients were cutting back on discretionary advertising expenses.

Despite the slowdown, clients continued to use our platform. This continued support reinforced our business model and spurred us on.

HKB: Why Hong Kong?

Joann: After analyzing the market, we realised that although Hong Kong has quite a few free recruitment publications, there was a gap as none of them targeted the middle to senior level professionals.

Together with the feedback and support of our platinum partners in HK, we launched our first issue in June 2011.

opinion

mark wadsley Six signs your top talent is about to quit

Mark wadsley

I

t is the moment every manager fears; the one when your top performer knocks on your office door and asks if you can talk privately and then hands you their resignation letter. With the economy back on track and Singapore’s labour market the tightest it’s been in ten years, finding replacements for top talent is harder than ever. As a business leader you have to be on the lookout for signs if your top people want to leave and act before they do. So are there any early warning signs that should make you prick your ears up and be alert that your talent is thinking of quitting? Yes, and here are some of the top ten.

Early Warning Signals The first sign is that if your talent takes the same days off each week, they are likely to quit. When people create a regular habit to take off the same time each week and with a higher frequency, it is an indicator that something is wrong. It could be something personal to them but then again, they might be considering to leave your company, and might as well have interviews with other companies. Either way you need to address this by having a conversation.

The second sign is when it applies internally for a role. If you run analytics based on tenure, seniority achieved, pay and reward, you will find it. This is a sign that they are unhappy with what they are currently doing, and they are looking around.

The third sign is when a behavioral change occurs.

It is when somebody who is fully engaged suddenly becomes disinterested. Lack of interest is the number one sign. Pretty soon productivity decreases and they stop delivering - they gossip more and time spent away from their work stations increases.

They are always at the coffee machine or downstairs, and the lunch break increases from an hour to an hour and a half. You will also notice a passive-aggressive response or antagonism when you are asking for input.

You need to quickly deal with this person and re-engage them or they can, like the proverbial apple, start to rot the rest of the barrel.

The fourth, and perhaps counter intuitive sign is when it asks for a pay raise. This shows they are considering their worth in the market and you have undervalued them. Money represents 5% of the job when somebody is happy. But otherwise, it represents 95%. If people feel they are being fairly paid, they will be looking for respect and recognition. But the minute you unfairly pay them it becomes everything. Asking for a pay raise may indicate there are deeper problems with their attachment to work.

The fifth sign is when your talent is always too busy 18 HONG KONG BUSINESS | OCTOBER 2011

to talk. People don’t want to engage because it’s face saving. People don’t like confrontation, so they will avoid it.

The sixth sign is when it is sad. Half of people won’t tell you why they are sad and half will. But either way it has the same outcome - they will leave. Keep communicating. Unless you engage in a conversation with someone, you cannot do anything. Don’t beat yourself up, you can take the horse to the water but you can’t make it drink.

The open-dialogue environment You need an environment where they feel they are free to engage in an open dialogue.

Most companies react to the symptom by yearly appraisals. But you need townhalls and company intranet for sharing of ideas. Facebook shows that people want to have community sharing; so if you don’t have an internal company 'facebook,’ you need one.

Do you take time to win hearts and minds? Tow halls, or just a simple ‘hi, how are you’? If you don’t create continuous dialogue with your employees, how will you know if they want to quit? Here is a great line to use with someone you feel is displaying one of the signs. Simply ask them: "Do you have something to tell me?” If someone has something to hide, and you are shooting in the dark, it is amazing how many people respond by divulging a secret.

It’s human nature that people want to tell the truth; very few are truly Machiavellian. And finally, if you are trying to keep someone working with you who has already resigned, you shouldn’t bother. But you should have read the warning signs.

"Don't wait for the 'It's been a great learning experience, thanks, I'm leaving you' letter"

ECONOMICs

Ian Perkin

Weathering a crisis and learning a lesson from HK’s experience

T

he best defence any economy can have against the current grave global market uncertainties – sovereign risk in the Eurozone and continuing economic malaise in the US – is sound domestic policies.

No economy can be totally immune to fallout from the crises on international markets, but sound domestic policies – both fiscal and monetary – provide a buffer against their impact.

Hong Kong arguably dodged a potential external financial shock in early August when the US Congress belatedly agreed to lift the country’s debt ceiling, ensuring – at least for the near future – the US government would avoid Treasury Bond default, raise additional funds and pay its debts and other obligations. These would have, in turn, raised further questions about Hong Kong’s currency board link to the US dollar and the prospect of the so-called “dollar peg” having to be abandoned in the midst of a global economic crisis.

Amidst the global uncertainty, Hong Kong has two vital strengths – first, its economic relationship with the Mainland and the strong sovereign support of Beijing and, second, its own domestic economic strengths.

IAN PERKIN Independent Economic Consultant perkin888@hotmail.com

HK Financial Results, 4 months to July 31, 2011 Item [All HK$ billion]

July 2011

July 2010

4 months to July 31 2011

4 Months to July 31 2010

Revenue

29.6

28.7

94.2

89.5

Expenditure

(27.4)

(27.9)

(101.4)

(99.0)

Surplus/ Deficit

2.2

0.8

(7.2)

(9.5)

Fiscal Reserves

588.3

510.7

588.3

510.7

Source: HK Government

The fiscal reserves stood at a healthy HK$588.3 billion at the end of July.

While property still seems to be underpinned – at least for now - by solid demand and low interest rates (negative real rates after allowing for inflation) consumer price inflation continues to edge higher.

The broadest measures of prices, the Composite CPI rose 7.9 per cent in the year to July, up from 5.6 Government finances all under control per cent in the year to June.

Hong Kong’s government finances remain strong.

A lot of this was due to the low base of comparison Four months into the 2011-12 fiscal year the Hong in 2010 when the government paid public housing Kong Government’s Budget strategy is on track. rentals for July. After removing this one-off impact, The outlook looks healthy even after the Budget the underlying CPI was still marginally higher at 5.8 programs announced earlier in the year allowed for per cent in July. the expected pick-up in spending in the second half In the opening seven months of the year, retail sales of the fiscal year. increased 25.1 per cent in value and 19.6 per cent in Figures for the opening third of the fiscal year volume over the same period a year earlier. through to the end of July revealed government Unemployment is also under control. It fell to 3.4 spending of $101.4 billion (see accompanying table), per cent in the May-to-July three months from 3.5 up 2.4 per cent on the $99 billion outlaid in the same per cent in the April-to-June period.

Underemployment was also down to “Hong Kong has two vital strengths – first, its 1.7 per cent from 1.8 per cent. Total economic relationship with the Mainland and the employment increased by 15 200 to a 3 625 800. strong sovereign support of Beijing and, second, its record Externally, trade growth has continued despite the global economic uncertainties own domestic economic strengths. although the deficit in goods trade remained stable. Merchandise exports increased 9.3 period of fiscal 2010-11. per cent in July and imports were 10.2 per cent higher.

Revenue for the period was $94.3 billion, up In the opening seven months of the year goods slightly 5.4 per cent from $89.5 billion a year earlier. exports were up 14.4 per cent and imports increased As a result, the deficit for the first four months of 14.3 per cent. The visible trade deficit was $236.5 fiscal 2011-12 was $7.1 billion, down on the $9.5 billion for the period. billion in the same period a year earlier.

20 HONG KONG BUSINESS | OCTOBER 2011

Budget on target?

opinion

richard branson The CEO is not always right

I “Innovation is about change – and when your plans to introduce a new product or service don’t work out, sometimes you have to adapt to changing circumstances instead of forcing your competitors to play catch up.”

am not always right. I can admit this without embarrassment, because it is true of all other business leaders and entrepreneurs. It can be a difficult thing for an executive or manager to acknowledge to employees – never mind put in print – but it is something that anyone who accepts a leadership position should keep in mind.

My management team says 2003 wasn’t exactly a vintage year for our group. Around the time Apple introduced its iPod personal music player in 2001, a couple of very bright people from Palm sold me their own funky version of the MP3 player and a range of accessories.

Virgin’s management team strongly argued the financial analysis did not stack up and that we would have to sell a very high number of units to make it work. I insisted we push on and launch our very own MP3 player, Virgin Pulse!

I felt the product fit well with our brand, our music business and our heritage.

What went wrong with the CEO’s decision?

We spent $20 million designing our MP3 player and bringing it to market. Though that product and its successors were critically acclaimed in the United States, the Virgin Pulse bombed, and we had to write off our investment.

Why didn’t our product work? Because Apple had an unbeatable strategy.

For Apple, 2003 was notable because it launched its iTunes store that year as the company simultaneously pushed down iPod prices very quickly. If a company drives down the

22 HONG KONG BUSINESS | OCTOBER 2011

retail price of an innovative new product fast enough when it is still the dominant player in the new market, no one else can catch up because they can’t make enough money from their new products. When Apple introduced the cheaper, smaller iPod nano, it slammed the door on anyone else trying to build a significant market share in the digital music business. And yes, I did freely admit that I was wrong; that helped us to exit the market within two years, before we lost even more money.

The courage to face what went wrong It can be very hard to own up to your mistakes when a big investment is not salvageable – especially when it is a cause you alone have championed.

This fear of embarrassment prevents many chairmen and bosses from doing their jobs properly and addressing the situation when it is most urgent. If the business is disappearing, you must face your team and start looking into what is going on – and the sooner, the better. Only by leaving the safety of your office and sampling the product or service yourself, studying the competition’s offerings and generally turning your operation upside down will you get to the bottom of what has gone wrong.

When you have uncovered the problem, get the right people working on fixing it. In this situation, honesty is the only policy. If you speak openly and bluntly about why you had hoped a strategy would work, why this proved to be wrong, and how you and your

team arrived at the solution you want to put in place, then your people will be better able to implement it. This is not the time to hold back information or pass the blame. This may be one of the more difficult moments of your career, but you will not lose people’s trust and respect by taking responsibility for the problem and admitting to your mistakes. People look for leaders to make informed decisions, not to be infallible.

If you discover that the problem was in the implementation of a service or product, do not make the beginner’s mistake of firing those responsible. Blame and recriminations may offer a spiteful sort of short-term comfort, but they will be toxic to your company and will stunt your recovery or the launch of future enterprises. It’s unlikely that you will even need to talk to those employees about where they went wrong; if you provide all the information necessary, they will know what they did and be very eager to prove that they can get it right. If you keep your team together, you will close the door on rivals who might benefit from your mistakes by hiring the very people who have just learned the lesson the hard way.

Innovation is about change – and when your plans to introduce a new product or service don’t work out, sometimes you have to adapt to changing circumstances instead of forcing your competitors to play catch up. As I’ve written before: Move on. If that means taking a hit, then take it on the chin. Don’t even think about it again. Just move forward.

social media

Facebook vs LinkedIn: Who wins in HK? Undeniably, almost everyone in the world has an account in either Facebook or LinkedIn, but how can companies best use these sites to their advantage?

Cherry Rahtu Founder Cherry Solution Forget about hard sell, social media is NOT a one-way communication channel; focus on building two-ways communication.

If you are a business-toconsumer (B2C) company, then consider Facebook.

And if you are a business-tobusiness (B2B) company, then consider spending more time on LinkedIn. People use Facebook to connect with friends, use LinkedIn to connect with professionals.

With over 800 million users, Facebook is currently the largest social networking site. According to Facebook statistics, average user spent 7 hours in August 2011, according to Nielsen, making it the best marketing tool.

Top B2C brands are leveraging Facebook business page to connect with consumers, run promotional campaigns, have seen great results.

On the other hand, companies use LinkedIn for recruitment and professional networking. According to LinkedIn, 73 of fortune 100 companies use LinkedIn hiring solutions. Top level executives spend most of their time on industry networking according to lab42. 82% of LinkedIn users are aware of linked ads now; with LinkedIn ads you can reach to 120 million members worldwide, and 7.9 million decision makers around the globe.

Kelvin Chan Managing Director Livewir3!! Communications Facebook users in Hong Kong record at 3.8 million (54.04% of the population). That’s 24 HONG KONG BUSINESS | OCTOBER 2011

founder

managing director

Cherry Rahtu

Kelvin Chan

Joe C.W. Lam

also 78.53% in relation to the internet users in Hong Kong.

This number beats the number of users in even the likes of Singapore and Vietnam. LinkedIn, on the other hand boasts of reaching 120 million global registered users.

Did you know that 78% of consumers trust recommendations of friends and other customers, with only 14% of consumers trusting advertisements? Given the above statistics that there are over 4 million internet users in Hong Kong, I’d say Online Media is one important, if not essential, tool for businesses in Hong Kong to reach out to customers.

Facebook and LinkedIn, though, have different functions and hence different usages for businesses. Facebook is a Social Media juggernaut where social interaction and communication will be useful for Businesses which are more B2C based. Use Facebook to acquire new customers as well as connecting to old ones, by conducting Facebook marketing campaigns. The Hong Kong Tourism Board keeps up with the trend and has a Facebook page with almost 27,000 likes.

LinkedIn has a more profes-

sional outlook hence it tends to attract professional users.

Use LinkedIn to interact and communicate with fellow professionals, showcase your business credentials and attend meetings and events organised by LinkedIn groups.

You could be a B2C business owner, but you still can use LinkedIn to communicate to potential partners from a wide range of industries. For instance, Nike, a consumer products company, has a corporate LinkedIn account and has more than 75,000 followers.

Business decision makers must learn to adapt to the changes. Hence, in honour of a genius, I quote Steve Jobs: “Here’s to the crazy ones, the misfits, the rebels, the troublemakers, the round pegs in the square holes... the ones who see things differently.”

and spend more focus on Facebook and Weibo over other social networking platforms.

Also Facebook fan page is the most effective web application for customer product companies as our fans and customers can do a lot of interactions there.

Being more like a businessto-consumer company, we have seen the potential of Facebook to aid us in our marketing campaigns. To initiate interaction with our fans, we have launched a mini-game where they could win prizes every week. We have the Baby Photo Contest campaign where parents can share their babies’ pictures to their Facebook friends after joining the competition. This way, our brand can then be shared as well.

We recognize online media to be an effective marketing tool as it helps us lower the media cost. The marketing cost is comparatively lower than the traditional marketing. For the baby contest, we just spent HKD 30, 000 on online media advertisement.

However there are over 370 participants and the number of fans was increased by more than 11,000 active fans.

Joe C.W. Lam Web Manager Vita Green Health Products We thought LinkedIn is pretty much more professional demographic than other social networks.

Since our products in Vita Green are targeting to general public, we picked Facebook

Web Manager

Hong Kong’s vanishing shops

With the big international brands’ rapid invasion in Asia’s shopping hub-- Hong Kong-- local brands are faced with challenges on how to compete and survive. Roxanne Uy explores these challenges.

H

ong Kong has never been a place to let sentimentality stand in the way of a fast buck and a redevelopment.

But even so, many retail industry observers are fretting over what they say is the displacement of Hong Kong shops in the favour of big brands aimed at the Chinese mainland tourist.

Perhaps the most famous of recent closures is that of the China Tee Club, which had been operating as a little oasis of calm upstairs from Shanghai Tang on Pedder Street, and which was forced to close to make way for a new Abercrombie & Fitch Mega store at the end of September. But this is just the tip of the iceberg as many local favourites are being pushed out of Central and Tsim Sha Tsui to make way for shops that do not meet the needs of the locals.

Another example is that of res26 HONG KONG BUSINESS | OCTOBER 2011

taurant Old Sanyang (老三陽), which sells Shanghai hairy crabs and other Chinese food products, and had been operating for over 40 years in its Causeway Bay location.

But alas, it too was forced to close and was replaced by, you guessed it, another retail store, this time the Swatch Group for a flagship store.

One person watching the trend with some concern is Ms. Caroline Mak, Chairman of the Hong Kong Retail Management Association who says that the influx of mainland tourists whose top priority is to go shopping drives strong growth in tourist retail. “Over the last few years, we have seen many big brands either extended in Hong Kong if they are already in Hong Kong or coming to Hong Kong to open stores, for example, Coach and MCM. And we have a few more American brands coming to Hong Kong to pick up very

“Retail rents over the last 12 months have risen anywhere from 20%50%”

prominent retail space,” Ms. Mak added.

And while electronics goods and luxury goods are still hot items for cashed up mainlanders, Ms. Mak noted that cosmetics sales are booming, having grown some 30% in the last 6 to 9 months.

Retail industry’s triple whammy Unfortunately, noted Ms. Mak, whilst local consumption also increased year-on-year, it’s “nothing compared to the mainland tourist retail sales.”

Other retailers are complaining that the rapid rise in inflation is also hurting their margins and, when combined with rent hikes, makes business very difficult. Retail rents over the last 12 months have risen anywhere from 20%50% with a doubling of rent not unheard of. As a result, rent as a cost of doing business has risen

retail report from the single digits to 25%, according to the HKRMA. According to Luke Samtani, owner of Ash Samtani Clothing that specializes in custom-made hand-tailoring business in Hong Kong, the costs of raw materials like cotton, wool, and natural fibers continue to shoot up. To cope, they try to maintain their prices. “Our profit margin is drastically reduced but we have to overcome the short term effects for the long term,” he said.

And the minimum wage has also taken its toll with the convenience and supermarket sector reporting wages have grown by up to 20%.

Local products set aside for big brands Though enjoying a fairly robust status in tourist consumption, the retail industry is facing roughly a 10% shortage in store space. “A lot of shopping mall operators are more geared to offer space to brands or products that attract mainland tourists. So as a result, products that are more for local residents, like Chinese medicine, personal care, supermarket, bookstore - are in the challenge for rental and space availability,” said Ms. Mak. To illustrate, Ms. Mak noted that Old Sanyang (老三陽), which sells Shanghai hairy crabs and other Chinese food products, had been operating for over 40 years in its Causeway Bay store but now it had moved due to high rent. Its original store location was taken by Swatch for the flagship store.

“Also, there is no more convenience store along Canton Road in Tsim Sha Tsui as they are replaced by big brands of High Fashion, Watch & Jewelleries,” she added.

Keeping up with the competitive retail environment Convenience Retail Asia, the owners of the Circle K Brand, say that they have made a lot of new instore changes to keep up with consumer demand.

A spokesperson told Hong Kong Business their priority was to support the ‘always something new’ consumer proposition. “In order to achieve that competitive market positioning, we have invested heavily in customer service training for

Clockwise: The Circle K brand; Circle K’s OK Fun promo; Luke Samtani of Ash Samtani Clothing

our frontline staff. We have introduced year-round new product programme to expand our product range and category offering.

We have also launched various premium promotions throughout the year to enhance the shopping experience for our customers, with innovative mechanics such as electronic lucky draw, an exclusive CRA concept enabled by the electronic point of sale system,” the spokesperson said. It works by allowing customers who make a purchase of over $20 to select a number on a keyboard at the counter and they stand to win prizes such as $1 free coupons and stuffed toys.

The company said the winning

“...the retail industry is facing roughly a 10% shortage in store space.”

rate is very high as almost everyone wins. Another promotion is what they call the “OK Fun,” where for a minimum purchase of $20, customers get a stem marked with points - 5, 20, 25, etc. And once a customer collects 100 points, he or she gets to redeem a premium gift.

CRA does these promotions in all branches once or twice a year, and each promo runs for 3-4 weeks everytime. However, they do not do the promos concurrently.

Despite the challenges, the outlook for Hong Kong’s retail industry looks good. “Our forecast for the year is most likely around 20-22% of sales growth versus last year which is already double digits,” said Ms. Mak. HONG KONG BUSINESS | OCTOBER 2011 27

numbers

Will you invest in digital media?

Would you access internet through Mobile Phone in next 12 months?

Activities done on a mobile phone in 30 days Southeast Asia Countries

Tapping into this growing demand for “anytime, anywhere” Internet access, Nielsen has just announced enhancements to its website tagging service, Market Intelligence, enabling website owners to, for the first time, monitor the make-up of traffic to their sites based on device type.

Nielsen’s enhanced Market Intelligence service will also report on the ultra-competitive operating system (OS) space, comparing Microsoft’s Windows OS with others such as Mac OS, iOS (the operating system used on Apple’s iPhone and iPad) and Android.

“With the lion’s share of Internet activity being driven by PCs, Windows remains the front-runner in

Source: Nielsen Global Online Omnibus

operating systems,” observes Bruce. “If we look at operating systems in use for Smartphones or

Source: Nielsen Global Online Omnibus

Tablets specifically, however, these numbers look quite different. As non-PC Internet activity continues to ramp up, operating systems such as iOS and Android will begin to account for a much larger portion of web traffic.”

Bruce notes that for those in the business of creating content for the Internet, such as media owners,

understanding the types of devices and operating systems consumers are using to access websites Intended Internet usage by device (next 12 months) is critical to ensuring their content is tailored appropriately. in Southeast Asia Chart 1: Intended Internet usage by device (next 12 months)

Most time spent on TV and internet Number of hours spent with media and entertainment in a typical day

85%

73%

71% 61% 48%

20%

18%

E-book Reader (e.g. Amazon Kindle)

20%

In-home video game system ( e.g. Playstation 3 orXbox 360)

Source: Nielsen Global Consumer Survey, Q310

Television at home

Handheld multimedia device - not a phone (e.g. iPod Touch, PSP)

Public computer (e.g. Libray, Internet Cafe, Gym)

Mobile phone

Computer (any)

Computer at work

Computer at home

24%

Television (any)

33%

About Nielsen Nielsen Holdings N.V. (NYSE: NLSN) is a global information and measurement company with Source: Nielsen Global Consumer Survey, Q310 leading market positions in marketing and consumer information, television and other media measurement, online intelligence, mobile measurement, trade shows and related properties. Nielsen has a presence in approximately 100 countries, with headquarters in New York, USA and Diemen, the Netherlands. For more information, visit www.nielsen.com.

Base: All respondents aged 8-24 Source: Synovate Young Asians Survey 210

2 of 2

Social media strategy: 50/50 Base: All marketers (N=321)

Type of agency to turn to...

Social media strategy

#/ ## denotes small sample base, caution should be noted when reading the figures Do you have a social media strategy?

Source: Synovate Media

Do you have a social media strategy?

Source: Synovate Media

For more information contact: Nielsen, Margaret Lim (margaret.lim@nielsen.com); Synovate contact Tim Hill (Tim.hill@synovate.com)

28 HONG KONG BUSINESS | OCTOBER 2011

opinion

Karin Clarke How to keep the top guys in your team?

M

karin clarke Randstad’s Regional Director for Malaysia and Singapore

anaging a team of high performers requires an innovative and detailed HR and leadership approach involving an effective talent attraction and recruitment process, ongoing development plans, motivating rewards and recognition programs, and a proactive retention strategy.

According to respondents of Randstad’s World of Work Report, the main reasons for a planned job change were for better opportunities for growth and advancement (39%) and salary and remuneration (21%).

As the Singtel Singapore Grand Prix roars into town, Randstad illustrates how managers can take a leaf out of the Formula One book to manage a high performance team for their businesses.

Recognise, reward and challenge Just like a team leader on the racing track, business leaders need to encourage their teams by providing genuine, regular recognition of excellence. At the same time, in order to ensure a sustainable level of efficiency, it is important to make certain that high performers, with their unique levels of intensity, don’t tire of the ‘everyday grind’.

Build in new goals once existing goals are close to being achieved, provide new challenge and competition, and introduce tangible rewards for milestones.

Set the goal and let them achieve it High performers are often unique in that they have different and innovative methods of approaching tasks and goals than other employees. Rather than trying to manage this and reign it in, set a clear direction and goal for them, and then step away. Don’t micromanage — let them achieve.

Align business and individual goals High performers need to strive towards inspiring goals that are achievable but may be just out of reach — this presents the challenge that they need to work harder, faster and smarter. This group is characterised by the need to constantly try to better previous successes, interestingly also the hallmark of some of the most competitive people in the world, Formula One drivers. Put the company or task goals in place, and then allow your high performers to set their sights on their own personal benchmark, often enabling them to far surpass expectations.

Ensure you are on the circuit Just like reputations forged on a rain-drenched track, the credentials of a true leader shine through during periods of difficulty — a concept set in stone during the recent economic downturn.

30 HONG KONG BUSINESS | OCTOBER 2011

High performers often feel the impact of periods such as downturn more acutely. Downturn for high achievers can transform quickly from a period of challenge, into an insurmountable obstacle — something that seemingly can’t be cleared regardless of determination — and this can result in plummeting levels of morale, and in turn, enthusiasm and dedication from high performers. Critical in these times is a leader’s ability to identify this drop and continue to inspire and motivate their people so they continue to achieve beyond average downturn levels.

During these periods, the traditional leadership attributes of inspiration, motivation, creating vision and providing recognition come to the fore. Effective harnessing of these characteristics can mean the difference between maintaining your high performers through difficult periods, and boosting them back up quickly in upswing, or losing them completely.

In pole position The key for employers and leaders to remember when managing this vibrant and evolving group is to recognise the top individuals in your organisation, and tailor programs to inspire them. Understand what drives them, reward their efforts and allow their passion for success to flow throughout the organisation.

"Know the value of your employees”

opinion

Tim hamlett Business vs Politics

A

Chamber of Commerce is a wonderful thing, and this is just as well because Hong Kong has a good many of them. No doubt they provide a useful service for their members, and for business in general. I fear that they probably also provide some exercise for my favourite Adam Smith observation, which goes “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” This does not matter too much, as long as the conspiracy or contrivance remains private.

The link in politics and business However a Chamber or a set of chambers are playing a dangerous game if they allow themselves to get caught up in politics, and the danger is not to them alone. The interests of business are, generally speaking, something of which most people are more or less in favour. Prosperous businesses mean a prosperous society. Political groups and interests will rarely explicitly aim to inconvenience or curb business. Even if their proposals are not welcome, they will be presented as in the interests of their victims. But a political programme is a package, which seeks to appeal to a wide range of people by offering to serve their interests. If it appears that one party has a monopoly on business support, then the others will feel no compulsion to help business generally, and indeed no compunction about hindering it.

That is not to say that chambers should ignore political matters which clearly affect business, like regulations governing particular trades or the state of the economy generally. Nobody minds groups who have interests arguing their corner if those interests are affected. But what chambers must do is to refrain from matters which do not concern commerce as such, but concern the politically engaged a great deal. For this reason I was concerned, nay appalled, by the report which stated that the government’s effort to abolish by-elections was a response to a consensus among chambers of commerce that something should be done about the problem. The rather fragile public interest hook on which this opinion depended was the notion that the By-elections Which Were Not a Referendum had wasted a certain amount of public money.

I realise that the government is fairly desperate for excuses, after incurring public odium for proposing a bad solution to a nonexistent problem. So it may be that the consensus was not as firm as the report made it appear. But there should not have been a consensus at all. Chamber members as such have no interest at stake in the occasional by-election. The cost to public funds is a red herring: the government has money coming out of its ears. I do not doubt that many chamber members thought the by-elections a waste of money, and many others thought them a fine idea. Businessmen are no more or less protective of public funds than the rest of us. On general political matters they have a wide range of views and if they want to put them before the public

32 HONG KONG BUSINESS | OCTOBER 2011

Huh! Money? That’s easy.

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

they can join a political party. But this is not a matter on which a chamber should have an opinion at all. It is, as it were, none of their business.

The perks of being a mega rich businessman There is a cost to this. Most Hong Kong people understand that business as a concept covers a wide range of people and companies.

We know that about 11 people own three quarters of the shares on the Hong Kong Stock Exchange. We know that about the same number of people or organisations control the vast majority of Hong Kong’s real estate. These two cricket teams, which overlap considerably, involve mega rich people who do not have to ask the price of anything. They can donate whole universities to their ancestral villages, buy babies by the litter, decorate their wives and mistresses with adornments costing the price of a small flat, and so on. When people talk about “collusion” or “developer hegemony”, this is the group they have in mind. The people in this group are generally neither liked nor trusted, and nobody outside it supposes that they need any help in protecting their interests.

But most of us recognise that “business” as an activity covers a great deal more than this. There is public sympathy for dying trades, for struggling proprietors in fickle markets, for young people who want to risk everything to be their own boss. Business, in Hong Kong, is a respectable career and there is support and sympathy for most of those who pursue it. This, however, is not guaranteed.

If organisations representing business appear to be siding with the government, or with the First XI, against the rest of the population, then opinions about business will change.

Spokesmen for the chambers, or some of them, will no doubt wish to claim at this point that actually the public is as exercised by the problem of expensive by-elections as they are. If the chambers are going to get into the habit of reflecting views which have no particular connection with business, then they are going to start upsetting people. And it is only a matter of time before someone misreads the runes and reflects a view which is not widely held at all, whether that is what has happened in this case or not.

People who are in a position to speak for business have an obligation not to speak for other things: like themselves, or the government, or the political opinions of their fellow committee members. Of course we have to leave it to chamber members to keep an eye on this. There is a tendency for people in leadership roles in such organisations to be from large firms with a welldeveloped habit and need to be on good terms with the government. The rank and file members are more likely to include representatives of small firms who just regard the government as an expletive deleted nuisance.

Whether either of these approaches is correct is not the point. The point is that politics involves fights, sometimes bitter fights, over issues which people view as matters of principle. The golden rule when you see a fight is: do not join in.

opinion

Hemlock Is Hong Kong losing its autonomy to Mainland China?

P

essimists will see not one but two nails being hammered into the coffin of Hong Kong’s autonomy in the second half of August 2011. The first was the introduction of Mainland-style security measures during the visit of Vice-Premier Li Keqiang, complete with creepy men in black suits sweeping a bystander off the streets of his own neighbourhood for wearing the wrong T-shirt. The second is Beijing’s imminent declaration that its doctrine of full sovereign immunity must apply in Hong Kong courts. In other words, as in the rest of the PRC, you may not sue foreign state-owned commercial entities here, regardless of the fact that the local English-style law says you can.

But are we really witnessing a whittling away of Hong Kong’s autonomy? If the Big Lychee’s boisterous civil society agrees on anything, it is Wendell Phillips’s aphorism about eternal vigilance – with extra added hyperbole if necessary – being the price of liberty. If the heavy-handed police really intend to permanently restrict freedom of the press and expression, they will have the Bar Association, the media, Dean Johannes Chan and the courts to contend with, not to mention the prospect of ViceChancellor Tsui at Hong Kong University declaring the campus an independent republic. (To make totalitarianism’s job even harder, we also have an almost laughably weedy government, backing down on a quick ban on by-elections, and now national education in high schools, at the first hint of public opposition.)

What we are really seeing here is not so much a clampdown on freedom and autonomy as a refusal by all concerned to honestly describe and explain what is happening in plain language.

The extraordinary security measures imposed in honour of Vice-Premier Li’s visit look suspicious because the official line is that there was nothing

assume the worst.

The rubber-stamp ruling by the Standing Committee of the National People’s Congress about sovereign immunity will be dressed up in terms of how Hong Kong cannot have a separate foreign policy to the PRC, and this is about ‘one country’ not ‘two systems’. Jittery Cassandras will throw up their hands in horror at a major curtailment of judicial independence and warn that companies may not be able to take legal action against stateowned firms in Hong Kong (presumably it depends on whether waivers of immunity in contracts remain valid). A more honest explanation would be that a Communist one-party state cannot coexist with a system where people may take legal action against any organ of any fellow state. More developed and sophisticated political systems do allow citizens to sue commercial entities ultimately owned by foreign governments. Some are even moving in the direction of allowing people to take court action against foreign powers for human rights infringements. But for China it “..the impact in Hong Kong of the monopoly remains a sacrosanct part of the whole non-interference principle, and ultimately of power in the one-party state appears to be the party and state’s status as above the law: people do not sue governments. If a sinister when in fact it is merely crude.” particular element of common law in Hong Kong is incompatible with that, it goes. unusual about it – oh, and Li bestowed 36 highly Officials won’t de-mystify these issues through generous gifts upon poor little Hong Kong with plain speaking because that would require its pathetic struggling economy. Any thinking abandoning pleasant fictions and admitting person knows that the security was indeed extreme, uncomfortable truths. The result is that the impact and talk of ‘gifts’ is disingenuous gibberish about minuscule central government measures to broaden in Hong Kong of the monopoly of power in the Yuan convertibility – nothing really to do with Hong one-party state appears to be sinister when in fact it is merely crude.

Kong. Faced with such BS, it’s no wonder people 34 HONG KONG BUSINESS | OCTOBER 2011

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

Free citizens of Hong Kong

w

analysis

China on the verge of a nervous breakdown Economic crisis threatens the upswing of Asia’s sleeping giant, reports Patrick Chovanec

O

ver the past several weeks, a number of news reports and market figures have caught my attention, which appear to indicate that China’s economy may be approaching a crisis. I use the word “crisis” in the traditional (or medical) sense, meaning a critical turning point when tensions or contradictions are resolved, for better or worse — sometimes in unexpected ways. One potential interpretation of this crisis is that China is entering the terminal stage of a bubble, and that what we are seeing are the early signs of a much broader collapse. But it may not be that simple. I have been saying since the year began that China is due for a correction, and I told the Globe and Mail that such a correction could be a lot worse than what most people would expect. How exactly the situation will unfold, though, and whether we’ve already reached a tipping point or not, remains to be seen. For the moment, I’m reminded of that song: Something’s happening here; what it is ain’t exactly clear. But — and this is

“China is entering the terminal stage of a bubble, and what we are seeing are the early signs of a much broader collapse”

the real point — something is happening, and people both inside and outside of China are right to be nervous.

China’s real estate on a downswing Let’s start with real estate. For the past several months, China’s official media have been touting official data indicating that while most Chinese cities are still seeing housing prices rise, a growing number of cities are starting to see a plateau or even decline in prices — evidence, they say, that the central government’s cooling measures are finally working. More significant, in my eyes, are reports — which began emerging in late August — that in several cities across China, prices in primary housing markets (developers selling to homeowners) have begun falling away from those in secondary markets (homeowners selling to other homeowners). The affected markets include not only 1st tier metropolises (Beijing, Shanghai, Guangzhou, and Shenzhen), but also 2nd tier (Chongqing, Wuhan, Tianjin, Zhenghou) and 3rd tier (Ningbo, Foshan, Wuxi) ones

as well. In late August, reports had secondary market prices for many downtown properties in Chongqing at 4-10% higher than primary prices.

What could explain the growing price gap? Back in April 2010, when the central government first announced its intention to “cool” the real estate market, property developers were skeptical. They’d seen this movie before: the market, they figured, might stall for a while, but as soon as policymakers saw the negative impact on investment-led GDP growth, they’d rush back in to support the sector. Six months, tops, they would be right back to business as usual. In the meantime, savvy developers better get ready for the next round by continuing to borrow and build. That’s precisely what they did, which is why, despite jittery buyers and slumping transaction volumes, investment in real estate (in yuan) rose 33% and new construction (in square meters) climbed 26% in the first eight months of 2011, compared to the same period last year — data that China’s National Statistics Bureau touts, by the way, as proof that the Chinese economy is still going strong.

All of this continued building was predicated on the assumption that China’s cooling policies could not last.

In fact, since developers kept building, there was no negative impact on GDP, and no reason for policymakers to pull back. On the contrary, inflation rose, and the cooling measures targeted at real estate were broadened into a more general credit tightening policy aimed at reining in lending. As developers piled up more and more inventory, they had to borrow to stay in business.

With credit conditions tightening, they systematically ran through the credit lines available: first the banks, then high-yield bonds in Hong Kong, then the private wealth management vehicles that have been popping up all over China, then the loan sharks. Finally, they ran out of options, and had no choice but to start selling some of their inventory at whatever price they could get.

That’s why primary prices are dropping: hard-pressed developers offering steep discounts on property they’ve been holding out on, in order to get cash. Investors, who already purchased homes, often as a place to stash large amounts of cash, don’t face the same pressure and so you don’t see the same price drop in secondary

analysis markets. However, it’s important to note how small and illiquid those secondary markets are.

Frustrated by their inability to cool the property market, China’s bank regulators say they are intentionally trying to squeeze developers to force a correction. The thing is, they may get more than they bargained for.

Consider what might happen if a lot of developers hit the wall at the same time, and start dumping their inventories. Sizeable discounts would have to be offered, and prices in the primary market would crater. True, investors who have already bought — in many cases — multiple properties might not face the same cash pressures, but absent a liquid secondary market they have been marking their investment to primary market prices, and looking to them for assurance that their properties are a reliable “store of value.” If primary prices collapse, that assurance is gone. And if they decide to cash out, even in part, they will find — as they might have known all along, had they cared — that there is no secondary market to cash into. The result could be a panicked rush to the exits. Even if just the primary market crashes, the rationale for the supposed solvency of a whole host of Local Government Financing Vehicle (LGFV) bank loans and bonds — that local authorities can always sell land to pay them back — falls apart.

The bad farewell’s of China’s ‘big men’ To be clear, this chain of events has not unfolded — yet. But there’s mounting evidence that it could, that the fabric of China’s investment-led growth is starting to fray and unravel. In Shanghai, primary market property sales for Sept. 1-18 were down more than 50% year-on-year (contrasted with the alltime high inventories I mentioned earlier). In Beijing, nearly 5% of the city’s property agents have shut down in the past two months. The global price of copper, 40% of which is driven by Chinese demand, including wiring for all those new homes and office buildings, is down almost 25% since the beginning of August. But more dramatic, and worrisome, is what is happening in Wenzhou.

Wenzhou is a city in the southeast coast that is well-known as the center of free-wheeling entrepreneurship in China. With a reputation for getting by on their wits and the skin of their

teeth, Wenzhou merchants have long relied on — and sponsored — informal methods of financing. So it’s no surprise that, as formal credit conditions tightened this year, they were front and center in providing alternatives. The fact that credit tightening has fallen disproportionately on China’s private sector presented them with both opportunity and risk.

For a while, I’m sure the opportunity was highly rewarding, with informal interest charges soaring to monthly rates of 4-10%. But eventually the risk caught up. Shanghai Daily reported on Sept. 23 that, in the previous ten days, at least seven local Wenzhou business owners had fled after defaulting on millions of yuan they had borrowed from banks and private creditors, which they in turn lent or invested in real estate and other speculative ventures. Take one example: Hu Fulin, whose Zhejiang Center Group was one of China’s biggest eyeglasses maker, is one of the runaway bosses. Hu ran a company with 3,000 employees in Wenzhou and used to be one of the city’s high-profile gurus. His company owns the best-selling sunglass brand in China and produces 20 million pairs a year, according to the company’s website.

Hu also expanded into the real estate and solar energy industries.

Sources close to him said Hu called them, admitting he is now broke.

The news of Hu’s disappearance triggered a panic among his suppliers who gathered in his factory demand-

“In Shanghai, primary market property sales for Sept. 1-18 were down more than 50% year-on-year...”

ing payments. National Business Daily said Hu also owed about 10 million yuan of salary to his employees for the months of August and September.

On Sept. 25, three more entrepreneurs — the owners of copper, steel, and shoe manufacturing firms – disappeared. On Sept. 27, the owner of another Wenzhou shoe company killed himself by jumping from his 22-story apartment.

The meltdown is not limited to Wenzhou. Malcolm Moore of Reuters relates the fascinating tale of Shiji, a small crab-fishing village which suddenly saw itself transformed, overnight, into a speculative boom town: “It all began when a man named Shi Guobao returned to Shiji after working in Beijing,” said Zhu Yi, the head official in the village.

“He became a property developer, but he wanted to make a bigger fortune so, he decided to also become a loan shark.” Together with 17 of his friends, Shi began tapping the villagers for their savings, promising to pay them 10% interest each month.

The gang quickly raised 350 million yuan, (£35.5 million) which they then lent out at rates of 30% or more each month to borrowers including local property developers. Shi became known as “King Claw”, the man at the head of the pyramid.

For a while, the scheme worked well. Other property developers borrowed from Shi in order to begin construction and the local government, which earned income from every acre

analysis

sold to the developers, also prospered.

During the boom, the villagers reported fireworks being lit in celebration almost every night. And for good reason: “We have become a BMW town!” wrote one shocked villager on a local internet forum. “In our county, there are now 800 BMWs and 600 Mercedes, 500 Audis, 50 Porsches, 30 Jaguars, one Ferrari, one Lamborghini and one Maserati,” he added.

A forest of cranes had also sprung up around the village, constructing large apartment blocks which advertised themselves with pictures of English butlers and sumptuous, chandelier–lit dining rooms.

Then suddenly, in early September, the whole thing came crashing to the ground.

But there was little demand in the end for the huge apartment blocks, which today stand empty and half– finished. And when the borrowers started defaulting on King Claw’s loans, the pyramid collapsed. Around 1,700 villagers have complained to the police, some having lost their entire life savings. Two villagers were killed in a mysterious car crash after trying to reclaim their money from one of the loan sharks.

The signs of a whack market What’s happening in Wenzhou and Shiji is not an isolated exception.

With CPI rising at 6.2-6.5%, and the regulated deposit rate at banks at 3.5%,

“In our county, there are now 800 BMWs and 600 Mercedes, 500 Audis, 50 Porsches, 30 Jaguars, one Ferrari, one Lamborghini and one Maserati”

China’s banks have recently seen a rush of withdrawals by savers seeking higher yields elsewhere. According to China Securities Journal, outstanding deposits at China’s “big four” banks fell by RMB 420 billion (US$ 65.7 billion) in the first 15 days of September.

Most of that money, it reports, is being channeled straight into speculative assets, either directly or via “shadow” lending arrangements. I was asked by a reporter what I thought about a Hong Kong-listed baby formula producer that was loading up on loans and relending the money to non-ferrous metals, tungsten, and highway companies. I replied: When companies neglect their core business and start speculating in “hot” sectors they know nothing about, especially with borrowed money, it’s a sure sign the market is out of whack.

Sometimes it’s because companies themselves are caught up in the “irrational exuberance” of a speculative bubble. Other times, it’s because inflation, price controls, credit controls, or other factors are distorting normal incentives. In any case, it’s a big red flag that something is seriously wrong.

I have a hard time believing, though, that the underlying credit quality of these “shadow” loans is substantially worse than the loans that the formal Chinese banking system has been making. The only differences, in my eyes, are that (a) the borrowers, being politically marginal, are more exposed to disruptions in credit availability and

therefore more likely to encounter immediate cash flow problems, and (b) the lenders, being entrepreneurs, are less likely to have the financial resources to be able to roll over bad loans indefinitely, without running out of cash themselves. They’re less liquid, but not necessarily any less solvent than the banks.

Nevertheless, it’s starting to become clear, to private investors at least, that the actual yields being generated in China are not living up to what was promised. The high-yield debt issued in Hong Kong by Chinese developers is now trading at a steep discount.

Mainland banks, despite reporting record earnings, are seeing their stocks valued in Hong Kong at price-to-book ratios that imply looming large-scale losses and recapitalization. Neither of these developments actually threatens China’s domestic financial stability, although they do close off valuable options.

What does the downward market pressure on the RMB indicate?

When it comes to both trade and investment, China is a net importer of foreign currency, which places pressure on its own currency to appreciate in order to resolve the imbalance.

China has prevented the RMB from appreciating more rapidly than it desires by fixing a price at which it buys dollars (and other foreign currency) and stockpiles them as official reserves. Because that price has always been fixed below the market equilibrium point (the RMB has been kept undervalued), whatever limited trading band was set, the RMB tended to bump up against the upper limit. In other words, the RMB was a one-way bet, always under pressure to appreciate against the dollar.

That is, when it started to bump up against the bottom of the trading band, implying that the RMB wanted to depreciate against the dollar. Why? Presumably because the capital account had flipped, and speculators were now rushing to turn their RMB into dollars in order to take their money out of China. It’s important to clarify what this does and does not mean.

It does not mean that the RMB is now suddenly going to collapse in value.

What the new downward market pressure on the RMB does indicate, however, is that China — for so long a no-brainer destination for investment — has turned into a big ques-

analysis

tion mark. And it suggests that at least some domestic Chinese investors who have been inclined to sock their money into empty villas and condos — or big stockpiles of raw materials — are now looking for a way out.

The easiest solution to all of this — and one that Chinese policymakers will be sorely tempted to try — would be simply to relax the “tightening” policy on money and lending. Let the money keep flowing and, for the moment at least, developers and speculators will have ready cash to pay their bills without selling off properties or jumping out windows. But China’s latest PMI (Purchasing Manager Index) numbers indicate why that would be a mistake. According to Reuters, “Factory inflation in China quickened markedly in September, with the sub-index for input prices climbing to a four-month high of 59.5 in September from 55.9 in August.”

Despite the risk of a slowdown, all the money that has been pumped into the Chinese economy — expanding M2 by 2/3 since the start of the global financing crisis — in order to engineer an investment boom is still putting upward pressure on prices.

Most economists saw the latest headline PMI numbers as good news, indicating that China is on the path for a “soft landing” and strong continuing growth. The HSBC index came in at 49.9 (implying a very very slight contraction) and the official figure came in at 51.2 (implying fairly resilient growth).

“This implies that although the lagged effects of credit tightening will continue to cool industrial activity in the months ahead, there is little need to worry about a sharp slowdown,” said Qu Hongbin, China economist at HSBC. To me, the PMI numbers provoke two thoughts. First, I’m told that HSBC’s survey has a higher SME weighting, while the official index has a higher SOE weighting. It’s interesting to consider whether the “gap” between them reflects what I was mentioning earlier, the fact that tightening is falling disproportionately on the private sector, while SOEs are being given a freer ride. If so, it would offer a vivid example of “guo jin min tui” (the state advances, the private sector retreats).

Second, the latest PMI figures suggest that, whatever cracks may be emerging — and I’ve pointed out several – China’s economy has not yet turned any corners or entered a “crisis” moment. The Chinese economy is still circling, sustained by a combination of formal and informal credit, and has not yet come in for a landing, hard or soft. The tensions and contradictions remain unresolved.

Bloomberg published a poll it took of global investors, gauging their attitudes towards China’s economy: Fifty-nine percent of respondents said China’s gross domestic product, which rose 9.5% last quarter, will gain less than 5% annually by 2016. Twelve percent see such a slowdown within a year, and 47% said it will occur in

“...factory inflation in China quickened markedly in September, with the subindex for input prices climbing to a four-month high of 59.5 in September from 55.9 in August.”

two to five years. Investors labeled the Chinese economy as “deteriorating” rather than “improving” by a nearly three-to-one margin, 38% to 13%. A plurality of 47% called it “stable.”

The placid PMI and other economic data coming out of China clearly mask some rather serious market concerns.

The problem with models, and the reason I’m inclined to stick with my eyes and my gut, is that models work very well when prior patterns of perception and behavior remain constant, but are very poor at noticing inflection points where the way people think and act undergo a shift. In other words, they are very poor at identifying moments of crisis.

One last thought I’d like to leave.

Notice that, throughout the above discussion, I never once mentioned the impact of a renewed global downturn on the Chinese economy. That seems to be the focus of much media discussion these days, but from my perspective, it is only a complicating factor. China’s economy is still based on an export-led growth model, and therefore ultimately derives much of its growth from external demand. But China’s accumulation and sterilization of foreign currency reserves, over the past decade, meant that when that external demand evaporated in late 2008, it could inject previous export earnings into its economy in order to finance a purely domestic investment boom. When it did so, China — for a time at least — was able to de-couple its fate from the rest of the global economy, tracing a story arc involving high levels of growth, bad debt, and inflation that has followed its own separate logic to their resolution — not unlike how Japan’s response to the Plaza Accord propelled it along a similar “bubble” trajectory in the 1980s. External factors, like a fall-off in exports, the fate of the dollar, or the volatile attitudes of foreign investors, may either intensify the forces at work or mitigate them, may accelerate or delay the moment of truth, but the primary forces at work and the primary choices to be made rest with the Chinese and the structure of their own economy, not with factors that have been imposed on China from outside.

Patrick Chovanec is a professor at Tsinghua University’s School of Economics and Management in Beijing, China.

Legal briefing

Bribers beware: British Bobby’s could nick you in Asia Turning a blind eye to the odd bribe in Asia has been a well established way to smooth business over in some of the more developing parts of the region, but the new UK Bribery act threatens this. Here is what you need to know to protect yourself from doing porridge.

W

ho should be worried?

You don’t even have to be British to come under its purvue - anyone with a “close connection” to the UK is prohibited from bribing.

According to Richard Tollan, Partner at Mayer Brown JSM, this also included holders of British National (Overseas) Passports. “The historical ties between the UK and many Asian countries (especially Hong Kong) mean that many entities and individuals are potentially subject to the Act.” As well, a company, even one incorporated in Hong Kong, conducting business in the UK is liable if any of its associates engage in bribery to obtain or retain business. “The corrupt conduct can take place wholly outside the UK by an employee or agent with absolutely no connections to the UK. Alarmingly, an organisation is exposed to criminal liability on a strict liability basis,” added Tollan. Amy Sommers and Robert Hadley, partners of K&L Gates LLP, said the key provision of the Act - the new corporate-only offence of “failure to prevent bribery” - will apply to any commercial organisation, not only those established in the UK, but also to any other corporate body incorporated outside the UK that carries on a business or part of a business in the UK. Moreover, according to Sommers and Hadley, the UK’s Serious Fraud Office calls for UK businesses to report corrupt activity that causes them to lose a tender anywhere in the world, with a view to the SFO’s pursuing the unethical competitor in England if it has a UK business presence.

Isn’t this just a British version of the US Foreign Corrupt Practices Act? Not really, it’s actually much stricter, acknowledges Ms Sommers and Mr Hadley. “Those whose compliance programme has been designed to meet the US Foreign Corrupt Practices Act will be well-advised to review it in the light of the Bribery Act. The UK law is significantly broader than the FCPA; consistent with PRC law for example, ‘commercial bribery’ is an offense, whereas the FCPA is limited to corruption of non-US public officials.”

Simon Clarke and Sharon Nye, litigation partners from Allen and Overy points out that if convicted, companies can face an unlimited fine. “Executives who participate in or have knowledge of bribery may be personally liable, and can face up to 10 years in prison for each offence.”

Are there any defences to this strict liability offence?

Surely no company can guarantee zero bribery?

Well, yes, but only if you can prove your company has done all it can in terms of compliance, so expect to go through a course on how not to bribe at your company

42 HONG KONG BUSINESS | OCTOBER 2011

shortly.

According to Tollan, “It is a defence if the organisation can prove that it has established ‘adequate procedures’ to prevent the occurrence of bribery.” This explains why many companies have recently gone through a compliance frenzy to establish or enhance their antibribery policies. And according to Ms Sommers and Mr Hadley, claiming ignorance is not a defence. “The company commits the offence, even if no-one at the company authorised or even knew what was going on,” she said.

“...but disguised attempts to win or influence the award of business are not allowed” So what are “adequate procedures”?

Mr Tollan suggests that “your interface with the government; not just in the bureaucratic sense but also your dealings with State-owned enterprises which control most key industries and are prevalent throughout Asia,” needs to be looked at. In addition, companies need to know what their third party agents are doing. In other words, it’s not enough to turn that blind eye if you let another company deal with the bribes.

For example, said Ms Sommers and Mr Hadley, a Hong Kong company with a UK business and operations in mainland China might have its training cover UK, Hong Kong and PRC anti-bribery compliance. “A China-headquartered construction company with a US listing and a UK business unit that is doing World Bank-financed infrastructure projects in Bangladesh might want to consider training around UK, US, PRC, Bangladesh anti-bribery laws, as well as World Bank anticorruption guidelines,” she added.

What about my expense account?

Yes, that too could come in for stricter review if it could be deemed that the entertainment was excessive. According to Tollan, “The bottom line is that genuine, reasonable expenditure for business and client relationships development are permitted, but disguised attempts to win or influence the award of business are not.” Allen and Overy’s Clarke and Nye say that companies even need an official policy on entertainment and gifting.

Companies need to “set out clear guidance on what action should be taken if one of your employees is faced with a corrupt situation, and on giving and receiving gifts and conducting corporate hospitality. “ So it may not be such a merry Christmas in Hong Kong then.

analysis

Hong Kong Property: Brace for higher interest rates Zarathustra explains what to expect from Hong Kong property investments now that its neighboring Asian country affects its monetary condition.

I

have explained early this year that interest rates in Hong Kong is not only a function of Fed Funds rate, but also many other factors. More importantly, the money flow into or out of the banking system. Thus I strongly suggested that it is wrong to assume that interest rates can stay low in Hong Kong as long as the Fed is still easing. And as the monetary tightening in China started to show its impact to the Hong Kong monetary condition, I became bearish on the Hong Kong property market, and warned the macro risks which may trigger outflow of capital, and thus the tightening of monetary condition in Hong Kong.

When I started discussing the prospect of rising interest rates in Hong Kong without the Federal Reserve tightening, it was absolutely not a popular thing to say as most people were so bullish, believing that there is no reason why interest rates will go up, and rents are rising, real interest rates are negative, etc. The reality is, mortgage rates have risen by more than 225 basis points from the lowest point of less than 1% to around 3.25% now. That’s a very remarkable tightening, considering that most major central banks raise interest rates with 25-basis-point step, and they meet once a month, which means it will take 9 months for any central bank to tighten that much. Now the banking system in Hong Kong has tightened that much in roughly 6 months all by itself, and more is still likely to come.

“...the reality is, mortgage rates have risen by more than 225 basis points from the lowest point of less than 1% to around 3.25% now.”

Such a tightening of monetary condition has actually caught me by surprise even though I have forecasted rates to go higher without the Fed tightening (and the worst possible scenario in my head has not happened yet), so it would have been a very big surprise for majority of people who thought that this was impossible. Some people, like Andrew Look, have started talking my M1 money supply hypothesis, which I have put forward long time ago.

So some have belatedly understood (I hope) that mortgage rates are not a mere function of the Federal funds rate, or the strength of US dollar, etc.

With tighter monetary condition thanks to tightening in China and the on-going market jitters 44 HONG KONG BUSINESS | OCTOBER 2011

in the developed markets (which may lead to money being pulled out of emerging markets, as the latest South Korean authorities’ action demonstrated), I am here expecting interest rates to go even higher.

Depending on the property classes, residential property market yields are now roughly 2.5% – 3.8%, according to the latest figure from the government.

Net of expenses and mortgages, investors who are looking to buy and let out a piece of residential properties, I suspect, will be disappointed by the return here. In short, property investment has already become unattractive to say the least.

With slowing economy, I expect rental growth would slow, and could turn south in the last quarter or early next year. Together with tighter monetary condition, I also expect inflation to come down towards the last quarter or early next year. Taken all these into account, my central guess would be that real interest rate could turn slightly positive in the first half of the year. If my central guess is right, all the reasons that the property bulls rely on to make their case will be gone by mid-2012.

Yet, as I pointed out quite a while ago, the physical property market turns before real interest rates turn positive and rents drop. By the time you recognise these factors are working against the bullish case, the property market would have fallen.

The Island of the Calm Our contributor visits Palma Mallorca and discovers why it’s a hit destination with royalty, celebrities (and writers)

“T

here are few places on this earth where one could find such complete repose, when tired out by this busy world,” wrote painter-writer Santiago Rusinol, referring to Palma Mallorca (also known as Majorca) in his book “The Island of the Calm”.

100 years later, his words still ring true. My visit to Majorca left me yearning for more. Idyllic and peaceful, it was an escape far from the Blackberry-wielding crowd.

Measuring 80 kilometres from one end to the other, it is outstanding for its diversity. With 550 kilometres of coast, here you will find some of the Mediterranean’s most beautiful coves, beaches and scenery.

The island’s beauty is often overshadowed by its famed reputation for package holidays. What most don’t know that is that Majorca is also the chosen holiday playground of the rich and famous –from the King & 46 HONG KONG BUSINESS | OCTOBER 2011

Queen of Jordan to the late Princess Diana to Kate Moss and Jamie Oliver.

Founded as a Roman camp upon the remains of a Talaiotic settlement, the turbulent history of the city saw it subject to Vandal sackings during the fall of the Roman Empire, then reconquered by the Byzantine, then colonised by the Moors (who called it Medina Mayurqa), and finally established by James I of Aragon.

With an average annual temperature of 17.9° C, and 300 days of sunshine a year, it is no wonder millions flock to Majorca each year. In June 2011, in a bid to woo the tourism dollar, the Spanish Tourism Board and Singapore Airlines (SIA) signed a Memorandum of Understanding (MOU) to commit funds through the year to support advertising and promotional campaigns, as well as familiarisation programmes for trade and media to promote tourist traffic to Spain, by way of SIA’s flights between

“Idyllic and peaceful, it was an escape far from the Blackberry-wielding crowd.”

Singapore and Barcelona.

SIA currently flies to Barcelona from Singapore seven times a week.

With the MOU, SIA customers can connect to the Spanish cities of Bilbao, Madrid and Majorca on codeshare partner Spanair.

Famous attractions Even with Majorca’s teeming city streets, and its commitment to commerce, its old-world charm and history still remains. Highlights of Majorca include Bellver castle, which has been standing for more than 700 years. Bellver – ancient Catalan for ‘lonely view’ was built in the 14th century for King James II of Majorca, and is one of the few circular castles in Europe. Used as a prison throughout the 18th to mid-20th century, it is now one of the main tourist attractions of the island, as well as the seat for the city’s History Museum.

Another tourist attraction is La Almudaina Royal Palace. Almudaina (meaning fortress in Arabic), was plundered and burnt, reconstructed, and then changed again. King James II began its transformation to the Levantine Gothic style and the palace became the headquarters for the

life & style Kingdom of Mallorca. Aspects of the palace include the King’s Palace, the Queen’s Palace, the Throne Room, the Royal Chapel and the courtyards.

“To Whom Else, Deia” For the most scenic views of Majorca, head to the northwest village of Deia, a 40 minute drive from the airport.

Nestled in the mountain range of Sierra de Tramuntana, and the Mediterranean Sea, it boasts peaks as high as 1,500m above sea level.

Deia is most famous for housing English poet Robert Graves for a blissful 45 years. The small coastal village was the setting for some of his important prosaic works such as “I, Claudius”. He also dedicated a book to the area, titled, “To Whom Else, Deia”.

It was here that Robert Graves entertained Hollywood starlet Ava Gardner who wrote, that living in the mountains of Deia, caused her “such unbelievable pleasure and satisfaction that nothing in [her] life could be compared to it”.

The crowning jewel of Deia was the hotel we were fortunate enough to stay at – La Residencia.

Consistently voted as one of the best hotels in Europe, it was nestled on a winding road between the mountain and the sea, dotted with cosy villages and olive groves. La Residencia was converted from manor houses, and the buildings retain as much of the original features as possible, seamlessly blending Majorcan architecture, with beautiful fittings and finishings.

Star-gazing Formerly owned by Sir Richard Branson, and now owned by OrientExpress Hotels, La Residencia has become a discrete escape for Hollywood stars and royalty such as the Duchess of Kent, the King and Queen of Norway, Hollywood stars like Gwyneth Paltrow, Pierce Brosnan, CatherineZeta Jones, and musicians such as Rod Steward and Bruce Springsteen.

Each of its 67 bedrooms has its distinctive Majorcan touch, and features paintings of local artists.

The luxury suite, which we stayed in was far from the ordinary. With a bedroom, a living room, a kitchen, our very own pool, a dining room, a bathroom for two, a patio, two TV sets (no fights for the remote control here!), and our chambermaid who loved leaving presents behind, our suite was a dream come true. Defi-

From left to right: View of the Mediterranean sea from Deia; El Olivo; Almudaina Royal Palace nitely a highlight for anyone who needed inspiration was the study desk overlooking the magnificent view, with white clouds gently grazing the mountain tops.

Scooters, donkeys & rubber duckies La Residencia offers everything you can imagine from a hotel – from its own professional beauty therapists, to resident sculptors, and Vespa scooters. Nature enthusiasts will love that La Residencia has its own donkey refuge for donkeys to accompany guests on a nature trail. Each corner of the property was immaculate, and the staff made extraordinary effort to remember details about each resident.

There were also heartfelt personal touches like fresh fruits and flowers replenished daily, hand-written notes to tell us when the maid will arrive for

“Each corner of the property was immaculate, and the staff made extraordinary effort to remember details about each resident.”

the day, and by the giant bathtub… the quintessential rubber ducky. And just like every bathtub needs a duck, every award-winning hotel needs a top restaurant. El Olivo, voted one of the best restaurants in Spain in 2010, and also a recommended restaurant in Michelin Guide Spain, is another feather in La Residencia’s hat, and cements the hotel experience as being simply unforgettable.

Someone once said, “No one needs a vacation so much as the person who just had one.”

With my memories of Majorca – sun filtering through the heavens, cloud-tipped mountains, beautiful weather, the blue horizon, and the friendly locals … I couldn’t agree more.

Contributed by Liyana Othman E-mail: liy_othman@hotmail.com HONG KONG BUSINESS | OCTOBER 2011 47

LIFE & STYLE

The Prime of Your Life

Concierge expert Quintessentially recommends five of the best places to enjoy beef, however you like it, in Hong Kong. From thick-cut juicy steaks, melt-in-the-mouth slow cooked ribs to snowflaked grade A5 Wagyu, unleash your inner carnivore with these suggestions.

THE STEAK HOUSE winebar + grill

www.hongkong-ic.intercontinental.com This is perhaps the most decadent steakhouse in town. Diners can choose their own type of salt from eight exotic blends in addition to 12 mustards and ten types of knives to cut into some of the most tender steaks imaginable. They also home-smoke and dry-age select cuts of beef, including a 35-day Canadian Angus Prime Rib Steak.

A sublime dining experience where no expense is spared.

Shore

www.shore.com.hk Where the land meets the sea is Shore, which serves prime steaks alongside fresh seafood.

Seasonal ingredients are simply prepared to bring out the best flavours, and steaks are cut and dryaged in-house under the careful eye of Chef Jason Black – check out the Meat Bible for a comprehensive overview of cuts available. We recommend enjoying a Shore cocktail on the terrace before heading upstairs for your dinner.

Bistecca Italian Steakhouse

www.diningconcepts.com.hk/bistecca/index.php Bistecca specialises in juicy, tender and tasty steaks from Canada, the US and Australia. The signature Fiorentina 32oz is a giant porterhouse meant for sharing. The meat is sourced from Oakleigh Ranch in eastern Australia and, like of all the steaks, is cooked simply with sea salt and peppercorns, charcoal grilled and drizzled with olive oil and lemon to bring out its natural flavour. The menu is deceptively simple – soups, salads, pasta and delicious sides – and the décor is modern Italian butcher with exposed brick and fridges that show off the goods.

Kyoto Joe

Grand Hyatt Steakhouse

www.hongkong.grand.hyatt.com The Grand Hyatt’s steakhouse is a wonderful new addition to the hotel. An oyster and seafood bar, salad bar, wine room and cigar tasting lounge make this a one-stop destination for those who appreciate the finer things in life. Get your gnashers into Canadian Heritage Angus Beef from Alberta, USDA Prime Nebraska Beef and Japanese Kumamoto Wagyu.

48 HONG KONG BUSINESS | OCTOBER APRIL 2011 2011

www.lkfe.com At Kyoto Joe, one of the best meat dishes and the star of the show is the Karubi – 6-hour, slow cooked beef rib – which is melt-in-the-mouth delicious. The accompanying terkiyaki sauce is simmered for two hours making it a thick, rich and unctuous complement to the savoury beef. Served on hot stones and creamy mashed potato, this is one of Kyoto Joe’s signature dishes.

Recommended by QUINTESSENTIALLY, the world’s leading luxury lifestyle group with a 24-hour global concierge service. Contact hongkongbusiness@ quintessentially.com.

Last word EMMA sherrard matthew

Shopping Spree Luxury European brands are building up in Asia’s sleeping giant.

C

hina will be the world’s largest luxury market by 2015, and it seems like many European luxury brands will soon need to learn Chinese.

French shoe brands step in China Earlier this year, Li & Fung Trinity’s Fung Capital division announced they had acquired French shoemaker Robert Clergerie. Trinity already owns a stable of stellar European men’s wear brands including the quintessentially British Kent & Curwen and the haute Parisian tailor Cerruti.

We may be used to seeing Asian consumers investing heavily in luxury goods but this is a shopping spree of a much bigger magnitude, and the traffic runs in both directions. And as the Chinese line up to buy Western brands, Western investors are battling to buy stakes in the Chinese companies who sell the brands’ merchandise.

“Chinese millionaires want a big slice of the retail action that’s taking place on their soil,” says Daniel Jeffreys, editor-in-chief of Quintessentially Asia magazine.

One of the biggest moves took place a year ago when New York-based Morgan Stanley Private Equity purchased a USD 42 million stake in Sparkle Roll, the Hong Kong-listed distributor of luxury goods in China.

The company’s Beijing auto-

“Chinese millionaires want a big slice of the retail action that’s taking place on their soil” dealership last year sold 476 RollsRoyces and Bentleys.

The Morgan Stanley fund’s interest in Sparkle Roll was undoubtedly driven by the Chinese company’s integrated approach to the millionaire marketplace.

Sparkle Roll has acquired the 50 HONG KONG BUSINESS | OCTOBER 2011

exclusive rights to four European watch brands operating in China and they are looking to buy into top-class jewellery brands. The company’s chairman, Ivan Tong, says he wants to pool his brands in shopping malls like the Sparkle Roll Luxury World that opened in February in Beijing.

Famous LV brand also in China Brand-pooling is precisely the strategy that luxury retail genius Bernard Arnault, the Chief Executive of Louis Vuitton, has used to build the profile of his brands in China, grouping labels like Louis Vuitton, Dior and Celine within a few steps of each other.

“Chinese entrepreneurs have seen how much money Europeans have made from China and how they have done it,” says Jeffreys. “Arnault’s personal fortune rose by USD 13.5 billion last year, largely because of sales in Asia. If, for now, the Chinese will only buy luxury goods made in the West, that means Chinese billionaires will have to buy the European luxury brands to get their piece of the pie.”

Uprising luxury brands Which can only mean one thing: there will continue to be an unprecedented number of bids for European luxury brands

by Chinese entrepreneurs, and European luxury conglomerates will become even more aggressive in buying up the distributors who sell their brands in China. The price of owning a stake in China’s luxury bonanza can only rise higher.

Emma Sherrard Matthew is the CEO of Quintessentially, the world’s leading luxury lifestyle group with a global concierge service. For more information visit www. quintessentially.com, call +852 2540 8595 or email hongkongbusiness@ quintessentially.com.

The Nature of Sleep “The thermostatic properties of camel wool in Dormirest beds keep the body cool and comfortable�

1016 Horizon Plaza, 2 Lee Wing Street, Ap Lei Chau, Aberdeen, Hong Kong Tel + 852 3741 1828 Fax +852 3741 1829 www.dormirest.com