Hong Kong Business (Oct-Nov 2014)

Issue No. 26

Display to 30 November 2014

Hong Kong’s Best Selling Business Magazine

PROPERTY ISSUE How low can property prices go?

+buy west Kowloon tenants

Dimsum bonds soar as HKD bonds slump

HK pawn stars losing

war to payday lenders

Banks playing a

dangerous credit game

The 10 costliest

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

HONG KONG

BUSINESS

FROM THE EDITOR

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

The self-storage industry in Hong Kong is becoming more popular with shrinking apartment sizes and SMEs wanting to achieve operational efficiency.

However, analysts’ data show that the available self-storage space from current operators meets only half of the market size.

Publisher & EDITOR-IN-CHIEF Associate Publisher

Tim Charlton Louis Shek

production editor

Roxanne Primo Uy

graphic artist

Tamara Pangilinan

Editorial Assistant

Queenie Chan

Editorial Assistant

Alex Wong

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Louis Shek +852 60999768 louis@hongkongbusiness.hk Laarni Salazar-Navida lanie@charltonmediamail.com

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This is why they believe the industry is far from being saturated and is poised to grow by leaps and bounds over the next decade. Around 300 self-store locations are currently scattered throughout the territory with an average site size of 10,000 sq ft divided into 14-90 sq ft units. In this issue, we bring you a report on how this industry started in Hong Kong and how self-storage operators are faring today. Meanwhile, our channel checks revealed that Hong Kong solidified its dominance as the preferred IPO market in Asia Pacific, capturing the lion’s share of what has been a bumper year for the region, while its rival Singapore languished with multiple delistings and a crisis of investor confidence.

HKB also went all the way down to Brisbane, Australia, the host city of this year’s G20 Leaders Summit, to find out what opportunities the city offers the Asian investor.

We also bring you regional reports on Asian inflation, global trade, and Hong Kong’s capital flows plus other stories about Hong Kong’s retail, banking, gaming, and property industries.

We have a lot in store for you so start flipping the pages.

Enjoy!

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

Interest rate strategy

CNH: Will Qianhai jeopardize Hong Kong’s position?

DBS Group Research

6 Sep 2013

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

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

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

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

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

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

Manufacturing 25%

Service (rhs)

85%

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

5% 0%

65% 1980

1984

1988

1992

1996

2000

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

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

CONTENTS

Hong Kong pawn stars losing 16 analysis war to payday lenders

22

COVER STORY Declining property prices to persist as cooling measures kick in

ANALYSIS

FIRST 06 How could the labour force be

a drag post-2018?

07 Kowloon tenants buy west 08 How HK escaped the middle

income trap train’ goes full blast

12 Find out more about Hong Kong’s

costliest serviced apartments

credit game

32 Asian economies struggle with severe ageing pressures

REGULAR

10 Shanghai-Hong Kong ‘through

OPINION

18 HK banks play a dangerous

36 analysis Find out what a globalising China could mean for ASEAN

44 Ian Perkin: Are there political and economic constraints to growth?

46 Tim Hamlett: Number games 48 Hemlock: Property bizarreness gets weirder

14 Financial Insight 28 Legal Briefing 30 CMO Briefing

Published Bi-monthly on the Second week of the Month by Charlton Media Group Pte Ltd, 19/F, Yat Chau Building, 2 262 HONG KONG BUSINESS | NOVEMBER Des Voeux Road Central, Hong2014 Kong

For the latest business news from Hong Kong visit the website

www.hongkongbusiness.hk

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

HR & EDUCATION

96% of HK’s C-Suite fear impact of cyber-attack on businesses According to PwC, with each case of hacking, the complexity of cyberattacks and the extent to which they expose businesses is becoming more apparent.

During a series of seminars looking at the business impact of cyber-attacks, PwC surveyed participants and discovered that 96% are concerned about the impact of cyber-attacks, and 72% have this threat on their risk register.

ECONOMY

Wages in Hong Kong soaring beyond historic levels Hong Kong has been given a score of 10.0 – the highest possible – for overall wage pressure in the 2014 Hays Global Skills Index, showing that wages are increasing above historic levels.

The Hays Global Skills Index, produced in collaboration with Oxford Economics, ranks Hong Kong 5th on the list of 31 countries overall for efficiency of the skilled labour market.

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most read commentary Why are businesses not being business savvy in volunteering?

BY ALIX FARQUHAR Whilst every volunteering activity is a step in the right direction, whether in Hong Kong or in other parts of the world, these sorts of activities aren’t nearly as impactful as ones which use an employee’s skill-set.

Skills-based volunteers provide six times the value to the community per hour and deliver five times the social impact to the community than a company which provides general non-skilled volunteering activities, according to Taproot Foundation.

RETAIL

Golden Week holiday to be marred by 30% drop in visitor bookings Early indicator signals weak Chinese visitor flow to HK during the upcoming Golden Week, and Hong Kong retailers have a cautious outlook for the holiday season sales.

Analysts from Maybank Kim Eng are also concerned about the impact from potential political tension.

The report also noted that more mainland visitors are travelling overseas and South Korea is their top destination.

Tackling food waste should be a food packaging priority

BY TIM OOI Food waste has a significant economic, environmental, and social cost. In 2011, over 3,600 tonnes of food waste was produced in Hong Kong each day – two-thirds came from households and one-third came from food-related commercial and industrial sources.

Reducing food waste is critical to the environment of HK and the wellbeing of its citizens. Food packaging is a simple yet effective solution to reduce the amount of food waste.

CM

Is your organisation ready for the future?

BY STEPHEN SMITH In nature, those species that are best prepared for change tend to survive and the same is true in the world of business; over the last twenty years seemingly unassailable organisations have become shadows of their former selves because they were unready or unable to adapt.

One way in which organisations can prepare for change is by increasing the strength of their future leadership team, but in Hong Kong and China only 15% of organisations have an ample leadership pipeline.

MY

CY

CMY

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FIRST Kong’s labour force begins to shrink within the next four years. There are currently 3.9 million people working in Hong Kong and that number is set to peak in 2018. Thereafter it will decline every year until the 2030’s.

The corollary is that this year there were around 1 million Hong Kongers aged over 65 and that number is expected to swell by half a million over the next 5 years. Perhaps some can be persuaded to stay working, but that still doesn’t solve the problem of a declining workforce.

secret debts

Moneytalk is a taboo among most Hong Kongers, and even lovers would rather not let their partners know how much goes in and out of their wallets.

According to a survey by TransUnion, Hong Kong’s credit reference agency, most of the happy couples planning to commit to marriage admit that they have little or no idea of their partner’s debt situation.

Over half (58%) of Hong Kongers surveyed said they had little to no knowledge of their partner’s finances and did not trust their significant other with details of their own finances.

In an online survey of 500 adults conducted by Zogby Analytics and commissioned by TransUnion, only 32% of Hong Kong natives said they trust their significant others enough to discuss their credit situation. According to TransUnion, this is despite the fact that three out of four (73%) Hong Kongers have developed a financial plan with an intimate partner.

Financial independence While 19% of respondents believed that personal finances should only be discussed after they are married, 22% said they wanted to remain financially independent even after the big day.

TransUnion Hong Kong managing director Angus Choi says, “Couples should openly discuss their finances and debts in order to mitigate any financial risks post-marriage.”

He notes that understanding your partner’s credit history can help you avoid future surprises and plan better for a secure future. “Work together to ensure that your bills are paid on time.

This will help you reduce interest payment and avoid overstretching yourselves. ”

6 HONG KONG BUSINESS | NOVEMBER 2014

Limited pressure on HSBC’s CIB revenue

Talent dearth hits Hong Kong

How the labour force will be a drag post-2018

I

t’s hard to pass a shop window in Hong Kong without seeing a for hire sign hanging in the door. Vinay Kapoor, owner of The Cottage Gastropub in Sheung Wan said it’s been difficult to find staff for at least the past 6 months. “When we had a sign up a year ago we had enough walk-ins, but this has been up for 3 weeks and we have had only two walk-ins and no hires,” said Mr Kapoor.

“It is much harder than it was 12 months ago. We tried online websites, and even a letter to the government labour department outlining the jobs open but so far nothing,” he added. Anecdotally many workers in the F&B industry who are fit are moving to construction which pays HK$1,000 a day and with overtime they can earn even more, said Mr Kapoor. “Now you can’t interview potential staff, they interview you and tell you what salary they will take, what days off they will take, and any other conditions they need and you have to take it or you won’t get them,” he noted.

Shrinking labour force to persist Unfortunately for Mr Kapoor and other business owners like him, the labour market tightness is only forecast to get worse as Hong

When we had a sign up a year ago we had enough walk-ins, but this has been up for 3 weeks and we have had only two walk-ins and no hires.

Vinay Kapoor

Falling labour supply David Mann, regional research analyst at Standard Chartered, warns that demographics is set to reverse from being a positive growth driver to a drag over the next decade. “Many face the challenge of compensating for falling labour supply in the coming years. Singapore, Hong Kong, South Korea, Thailand and China face the greatest challenges,” he adds.

These numbers are unlikely to change until at least 2030, even if major reforms are implemented today.

“Demographics start to become less positive from the mid-2010s, before turning into a drag on growth. The negative impact increases in the 2020s,” says Mann.

Ryan Lam, senior economist at Hang Seng Bank, notes that labour contribution will be increasingly constrained by demographics and the limited upside room for an increase in the labour force participation rate. “Because of the gradual nature of human capital accumulation, improvement in the ability of the workforce is not likely to fill the void that is being created by a shrinking working-age population,” he adds.

Ppt contributions to GDP growth

Source: Penn World Tables, Standard Chartered Research

FIRST Grade A office rents in Kowloon East have increased an average of 128% over the past five years.

Kowloon offices selling like hotcakes

Kowloon tenants buy west

B

usinesses are fast running out of reasons to rent in Kowloon: Leases are skyrocketing, strata prices remain affordable, and property investments in the city should yield handsome long-term returns, argue analysts. These factors helped drive up Kowloon East office sales by 37% in the fourth quarter of 2013 and 22% in the first quarter of 2014, some of the highest increases seen across Hong Kong.

Rental appeal has waned in the face of fast-climbing rates. Grade A office rents in Kowloon East have increased an average of 128% over the past five years, says John Siu, managing

director at Cushman & Wakefield in Hong Kong. “The strategy suits some local businesses who can afford to purchase their offices in that it allows them to effectively manage their office cost over the long-term,” he says.

Owner-occupiers seeking the most bang for their buck find it hard to ignore Kowloon offices. New offices in Kowloon East are currently about half the prices for Grade A strata buildings in Central. and around HK$5,000 to $7,000 less than prices for good quality buildings in Wan Chai and Causeway Bay. Supply has also been abundant, which has create more buying op-

portunities, says Denis Ma, head of research at Jones Lang LaSalle.

Once purchased, Kowloon offices not only bring significant cost savings, but also high investment returns over time, he adds.

Hong Kong’s CBD 2 Kowloon East is shaping up to become Hong Kong’s second central business district. Ma expects Kowloon East to become the largest Grade A office market in the territory within the next decade.

Businesses that own Kowloon offices can look forward to strong capital appreciation. “Although capital values in Kowloon East more or less doubled over the last 5 years, they are currently still less than a third of those in Central,” says Ma. With three Billion projects rising in Kwun Tong, Siu expects most opportunities in 2015 to be more suited for local small- to medium-sized businesses.

On its way to becoming the largest office market by 2021 Kowloon east grade A office stock

Source: JLL

The Chartist: hong kong labour market Job cuts in Hong Kong’s financial sector continue to drag employment growth, pulling it very sharply to near 0%. According to a report by UBS, the labour market has been weakening despite the steady unemployment rate at around 3%.

Changes in the labour market provide important clues about income growth and inflation in Hong Kong.

UBS forecasts that the domestic sectors, in particular construction (thanks to the strong pipeline of projects) and hospitality services, will still be creating jobs. But in part reflecting tightening liquidity, job growth in the higher paid service sector will remain subdued.

Labour force growth

Employment growth

Source: CEIC, UBS

Source: CEIC, UBS

HONG KONG BUSINESS | NOVEMBER 2014 7

FIRST

How HK escaped the middle income trap

STARTUP WATCH

Connected social agents

S

tellar economic growth might lead a country to think that it is already taking off, until suddenly it slams into what economists call the middle-income trap. Defined as having a GDP per capita in the range of $2,000-3,000 to $12,000-15,000, middle-income countries often find themselves stagnating instead of rising to become advanced economies.

Lucky for Hong Kong, it only took less than 30 years to escape the middle-income trap.

Alaistair Chan, an economist at Moody’s, says there is still a debate on how an economy is able to graduate to a high-income level. “For Hong Kong it seems to be a combination of good institutions, consistent rule of law, and investment in ports and other infrastructure and investments in education. This has allowed productivity to grow rapidly and allowed Hong Kong to reach high income status,” he says.

Hong Kong escaped the trap in less than 30 years but those in Latin America, South Africa and Middle East remain stuck in a rut for half a century. Jan Bellens, global emerging markets leader at EY, believes countries unable to move forward

What’s it like trapped in the middle?

from basic manufacturing activities are the ones most vulnerable to the middle-income trap. “Hong Kong has been able to avoid the middle income trap by diversifying from low valueadded activities to a sophisticated financial hub and higher value-added service activities serving the broader region,” he says, adding that this was bolstered by openness to foreign investment and talent.

A special report by Japanese financial holding company Nomura, on the other hand, points to productivity as the most important variable. “Rising productivity is the essential ingredient to remain competitive as wages rise,” it says.

Hong Kong has been able to avoid the middle income trap by diversifying from low value-added activities to a sophisticated financial hub.

Survey

4 out of 5 Hong Kong professionals work overtime An overwhelming majority of professionals in the financial services, technology and retail sectors are clocking in longer hours at the office – above and beyond those that they are contracted to do, as revealed by the Morgan McKinley Working Hours Survey 2014.

According to the survey, 4 out of 5 professionals in Hong Kong are working longer hours than stipulated in their contracts, their work hours on par with professionals in Japan (84%) but more than those of Singapore (82%) and China (65%).

The research also revealed that Hong Kong’s professionals feel the most obligated to put in the extra hours when compared with their counterparts in Asia. Additionally, almost 3 out of 5 professionals say they feel obligated, or very obligated, to work these extra hours and forego dinner time at home or a coffee date with a friend. On the other hand, those 8 HONG KONG BUSINESS | NOVEMBER 2014

who leave the office early also admit to working on their mobile phones while heading home, and facing their office tasks even when their beds are already calling them to rest.

Despite the onus and obligation to work longer hours, only 2 in 5 professionals say they are more productive during this time. The survey adds that working beyond the time required is already a lifestyle for most Hong Kongers even if they acknowledge its toll on their personal lives.

To help companies connect with their independent sales agents and gain more sales and leads, Michael Michelini, an American engaged in e-commerce business, gathered two Chinese web programmers returning from Canada to form SocialAgent in 2012.

Clients use the website to list their sales opportunities and hthe amount of commissions and bonuses that they pay their sales representatives. Agents, meanwhile, use the SocialAgent mobile app to view opportunities, manage their contacts, and send leads or customers to the client for their bonus or commission.

SocialAgent started in a Lean Startup Machine in Shanghai which then attracted the attention of Chinaccelerator incubator where they received seed funding and a 3 -month hand-on program.

Stackable storage

When storing photos and videos, phone memory can be very limited while cloud storage can’t just do enough.

This was a problem faced by 36 year-old Ashok Jaiswal, who founded a multimedia tech firm Ezee Systems last year. Its flagship product EzeeCube was aimed at solving his family’s personal problem of managing photos and videos of his baby. During the first 6 months, the whole family took so many photos but they wanted a better storage option than the cloud or personal computers.

EzeeCube automatically consolidates content from all the devices in household and automatically organizes them, deleting duplicate photos.

It raised USD100K from its Indiegogo campaign last July and USD30K seed funding from Big Bloom.

YOUR SOLUTION OF IDENTITY THEFT PREVENTION Your credit report is one of your best resources in managing your finances and financial health.

Through your credit report, you can keep trace on any unaware change on your personal financial record like opening of unknown account or unauthorized enquiry, which might be signs of potential fraud.

Check your credit report regularly and protect yourself against identity theft today!

Suit 1006, Tower 6, The Gateway, 9 Canton Road, Taim Sha Tsui, Hong Kong (852) 2577 1816

www.transunion.hk

TransUnion HK 環聯資訊

FIRST

What can we expect from the Shanghai-Hong Kong ‘through train’?

A

new scheme connecting the Shanghai and Hong Kong stock markets, which is seen to drastically reshape investment flows, allows locals to invest directly in foreign equities and at the same time provide foreign investors direct access to the stock market. By opening up its financial markets, China will increasingly become a stronger global investor base, backed up by a series of economic reforms that the government is committed to implementing. Under the Hong KongShanghai Connect, known as the “through train,” investors in Hong Kong and Mainland China are able to trade in each other’s market.

Hong Kong was listed as the second largest stock market in Asia during the first half of the year. Within that period, a total of 51 IPOs were listed in Hong Kong, raising a total of US$10.4 billion, says Kathleen Poon of the British Consulate-General in its September Hong Kong economic update.

“The internationalisation of the country’s capital markets will boost efficiency through competition, increase domestic financial market liquidity, attract more sophisticated investors and improve governance standards,” notes John Zhu, economist at HSBC Global Research.

Under Stock Connect, Zhu says investors

from Hong Kong can buy Mainland stocks up to a limit of RMB13 billion per day, and RMB300 billion in total. Mainland investors, on the other hand, can buy RMB10.5 billion worth of stocks per day in Hong Kong, and RMB250 billion in total. According to HSBC, once the quotas are reached, investors can only sell.

Perfect timing for reforms Policymakers are also strongly advised to take this opportunity to jump-start reforms, similar to China in 2001 when it globalised its economy by joining the World Trade Organization. “The pace of financial reforms in China has lagged relative to the demands of the rest of the economy,” says Zhu. Reforms to be seen in the coming years, with Stock Connect as catalyst, include interest rate liberalisation, specifically of deposit rates; increase in the foreign ownership cap for banks and other financial institutions; scrapping of restrictions on overseas direct investment; and renminbi (RMB) convertibility within the next three years, among others.

Along with these, the new clearinghouse will also lead to the internalisation of the RMB currency. Analysts expect the new programme to boost deposits to RMB1.3 billion by the end of 2014, opening up a new

Strengthening HK-Mainland trade

platform to deploy offshore RMB. The Shanghai-Hong Kong Stock Connect also aims to “deepen China’s integration with international markets and for the greater global role of the RMB,” according Suan Teck Kin of UOB. But is China’s economy ready for such big changes? Zhu says the country’s economy and financial system are “sufficiently robust to withstand the potential permanent increase in volatility” that occurs with an open capital account because of recent developments.

office WATCH

BEA’s new SupremeGold Experience Centre

The Bank of East Asia has collaborated with marketing consultancy firm Prophet to contemporize the SupremeGold brand, in order to better fit the needs of its premier customers.

The new SupremeGold Experience Centre, located on the 33rd floor of the Times Square Office Building, aims to bring the “Wealth Health” concept to life. A proprietary visual language based on paper cut illustration was developed to communicate the 3 key brand communication messages: Partnership, Growth and Happiness.

According to David Brabbins, associate partner at Prophet, its features include a comfortable lounge with relaxing areas for customers to enjoy at their own pace.

People can browse product information and check online activities such as stocks and shares.

10 HONG KONG BUSINESS | NOVEMBER 2014

Lobby

Lounge Area

Relationship manager rooms

Lounge Area

FIRST Hong Kong, the HarbourView Place is another development from Sun Hung Kai Properties, following its sister project, Four Seasons Place. HarbourView Place prides itself on its two Presidential Suites – The Premier Suite and the HarbourView Suite, both of which are subject to offer. The prices are not disclosed. Its 3-bedroom suites ranging from 1420-1623 sq ft are priced from HKD112K-136K.

Find out more about Hong Kong’s costliest serviced apartments

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hether you’re travelling in Hong Kong for business or purely for leisure, for a month or more, here are some of the city’s priciest and best serviced residences – so splurge and treat yourself! This list, compiled by Hong Kong Business through survey and research, consists of apartments and suites ranging from a 1,550 sq ft two-bedroom Suite to a 3,273 sq ft four-bedroom Presidential Suite, with monthly rental charges from HKD92K to more than HKD300K.

The Lily, 3,900 sq ft Penthouse, HKD300K+ Designed by Sir Norman Foster, the development’s unique and striking design adds to its prestige. Located at Repulse Bay, Hong Kong Island, the 24-storey building boasts an unparalleled 180° panoramic sea view from each unit. Its lofty 3,900 sqft penthouse features both a 52” and 40” HD LCD TV in the living room and master bedroom, respectively.

1

2 Hong Kong Parkview, 3,273 sq ft fourbedroom Presidential Suite, HKD300K Hong Kong Parkview’s Presidential Suites are available in two to four bedrooms plus study configurations, and range in size from 1,263 sq ft to a generous 3,273 sq ft. Priced from HKD81,500-300,000 per month, the pet friendly suite comes with its own maid’s quarters and expansive living spaces. Some also benefit from spacious private balconies.

12 HONG KONG BUSINESS | NOVEMBER 2014

3 Pacific Place Apartments, 2,650 sq ft three-bedroom Apartment, HKD220K Pacific Place Apartments comprises 270 fully-serviced suites ranging from 1,220 to 2,650 sq ft which can be furnished with contemporary or oriental design theme.

It has views overlooking Hong Kong Park and The Peak, or the iconic city skyline and Victoria Harbour. Its 3-bedroom suites are priced from HKD200-220K. 4 Four Seasons Place, 1,867 sq ft threebedroom Suite, almost HKD200K At the very top of Four Seasons Place are two luxurious penthouses on offer, however management prefers not to disclose their prices. Meanwhile, its 3-bedroom suites with gross floor area of 1,867 sq ft are priced from HKD193,800 to HKD199,800.

5 Gateway Apartments, 2,931 sq ft three-bedroom Penthouse, HKD177.4K Gateway Apartments, located in Tsim Sha Tsui, features 499 units across 14 floors within two towers: Sutton Court and Hampton Court. Apartment types range from Studios to 3-bedroom Penthouse units with sizes ranging from 712 to 2,931 sq ft. Its penthouse units are priced from HKD51,500 to 177,400 monthly.

6 The HarbourView Place at the ICC megalopolis, 1,623 sq ft three-bedroom Suite, HKD136K Billed as the tallest luxury suite hotel in

7 Convention Plaza Apartments, 1,872 sq ft three-bedroom Apartment, HKD105K Managed by Marriott Properties, the Convention Plaza Apartments is built atop the Hong Kong Convention & Exhibition Centre in Wanchai. About 600 individually-owned furnished apartments occupy the 12th to 46th floors. Prices for its 3-bedroom apartments, with sizes ranging from 1,772-1,872 sq ft, start from HKD90K-105K. 8 The Jervois, 1,550 sq ft two-bedroom Suite, HKD100K The Jervois is a boutique hotel apartment

by National Properties, the developer of The Putman and 99 Bonham. Located in Sheung Wan District, it features custom interiors and furnishings by internationally renowned French designer Christian Liaigre. Its 2-bedroom suites, with gross floor area of 1,550 sq ft, are priced from HKD82K-100K. 9 Lanson Place Hotel, 1,900 sq ft twobedroom Penthouse, HKD95K Lanson Place Hotel is a 194-room boutique hotel in Causeway Bay. In the tower rising above it are apartments ranging from a comfortable studio at 380 sq ft to a two-bedroom penthouse of 1900 sq ft. The penthouse is for rent for HKD95,000 a month.

10 ACTS Rednaxela Hong Kong, Terraces of approximately 800 sq ft and 1,000 sq ft in the Terrace Duplex Suite, HKD92K A member of ACTS hospitality group, ACTS Rednaxela, Hong Kong, boasts the luxurious Terrace Duplex Suite. It has terraces of approximately 800 sq ft and 1,000 sq ft.

The development, located in Mid-levels, has an outdoor private lap pool tiled with black mosaic and a canopied back terrace with trellis, barbecue and outdoor cinema experience.

FINANCIAL INSIGHT: debt capital markets

HKD-denominated bonds loses steam

Dim sum bonds soar at the expense of HKD bonds

What’s whetting the US$40.3b appetite for offshore renminbi bonds?

T

hese days when foreign investors browse through the menu that is the Hong Kong debt market, their mouths water at the sight of the hottest deal of the moment: Offshore renminbi bonds also known as Dim Sum bonds. These relatively bite-size bonds are proving irresistible for their high yields, more than doubling to a record volume of RMB248 billion (US$40.3 billion) so far this year, according to Thomson Reuters data, due to their easy access, strong demand momentum for the currency, and continued confidence in the still-growing Chinese economy.

Aside from record volume peaking to a new high, number of Dim Sum bond issuances grew rapidly as well at a 77.2% clip.

These kept Hong Kong on top as the largest offshore renminbi clearing centre in the world.

14 HONG KONG BUSINESS | NOVEMBER 2014

Dim Sum bonds reached a record volume worth RMB248 billion (US$40.3 billion) so far this year, a 109.8% increase from the same period in 2013.

Dim Sum bonds in the Financials industry have particularly flourished in the first half of the year, including a US$653.8 million issuance from China Construction Bank in March. Telecommunications firms also drove up the offshore issuance of renminbidenominated notes led by China Unicom raising US$643.9 million in April.

Dim Sum bonds have soared in popularity due to their easy access to foreign investors, says Becky Liu, senior rates strategist at Standard Chartered. “Dim sum bonds are international bonds similar to Eurodollar bonds, and subject to no restriction of foreign participation. As a greater share of global trades are now settled in renminbi, the currency’s usage has gradually increased, and so does the amount of renminbi funding held by foreign investors,”

she says. “Thus it is a natural step forward to look for assets and investments to deploy such holdings, and Dim Sum bonds are now the best candidate.”

Liu expects demand for Dim Sum bonds and other renminbi assets such as onshore bonds and equities to increase rapidly in the coming years on the strong momentum of the currency’s internationalization. Global investors, including central banks, are looking to diversify their current assets and they are naturally drawn to renminbi assets since they boast much higher nominal yields compared to most developed country assets.

There is also little to dampen investor confidence as China’s economy continues to grow.

HKD bonds decline While Dim Sum bonds have ballooned, Hong Kong dollar (HKD)-denominated bonds are losing steam, raising just HK$61.5 billion in proceeds (US$7.9 billion), or a 3.1% decline despite a 4.8% increase in number of primary bond issuance. Thomson Reuters notes that this is the

FINANCIAL INSIGHT: debt capital markets lowest first nine months period for HKD-denominated bonds since 1999 when proceeds amounted to HK$59.9 billion (US$7.7 billion). The HKD bond market also saw marginal growth in proceeds with HK$57.2 billion (US$7.4 billion), a mere 0.9% y-o-y increase in proceeds as number of primary bond issuance grew 8.9%. “Ever since the offshore renminbi market started to pick up, Dim Sum bonds have been drawing the attention of foreign borrowers away from the HKD bond market, resulting in proceeds raised by issuers, based outside China and HK, continuing to decline,” says Elaine Tan, senior analyst, Deals Intelligence at Thomson Reuters.

The HKD bond market’s flagging appeal among foreign investors can be linked to the territory’s smaller economy. “HKD can hardly be an international asset class or international reserve,” says Ivan Chung, senior vice president, Greater China credit research and analysis at Moody’s Investor Service. Contrast this with the popular Dim Sum bonds, which draws strength from the massive Chinese economy and share in international trade.

Chung says investors are snapping up Dim Sum bonds – and will continue to do notwithstanding changes in RMB appreciation expectation – as they expect RMB to become an important asset class and even an international reserve currency when China open its capital account and RMB becomes fully convertible. “The expectation of RMB appreciation in the past few years also encouraged investors to hold offshore RMB assets. As there are limited supply and choices of offshore RMB assets relative to pool of offshore RMB funds, Dim Sum bonds is the major investment products relative to low yield RMB deposits,” says Chung.

Because of these reasons, foreign investors will not likely flock to HKD bonds as they have done to Dim Sum bonds anytime soon. Instead local investors will

continue dominate the HKD bond market, says Liu, with banks and pension funds holding a majority.

Which banks ruled the HKD bond market in the first nine months of 2014? HSBC led the HKD Bonds league table with US$3.8 billion in proceeds for 126 issues, representing a 47.8% market share, according to the Thomson Reuters. This is lower than US$4.7 billion in proceeds for 135 issues HSBC raised in the same period last year.

Standard Chartered came in second in the league table, with US$1.3 billion in proceeds for 42 issues, representing a 16.5% market share. This is likewise weaker than the US$2.2 billion in proceeds for 45 issues Standard Chartered raised in the same period last year.

Looking at the broader bonds market, total bond proceeds from Hong Kong issues reached US$41 billion this year, up an impressive 44.8% from last year. The majority of the bond sales or 75.3% market share during the period was denominated in US dollar as issuers took advantage of deep liquidity in the US dollar market before rates are expected to rise in 2015, says Tan. Liquidity preference Looking to the near future, the theme of liquidity that has so far defined the HK and wider Asian bonds markets should persist.

Another major theme will be bigger deals.

“What you see is a larger component of this year’s volume is investment grade, and that really underscores the theme of liquidity,” reckons Devesh Ashra, head of debt capital markets syndicate at Bank of America Merrill Lynch. “Investors prefer to be in larger, more liquid corporate issuers and sovereigns and banks vis-a-vis the higher BETA, lowerrated debut issuers.”

Ashra says the Financials sector should continue to capture the largest market share, which aligns with increased preference for large cap issuers. “Certainly the theme

Elaine Tan

Becky Liu

Devesh Ashra

Ivan Chung

for the rest of this year is going to remain around the larger large cap issuers. And we’re actually seeing it come through right now with the theme of near-term issuance being big from the financial institution group sector,” says Ashra.

Look to China, Southeast Asia He anticipates that the headlinemakers in the next two months among primary issuers will be Japan, Australia, China and Korea. Chinese borrowers in particular have been devouring debt at an astounding rate. In the first nine months of the year, they represented the majority of Asia’s bond offering at 36.7% or worth US$210.6 billion in proceeds driven by issuance from sovereigns and financial institutions, says Tan. Compare this with Southeast Asian borrowers which raised US$75.8 billion – or roughly a third of that raised by Chinese borrowers. Still, the growth potential in the Southeast Asia region has analysts buzzing with the US$75.8 billion year-to-date total increasing 19.6% from the comparative period last year.

“With investors looking to diversify their portfolios, Southeast Asian bonds will likely continue to attract good interest,” says Tan. Other factors that will drive up bond issuance in Asia are continued investor demand for yield and increased refinancing pressure as US$130 billion worth of bonds are due to mature for the rest of the year.

Offshore Renminbi bonds

Source: Thomson Reuters

analysis: Pawnbroking industry

Have a Rolex to pawn?

Hong Kong pawn stars losing war to payday lenders What could be the silver lining for the 208 pawnshops in the city?

H

ong Kong’s pawnshops are facing stiff competition from money lenders and credit card cash advances which is hobbling their ability to expand.

Some operators have acquired money lender licences to diversify their services by offering mortgage and personal loans.

But it is not without difficulty as this segment of the business is strictly ruled by government regulations such as the Money Lender Ordinance and Pawnbrokers Ordinance. There are approximately 208 pawnshops run by 154 pawn loan service operators in Hong Kong.

Oi Wah, one of the largest pawn loan service providers in Hong Kong, faces these risks on a day-to-day basis. “Our operations and financial results could be adversely affected by changes in government policies, relevant laws 16 HONG KONG BUSINESS | NOVEMBER 2014

The maximum effective interest rate is 60% per annum as provided by the Money Lenders Ordinance for pawn loans and mortgage loans granted pursuant to the company’s Money Lenders Licence.

and regulations. As a pawnbroker and a licensed money lender in Hong Kong, we have to ensure, at all times, strict compliance with all applicable laws and regulations, in particular, the Pawnbrokers Ordinance and the Money Lenders Ordinance,” notes Oi Wah. The interest rate Oi Wah currently offers to customers shall not exceed the prescribed monthly interest rate of 3.5% per lunar month for pawn loans granted pursuant to the Pawnbrokers Ordinance. Then the maximum effective interest rate is 60% per annum as provided by the Money Lenders Ordinance for pawn loans and mortgage loans granted pursuant to the company’s Money Lenders Licence.

“The lowering of the legal limits on the interest rates that we can offer as a result of any changes to the relevant laws, rules and

regulations may adversely affect the profitability of our Group and our operating results and financial performance may be adversely affected,” says Oi Wah. The company adds that there is uncertainty in the licensing regime under the Pawnbrokers Ordinance and any change of interpretation of the relevant laws and regulations by the Commissioner of Police and the Police Licensing Office may affect its business operation.

To remain afloat, pawnbrokers like Oi Wah bank on flexibility, which means they have to be able to offer a range of different loan interest rates, loan amounts, and terms to suit the needs of its clients. “We have to compete with competitors who may have more established reputations and longer operating history.

As a result we have to compete by lowering the interest rates in order to win business,” Oi Wah says.

But despite the regulatory risks and intense competition, analysts still foresee significant growth in the industry with the younger generation’s changing lifestyle, widening poverty gap, and the influx of foreign domestic workers to Hong Kong.

Growth drivers Pawnshops are becoming more popular among younger customers in their 20s and 30s who aim to improve their living standards. “Hong Kong consumers are experiencing a change in lifestyle, primarily driven by the increase in the standard of living. They have been increasing their spending on luxury and technological products as they believe the use of luxury goods is a reflection of one’s social status,” says Markus Scherer, associate director of Ipsos Business Consulting.

And it is this changing lifestyle and a widening poverty gap that will keep sustaining pawnshops.

“In particular, with the changing technology nowadays, people in Hong Kong have more electronic

analysis: Pawnbroking industry gadgets with high resale value to use as collaterals such as laptops, mobile phones and so on,” he adds.

Scherer says that, by banking on this trend alone, pawn loan service operators can expect growth because of high demand shortterm financial needs. “[People] pledge their personal possessions such as jewellery and watches as collateral and redeem them within a given period of time without a complex and lengthy process like other authorized institutions and money lenders.”

Lawrence Chau, vice president for Business Development of MoneyHero.com.hk and Compare Asia Group, agreed that pawnshops are here to stay.

“The business model has, through centuries, proved profitable to both pawnbrokers and the customers.

It’s an industry that can only continue to grow,” he said.

This is especially desirable for clients in Southeast Asia, he points out, who own heirlooms and other items of sentimental value. “Pawnshops give them an opportunity to get cash they need for an emergency, or to meet living costs without having to sell things of value to them,” he says. And in turn, pawnbrokers earn good profit from repayment interests.

The rise of Oi Wah In Hong Kong, Oi Wah continues to draw in clients who can pawn just about anything, including property. It is widely known as the one-stop shop credit provider. Oi Wah was listed as the top service provider in Hong Kong in 2011 in terms of loan amounts granted and number of pawnshops. The company amounted to 9.4% of the total value of loans and advances granted by all pawn loan service operators in Hong Kong.

David Lee, an analyst at SBI E2-Capital Securities, described the company earlier this year as one of the few financing service providers in Hong Kong “holding both pawnbroker and money lender licenses, allowing it to offer products and services including pawn loans, mortgage loans, and

individual loans to customers.”

Founded in 1975, Oi Wah Pawnshop Credit Holdings is the largest pawnshop operator and an established one-stop shop credit provider in Hong Kong. And in 2009, it started its mortgage loan lending business, raking in the profits.

“While the company’s pawnbroking business has experienced steady growth in recent years, its mortgage loan lending business is expected to be its growth driver going forward,” SBI’s Lee said.

The company is not just backed by its equity and retained earnings, but it also earned a top-up placement by raising HKD155 million in February 2014, following its IPO in March 2013. The company’s retained earnings are expected to reach HKD168.1 million by the end of 2014, with mortgage lending seen as the growth driver. “The status of being a listed company has helped with our brand awareness and credibility. With more advertising, business has definitely taken off since we’ve been listed,” says Edward Chan, chairman and CEO of Oi Wah Pawnshop Credit Holdings.

Money lending surge Lee says the money lending industry in Hong Kong has experienced double digit growth for the past five years. SBI estimates the value of loans and advances granted by licensed money lenders will increase at a

Money lending experiences double digit growth

Edward Chan

Markus Scherer

Lawrence Chau

four-year growth of 12.7% between 2013 and 2017, reaching HKD50 billion in 2017.

Foreign domestic helpers also account for 25% of the total number of customers in 2011, according to Oi Wah. These workers need to adapt to the high living standard in Hong Kong and can barely keep up with their low salary. This clientele is also seen as a key engine growth for the pawn loan industry, as their population continues to grow, particularly Filipinos and Indonesians.

SMEs and corporations also find it convenient to secure loans from money lenders, as there are those who are unable to access capital markets due to higher loan default and delinquency risk. “The demand is always there regardless of the economic cycle. We see that pawn loans will remain an alternative loan option for a lot of people and will maintain stable growth,” Chan says.

But money lenders are not without challenges. Scherer cautions that new wage regulations and surging rental costs in Hong Kong are putting a dent in earnings.

Chau adds that personal loans in Hong Kong are possibly the most ideal financing option for lowmiddle income markets.

He says banks have been offering more competitive interest rates in recent years to attract more borrowers. Plus, the application processing time is also now faster, with loans granted within one business day.

analysis: hong kong banks

Credit levels goes off-kilter

HK banks play a dangerous credit game Mounting Mainland-bound credit could see risks stack up to unmanageable levels.

H

ong Kong banks are lending furiously to Mainland Chinese companies with further acceleration expected in the next few years, raising concerns among analysts on whether their liquidity and asset quality will hold up. While Hong Kong’s banking industry remains relatively solid and well-managed compared with regional peers, it could go off-kilter when banks take on too much risk too fast.

One of the Big Three credit rating agencies, Moody’s Investors Service, warns of rising Mainland credit and banking activities as a potential pain point for Hong Kong banks. This has led Moody’s to maintain a negative credit outlook for the Hong Kong banking system until 2015.

“The key risks that underpin the negative outlook are the banks’ growing exposures to Mainland China, deteriorating credit conditions on the Mainland, asset market imbalances in Hong Kong’s economy, high levels of private sector debt, and the implications for support for creditors from 18 HONG KONG BUSINESS | NOVEMBER 2014

The explosion in Mainland exposures will pose challenges to some Hong Kong banks’ liquidity profiles and capitalization levels.

the impending new resolution regime,” says Sonny Hsu, vice president – senior analyst at Moody’s.

Growing Mainland exposures Hsu says Hong Kong banks grew their Mainland exposures by 29% in 2013, and these accounted for 20% of their total assets at end-2013 versus 16% at end-2012. Mainland exposures should expand further in the coming 12 to 18 months.

This rapid growth was and will be driven by Mainland and overseas corporates’ expanding cross-border trade and investment activities. Firms are opting to borrow from Hong Kong banks given their relatively low funding costs and higher liquidity conditions compared with Mainland China alternatives.

China’s State Administration of Foreign Exchange have also imposed a new policy to allow Chinese corporates to provide credit guarantees to overseas subsidiaries wishing to borrow offshore. This will likely increase overseas borrowing by Mainland

corporates in the near future.

The explosion in Mainland exposures will pose challenges to some Hong Kong banks’ liquidity profiles and capitalization levels, warns Hsu. Asset quality levels can also deteriorate when factoring in the slowdown in the Mainland’s economic growth, overcapacity in certain industries, and increase in corporate balance sheet leverage.

“Hong Kong banks have so far maintained conservative credit standards on their Mainland-related lending and report good asset quality metrics. However, the rapid growth in their Mainland-related business and the transformation in their financial profile entail risks, as the banking system evolves into an important offshore financial conduit for Mainland China,” says Hsu. “In addition, we expect asset quality trends in China to remain under pressure in the next one to two years from the country’s economic rebalancing and slowing growth.”

Hong Kong banks will also need to

analysis: hong kong banks be wary of contagion risks resulting from increased vulnerabilities in China’s financial system, as reflected in increasing non-bank intermediation.

“Volatilities in China’s interbank markets may spill over into Hong Kong, as linkages between the banking systems increase. Although we maintain a stable banking system outlook on China, the average standalone rating on Chinese banks is lower than that of Hong Kong, reflecting our assessment of the weaker intrinsic financial profile of Chinese banks,” says Hsu. “Even though we think that Hong Kong’s banking system will remain stronger than China’s for some time, even a modest degree of convergence has credit negative implications for Hong Kong banks.”

1H14 Performance Echoing concerns by Moody’s, Steven ST Chan, analyst, banking and financials at Maybank Kim Eng, says most banks should see a slight increase in non-performing loans for their China loans during the first half of 2014 (1H14). This was due to slower economic growth and external trade activities, and will result in higherthan-average credit costs for most banks in 1H14 than last year.

Still, it can be argued that fears of overexposure could be overblown, based on the Hong Kong banking industry’s decent net profit performance in1H14.

Based on Bloomberg forecasts, the net profit of most Hong Kong-listed banks should have grown 3-14% year-on-year (yoy) in 1H14, powered by solid loan growth, widening net interest margin (NIM) and tight cost control, says Chan.

Chan estimates core net profit for most Hong Kong-listed banks will grow more than 10% this year.

Meanwhile, loan growth in most banks likely ranged from the mid-tohigh single digit in 1H14. They also should have posted stable-to-slightlyrising NIM compared with the previous period, with the exception of the Hongkong and Shanghai Banking Corporation (HSBC), Standard Chartered Bank (SCB) and the Bank of East Asia (BEA). “While BEA should suffer from rising funding costs in

China, both HSBC and SCB continued to run down their high-yield consumer loans during 1H14.”

Net fees growth of most banks should have also moderated in 1H14, given weaker securities brokerage and fund distribution fees.

Deteriorating operating environment As Hong Kong banks play with fire when it comes to their Mainland exposures, they are also feeling the heat on the domestic front due to a deteriorating operating environment.

Hsu says 2015 will see a spike in interest rates, making it that much harder for the Hong Kong economy, and in turn banks, to sustain their solid performance.

Hong Kong is poised to tighten monetary conditions in conjunction with the US Federal Reserve’s move to raise policy interest rates in 2015. Hsu says Hong Kong’s pegged exchange rate regime forces the territory’s monetary policy to nearly mirror that of US monetary policy. This threat of interest rate increases offsets the small respite offered by the recent stability in property prices and credit market conditions.

It is well known that property prices in Hong Kong have stabilized after more than doubling between 2009 and 2012, but Hsu says they are still elevated relative to household income and rent, and still pose a lot of risks to the territory’s economy and banks.

Falling property prices hurt bank credit worthiness to some degree, says Hsu: “While our assessment is that the banks can withstand the direct impact of a substantial fall in property prices, such a fall will have negative effects on the economy, which could in turn prove disruptive to the banks’ credit profile.”

When dissecting what makes Hong Kong’s operating environment particularly risky these days, Hsu points to two groups of local customers that pose the highest credit risks for banks: unsecured consumer loan borrowers and small and medium enterprise (SME) borrowers.

Non-mortgage consumer lending extended to these groups grew 17%, and they are especially more sensitive

2015 will see a spike in interest rates, making it that much harder for the Hong Kong economy.

to economic cycles than mortgage consumer loans. Hong Kong banks should be particularly concerned with SME borrowers in southern China, which have been, and will be, hit hard by the economic slowdown and face climbing land and labour costs.

“Mid-sized banks, which have higher exposures to SME borrowers relative to their size, are especially sensitive to the financial conditions of such borrowers,” says Hsu. Hong Kong banks depending on strong systemic support will also find this is weakened as of late. The government recently unveiled plans to adopt revised bank resolution regimes in line with the Financial Stability Board’s Key Attributes for Effective Resolution Regimes for Financial Institutions.

“This development is credit negative for bank creditors as they are less likely to benefit from public sector support and more likely to have losses

Country CAMELS ratings

Source: Macquarie Research, Aug 2014

Hong Kong banks’ mainland exposures continue to grow

Source: Hong Kong Monetary Authority

HONG KONG BUSINESS | NOVEMBER 2014 19

analysis: hong kong banks imposed on them during times of stress,” says Hsu. “It is unlikely we would remove all systemic support uplift in the five Hong Kong banks whose ratings incorporate elements of systemic support, but a change in our assumptions would imply lower ratings for some of the banks.”

If there is one thing going for banks, it is that they are coming off a period of strength, says Hsu. Hong Kong banks reported good financial results last year and the first half of 2014, asset quality metrics remain sound, and problem loans kept at notably low levels. Moreover, capitalization levels have been strong and will serve as a buffer to absorb any rise in problem loans.

“These buffers explain why Hong Kong banks continue to have high credit ratings,” says Hsu, noting that Moody’s extends Hong Kong banks the second highest baseline credit assessments on a weighted average basis, just a few tiny steps behind

In terms of earnings, Hong Kong banks will continue to post slim profits amid a more competitive environment that has pushed down overall profitability to historical lows.

Growth in property prices has moderated, but prices remain elevated (Jan 2009 = 100)

Source: Ratings and Valuation Department, Hong Kong Government

Net interest margins improved in 2013

Source: Hong Kong Monetary Authority

20 HONG KONG BUSINESS | NOVEMBER 2014

Singapore. “Our negative system outlook needs to be understood in the context of this very high starting point; we are signalling the potential for a modest deterioration in credit profiles from a strong base,” says Hsu.

such as Hang Seng Bank.

In terms of earnings, Hong Kong banks will continue to post slim profits amid a more competitive environment that, according to Pili, has pushed down overall profitability to historical lows.

Regional comparison Looking at the Asian region, the Hong Kong banking industry still holds up well but not very much relative to the more competitive countries. “Our overall rating of Hong Kong banks under the CAMELS system is 2.5,” says Ismael Pili, research analyst at Macquarie, with 1 being the highest rating score and 5 the lowest. The CAMELS system assess a banking system’s overall health.

Macquarie rates the territory’s banking system with the following component scores: Capital at 2, asset quality at 1, management at 2, earnings at 4, liquidity at 3, and sensitivity at 3. Hong Kong’s overall CAMELS rating falls in the middle of the pack in Asia, weaker than the ratings of Singapore (1.5), Japan (2.2) and Indonesia (2.3), but slightly stronger than those of China (2.6), Korea (3.0) and India (3.3).

Hong Kong shines in asset quality, boasting the lowest impaired loan incidence in the region, although trouble could be brewing on the horizon. “The Hong Kong domestic book remains in stellar condition.

Risk rests with the banks’ China related exposure, given we expect an economic slowdown in the Mainland. Those with greater China exposure would thus be perceived to be more at risk,” says Pili.

Hong Kong banks also showed strength by being well capitalized and conservatively managed. “We do not see the falling profitability trend as reflective of management abilities, but rather a function of an increasingly more competitive operating environment,” says Pili.

But Hong Kong banks have room to improve when it comes to liquidity and earnings. The banks are facing a liquidity issue due to accelerated loan growth, and this has led to rising funding cost pressures, says Pili. This gives an advantage to bigger banks with greater deposit franchise,

Russian sanctions While it seems that Hong Kong banks might benefit from increased profitability and liquidity following fresh sanctions on Russia, this development will have minimal actual impact on the sector, says May Yan, analyst, Asia Ex-Japan banks at Barclays.

Yan says the US and EU broadened sanctions on Russia in late July. The US added Bank of Moscow, Russian Agriculture Bank and VTB to its Sectoral Sanctions Identification List and prohibited US persons from “transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity or new equity for these persons, their property, or their interests in property.” The EU also banned financing with maturities of more than 90 days for state-owned Russian banks, development banks and their subsidiaries effective 1 August.

In response to the sanctions, Russian corporates and banks may be reducing risks by shifting cash to Hong Kong and other Asian markets, says Yan. Media reports suggest large companies such as MegaFon OAO, the second-largest mobile-phone operator in Russia, are converting a big chunk of their cash reserves into HKD and keeping them as deposits in several Chinese banks in Hong Kong.

Yan says these funds flowing from Russian companies into Hong Kong dollar (HKD) deposits would likely be equivalent to HKD67 billion at most, or only roughly 1.5% of the HKD system deposits in Hong Kong.

This assumes that 20% of Russian companies are international and convert 40% of their cash balances into HKD. “Russian corporate will only constitute a small deposit inflow for Hong Kong’s banking system, by our estimates. Thus we believe such inflows would likely only marginally improve system liquidity,” says Yan.

COVER STORY

Follow the yellow brick road

Declining property prices to persist as effects of the cooling measures kick in

Interest rates are likely to rise by mid-2015, which could potentially drag down prices as risks rise.

W

hen Hong Kong home buyers shop around in the coming months, they will likely see prices significantly slashed and accompanied with more agreeable terms from when they last looked earlier this year. Gravity seems to have finally caught up with skyrocketing HK residential prices, with analysts predicting a 5-10% decline in prices in the second half of 2014, as developers offer higher discounts to attract more primary unit buyers and owners compete by also lowering selling prices for secondary units.

Thomas Lam, senior director and head of valuation & consultancy at Knight Frank, estimates that luxury residential sector prices will drop by 3 to 5% in 2H14, while mass residential prices will drop by 5%. “The market has turned and entered a downtrend,” says Lam. “Residential prices will be heading south in the coming few years.”

He says the downtrend will extend beyond 2014 as the dampening effect from cooling measures start to kick in and additional supply enters the market.

Meanwhile, Richard Kirke, managing director at Colliers International in Hong Kong, predicts prices for mass residential properties will drop 5%, with the luxury sector falling by 7% in 2014. “The downside risks of imminent interest rate hikes, an increasing residential supply, and stamp duty measures are working to push 22 HONG KONG BUSINESS | NOVEMBER 2014

home prices down,” says Kirke. Market consensus points to a likely rise in interest rates by mid-2015, which could drag down prices as market risk rises.

Increasing supply Meanwhile, the Hong Kong government has been ramping up residential supply. The influx of more residential units has made the field more competitive, and pushed developers to lower their asking prices in order to woo home buyers. A Knight Frank report estimates that the completion of residential units in Hong Kong will dramatically increase to an average of 19,500 units annually between 2014 and 2017, from 11,284 units annually between 2005 and 2013.

The same report projects that of the 14,600 new homes that could become available for sale in Hong in 2H14, around 75% or 10,900 units will be launched in New Territories. The rest will be split between 15% (2,200 units) in Kowloon, and 10% (1,500 units) on Hong Kong Island.

Aside from increasing home supply, another price pressure comes from the introduction of double stamp duty last year. The luxury home segment, in particular, has felt its dragging impact. “The double stamp duty and buyer’s stamp duty have increased transaction costs for

“Prices for mass residential properties will drop 5%, with the luxury sector falling by 7% in 2014.”

COVER STORY luxury home buyers, resulting in continuing low transaction volumes, and we therefore expect luxury home prices to fall by around 5% over the remainder of 2014,” says Simon Smith, senior director, Asia Pacific at Savills Research.

Already, luxury apartments and townhouses have been showing signs of price weakness. He notes that on The Peak and in Happy Valley/Jardine’s Lookout, luxury apartment prices remained weak, falling by 1.7% and 2.8% in 2Q14, respectively. The townhouse market followed a similar trend to the luxury apartment sector, remaining stable and falling by nearly 0.6% and 0.5% on The Peak and Southside, respectively.

This continues what has been four months of consecutive decline for luxury residential prices until the second quarter of 2014, according to the Jones Lang LaSalle (JLL) residential index report.

Looking at the wider Asian region, Hong Kong was not alone in seeing a fall in luxury residential prices in 2Q14. Singapore has also seen weakened home prices due to a tighter lending environment and tapered investment demand.

The growth of capital values has also stalled in Shanghai as sellers become more flexible on prices due to fewer enquiries, notes the JLL report. This somehow offsets the rise in capital values in Beijing, resulting in a mixed performance in China.

Kuala Lumpur had a flat performance in the period, while Jakarta suffered from a weaker buying sentiment on the back of higher interest rates and political uncertainty as a result of its recent elections.

Still, the region has a few stellar markets for luxury residentials. Manila, for instance, has outperformed Hong Kong and other regional peers with capital values ballooning to a relatively robust 3.1%. The Philippine capital has been supported by strong local investor demand for luxury condominiums with many upcoming projects fully pre-sold.

In fact, JLL notes that in the 12 months ended 2Q14, Manila and Shanghai recorded the strongest price growth of around 10% of all monitored markets.

This regional pecking order will not likely change in the next year, the report argues, due to policy restrictions expected to remain in place, namely extra stamp duties in Hong Kong and Singapore. Price correction will be the main theme in these two countries in the face of prop-

erty curbs limiting buying demand and discounts in the primary market pulling down prices. In contrast, in most other emerging Southeast Asian markets moderate price growth should be the norm, with the exception of Jakarta where small declines in capital values are foreseen.

Improved buying sentiment With residential prices widely expected to fall off in the near-term horizon, buyer sentiment should improve even more and lead to higher unit sales. Analysts point to the resulting pickup in residential sales in 2Q14 after developers offered enticing discounts and the government eased its double stamp duty policy. “The double stamp duty adjustment, intended to benefit home upgraders, together with attractive pricing, significantly boosted buyer sentiment in 2Q14,” says Kirke.

Developers have every incentive to continue offering discounts, argue analysts. These offers help overcome buyer apprehensions and offset the barriers created by property cooling measures. Kirke says that having found a successful strategy to rev up sales, developers will likely roll out more residential launches in 2H14.

In fact, over the next 12 months, the primary sales market will be the key focus of interest among home buyers, says Denis Ma, head of research for JLL in Hong Kong. Developers will also have virtually no choice but to discount prices if they hope to close deals.

“Looking ahead, more new residential schemes are set to be launched for the sales market, keeping the primary sales market as the main focus of buying activity. In view of increased competition, developers are likely to need to continue to set prices at competitive levels and offer discounts to drive sales volumes,” says Ma. With price discounting becoming prevalent in the primary sales market, coupled with interest rate uncertainty, capital values should feel some downward pressure.

Ma shares the view of many analysts that Hong Kong’s residential property market is overpriced, which is why it is not surprising that prices are already coming down.

“Since reaching all-time highs in 2013, transaction volumes have dropped to generational lows and prices

Thomas Lam

Richard Kirke

Dennis Ma

Simon Smith

Completion of residential units

Source: Rating Valuation Department / Knight Frank

How much for this flat?

HONG KONG BUSINESS | NOVEMBER 2014 23

COVER STORY have retreated by about 7% as the government’s cooling measures have started to weigh on the market,” says Ma, although an “outright collapse” is unlikely.

Record home prices The 5-10% estimated decline in home prices in 2H14 will be a significant turnaround from the upward momentum that has pushed home prices to record highs. Paul Louie, analyst at Asia ex-Japan real estate at Barclays Bank, notes that home prices were up 7.2% in the first seven months of 2014.

The unabated home price increases also caused two separate home price indices to hit the roof recently. In a report released in early September, Louie points to the weekly Centa-City Leading Index (CCL) which showed secondary home prices rose 0.59% week-on-week, putting the CCL’s latest 126.94 reading up 6.61% this year.

This is 23% higher than the 1997 peak and 2.6% higher than the 2013 March peak reading of 123.66.

Separately, the Hong Kong government’s Rating & Valuation Department’s domestic home price index showed home prices rising 2.3% month-on-month. The index’s 255.6 July level implied a year-to-date gain of 4.3%. Relative to the 1997 peak reading of 172.9, this suggests home prices are now 48% higher, according to Louie.

Can Hong Kong home buyers expect the government to roll out another round of prudential measures to help rein in prices? Not likely. “The government has always maintained that the various prudential measures are meant to be counter-cyclical, and with interest rates expected to rise in mid-2015, we believe the government is likely to choose to wait for the cycle to turn on its own rather than launch new measures,” says Louie.

Leasing market outlook Similar to residential prices, leasing rentals are also facing equal, if not even greater, downward pressure. Lacklustre leasing demand and tightening housing budgets have driven down luxury rents in recent quarters. “The slowdown in hiring in the financial sector has affected the luxury leasing market in Hong Kong,” says Smith.

Investment banks, fund houses and asset management firms are holding off on their expansion plans, and some expats have chosen to return to their home countries to Average monthly private housing sales in the three months and twelve months prior to new property cooling measures (HK$ mn)

Source: Centaline, Barclays Research

24 HONG KONG BUSINESS | NOVEMBER 2014

pursue better job opportunities, lowering demand for luxury rental accommodations. This assessment is mirrored by a recent rise in vacancy in Central Grade A office spaces, which are mostly taken up by financial firms.

In 2Q14, luxury apartment rents on the island fell 2.6% over the quarter as demand from the financial sector diminished further, says Edina Wong, senior director at Savills Residential Leasing. Townhouse rents fell more steeply by 3.7% in the same period alongside rising vacancy rates. “As international banks continue to consolidate, this is having a knock-on effect on the upper end of the leasing market,” she says. While most of Hong Kong has been seeing declines in luxury rents, Kowloon has shown marked resilience. “The reason is most likely a ‘flight to value’ from the island but improved schooling and better quality stock also have a role to play.”

The third quarter will not perform much better due to seasonal weakness. The summer heat and holiday exodus during the period should continue to pull rents down.

The rest of the year holds little prospect for rental upsides. Wong expects luxury apartment rents to decrease by 15% in 2014, with townhouse rents slipping by 20%.

In terms of budget bands, the current sweet spot is HK$40,000 to HK$60,000 a month. More drastically expensive rentals are discounting by as much as 20% to 25% to lock in more budget-conscious tenants. “While arrivals have been reduced to a dribble, properties in the HK$40,000 to HK$60,000 per month range are the most active,” says Wong. “Hardest hit have been larger units and townhouses where vacancy is rising and in this market, landlords who were asking HK$500,000 per month last year are settling for below HK$400,000 this year. In many cases, tenants can secure a deal 20% to 25% below asking with a bit of canny negotiation.”

Ma also expects luxury rents to fall further this year.

He says leasing activity is expected to remain quiet amid the slowdown in expatriate hiring. It also does not help that leasing stock is expected to increase, further eroding the negotiating power of owners.

In contrast to luxury residential rentals, the mass residential leasing sector will be more resilient due to the rising local demand and an increasing number of expatriate arrivals in the junior and middle management levels, says Kirke.

“More drastically expensive rentals are discounting by as much as 20% to 25% to lock in more budgetconscious tenants.”

Share of Mainland buyers of Hong Kong privates residential units worth HK$12 million or above

Source: Public sources / Knight Frank

CO-PUBLISHED CORPORATE PROFILE

Mercedes-Benz GLA: Bridging the gap of day-to-day and off road motoring Get size, comfort and spaciousness all for an excellent value.

A

new concept in motoring is the idea behind the latest offering from Mercedes-Benz. The highway or off-road GLA captures the imagination in that it looks the part no matter where you find it. The discerning buyer will find in the GLA all the features he is looking for at the right price. Its creators call it “a wanderer between automotive worlds” since it can both tackle day-to-day motoring and off road driving.

Nothing less can be expected of Mercedes-Benz, which has long been a pillar of the automotive industry. Its Hong Kong operations has been seeing a great boost in sales, which increased by 16.8% in 2013 after almost 7,000 cars were delivered in Hong Kong and Macau. Bother territories have been showing remarkable growth, especially with Macau’s new record sales growth of 65.6%.

The GLA will be one of the series expected to draw in more sales as Mercedes-Benz expands its model line-up.

SUV of the future A stylish car that turns heads on the highway. A reliable machine that can easily wade through traffic or bring you to your favorite hiking camp. The MercedesBenz GLA is all that and much more.

Designers of the GLA series describes its design philosophy as “sensual purity as an expression of modern luxury.”

Clear contours and smooth surfaces allow the series to have emotional appeal while making it look as hightech as its contents. And the design is

26 HONG KONG BUSINESS | NOVEMBER 2014

not just for folly. Its muscular shoulders and divided tail lights allow the GLA to have a pleasantly wide loading hatch and luggage compartment (421 to 235 litres). Its aerodynamic roof spoilers, on the other hand, are as eye-catching as it is performance-boosting.

Mercedes-Benz predicts that the GLA will soon be a leader in its segment for its aerodynamic efficiency with a Cd of value of 0.31. Low fuel consumption can also be expected because of its good air flow characteristics.

Driving the GLA to The Peak or other Hong Kong landmarks will be a breeze, to say the least.

Focused on overall efficiency, the GLA’s electromechanical power steering allows better feedback for the driver while its servo assistance only consumes energy as the vehicle is being steered. Various steering assistance functions initiated by the ESP control unit allows steering corrections when breaking on surfaces with different levels of grip, reducing front-

“Mercedes-Benz predicts that the GLA will soon be a leader in its segment for its aerodynamic efficiency.”

wheel drive and allowing compensation of cross-winds and road camber.

While capable along Hong Kong’s city streets, the GLA is also reliable in off-road drive, equipped with a Downhill Speed Regulation and an off-road transmission mode. The shift points and accelerator

CO-PUBLISHED CORPORATE PROFILE

characteristics immediately changes in offroad transmission mode to adapt to light off-road terrain with loose surfaces.

The numerous driving assistance systems include an attention assist drowsiness detection and adaptive highbeam assist.

Sports car quality With Mercedes-Benz producing only the best, the GLA 45 AMG is fitted with the AMG 2.0-litre turbo engine – the most powerful series-production four-cylinder engine in the world that is able to produce 360 hp of power and a peak torque of 450 Newton metres (Nm). You can expect the GLA to run side by side with sports cars with a power density of 181 hp.

The engine itself is assembled by hand to ensure superior quality.

The GLA 45 AMG has its own sports transmission with a “race start” function that gives the car optimum acceleration.

The AMG SPEEDSHIFT functions have extremely smooth gear shifts with a high

level of efficiency.

In accordance with its off-road capabilities, the all-wheel drive system provides perfect traction for all road conditions. The interior itself depicts highquality with a sporty flair and exclusive equipment.

The sports seats are made from ARTICO man-made leather and DINAMICA microfibre.

“The GLA 45 AMG is fitted with the AMG 2.0-litre turbo engine – the most powerful series-production fourcylinder engine in the world that is able to produce 360 hp of power and a peak torque of 450 Nm.”

Red contrasting topstitching is also to be found on all these elements, indicating a particular attention to detail. Further features include sports pedals in brushed stainless steel with rubber studs or the instrument cluster with silver-coloured backplate in chequered-flag look and red dial needles.

The standard panoramic sunroof with its large glazed area provides for an especially bright and friendly ambience in the interior.

It consists of a fixed panoramic glass roof in the rear section and a top-sliding power sunroof with net wind deflector in the front. In addition, two electric roller sunblinds provide shade for the passengers in strong sunlight.

The GLA offers both performance and comfort for an excellent value. The GLA 200 sells in Hong Kong at $409,000 up.

CONTACT Zung Fu Company Limited www.mercedes-benz.com.hk 2895 7339

HONG KONG BUSINESS | NOVEMBER 2014 27

legal briefing

Are HK’s anti-discrimination laws lacking?

A three-month review has analysts split on whether additions are possible or even necessary.

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hen Hong Kong’s Equal Opportunities Commission commenced a three-month review of its four anti-discrimination laws in July, it left legal experts butting heads on whether the government should push the envelope in new protections. Some say the time is ripe to expand the scope of the ordinances to possibly cover discrimination based on sexual orientation, age and religion in order for Hong Kong to catch up with more progressive countries.

But others consider it unwise and uncharacteristic of the territory to ruffle feathers by dramatically broadening anti-discrimination laws.

What will change with the review?

For its Discrimination Law Review, the EOC has invited opinion on whether the law should protect new immigrants from discrimination, whether there is a need for protection from discrimination on the ground of being in a de facto relationship and whether the law should provide protection from sexual harassment in common workplaces. These will likely have an effect on discrimination laws in an employment context, says Gareth Thomas, litigation partner at Herbert Smith Freehills.

“There is currently no clear prohibition against discrimination on the basis that a person is in a de facto relationship as opposed to a marriage. Provided that the definition of a de facto relationship is clearly

“The EOC review may also lead the government to introduce workplace liability for a person sexually harassing another person in the same workplace.” spelt out, an amendment to the discrimination laws in this regard would be a welcome addition to ensure that employment benefits such as travel allowances, housing allowances and insurance benefits are not withheld from an employee on the basis that they are not married to their partner with whom they are living on a genuine domestic basis,” he says.

Thomas believes the EOC review may also lead the government to introduce workplace liability for a person sexually harassing another person in the same workplace even when there is no employment relationship between the two people.

“There are a number of gaps that we are optimistic the proposed changes will resolve. For example, the proposal to require equal pay for work of equal value, regardless of gender, and clarifying the definitions of race – including discrimination against persons from 28 HONG KONG BUSINESS | NOVEMBER 2014

Mainland China – disability and sexual harassment,” says Laure de Panafieu, Head of Employment and Incentives, Asia at Linklaters.

Gareth Thomas

Laure de Panafieu

Minny Siu

Alice Molan

Hong Tran

What will remain unaddressed?

Even with these expected advancements in the anti-discrimination regime, analysts note that it will take time for the EOC to address several grounds of discrimination such as sexual orientation, age and religion. de Panafieu says that Hong Kong could have used the review to expand the range of protected attributes and keep pace with other jurisdictions such as the UK and Australia.

Still, it is worth noting that the EOC has engaged King & Wood Mallesons to research the availability of anti¬-discrimination protections in certain other jurisdictions for lesbian, gay, bisexual, transgender and intersex (LGBTI) persons.

“Currently, there is no anti¬-discrimination law that makes it unlawful in Hong Kong to discriminate against LGBTI persons. This means that where a person is denied access to education, goods, services or accommodation, for example, simply on the grounds of their LGBTI status, such discrimination is not unlawful,” says Minny Siu, partner at King & Wood Mallesons.

In contrast, jurisdictions like UK and Australia provide anti¬-discrimination protections for LGBTI persons in certain circumstances and with varying scopes, according to Alice Molan, a registered foreign lawyer at King & Wood Mallesons. Siu says that the proposal to introduce more comprehensive anti¬discrimination laws in Hong Kong is an opportunity for Hong Kong to develop protections that take into account the experiences of LGBTI persons and ensure they have appropriate protections ordinarily afforded to others.

“It is illustrative of the growing awareness of practical issues facing LGBTI persons and reflective of developments in other leading jurisdictions,” says Siu. Why is Hong Kong proceeding with caution?

While overseas jurisdictions may have legislation that provide more protection against discrimination, Hong Kong should and will likely proceed with caution, says Hong Tran, partner at Mayer Brown JSM. “Just because another place legislates in a particular way does not mean Hong Kong should follow. Hong Kong is known as a ‘light touch’ regulatory environment.

As such care needs to be taken before introducing material and intrusive new restrictions.”

He argues that a more notable takeaway from the EOC proposals is that the government is shifting from the current anti-discrimination regime to one of promoting and mainstreaming equality.

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CMO Briefing

The power of bespoke content

See how an Asian company used social media to earn 3.6m online impressions for branded content.

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hen cloud-based learning company Skillsoft wanted to penetrate Asia Pacific, it gambled on a bespoke content strategy that eventually turned the unknown brand into a regional thought leader in just two years. Skillsoft began 2012 with a daunting goal of increasing market share and brand presence among C-suite executives, and senior human resources professionals in the Asia Pacific region, but had little idea where and how to approach them. This convinced Skillsoft to perform a communications ecosystems audit – a process that mapped audience information consumption journeys – which then identified LinkedIn as the most relevant social network channel for the brand in APAC, says Justina Phoon, director, marketing communications, Asia Pacific at Skillsoft.

The audit encouraged Skillsoft to focus its communications efforts on LinkedIn. It started modestly by setting up the LinkedIn profile, then gradually ramped up the engagement with its growing business execuetive audience through a torrent of APAC-specific bespoke content. By sending their LinkedIn members a steady stream of useful articles and resources tailored to their region and country, Skillsoft earned the trust of discerning professionals in their industry.

As members shared Skillsoft content within their circles, Skillsoft triggered every content marketer’s dream result: Viral word of mouth. The Skillsoft APAC LinkedIn group grew to a sizable membership, which helped the brand earn close to 3.6 million online impressions for branded content since July 2013.

Phoon says if there was one key factor for success in growing Skillsoft’s LinkedIn presence, it would be the creation of unique content like its annual

30 HONG KONG BUSINESS | NOVEMBER 2014

As members shared Skillsoft content within their circles, Skillsoft triggered every content marketer’s dream result: Viral word of mouth.

Skillsoft learning & development report that zeroes in on the concerns of their target market.

“Such bespoke content has enabled Skillsoft to address very specific needs of business leaders in this region and further propels the business as a thought leader in the industry. We were able to link leads generated by these and other marketing initiatives to sales opportunities and revenue.”

In communicating with customers across so many online channels, companies may dilute the broader brand narrative. Sony Mobile resists this urge and focuses on telling a cohesive story that is both compelling and convincing to its audience.

Sony Mobile keeps its messages unified by anchoring them on the concept of a “One Sony” experience, which shows how the strengths of Sony come together to deliver a compelling consumer proposition, says Chang Seng Hock, marketing director, South East Asia & Oceania at Sony Mobile Communications. “The development and sharing of content and information has ceased to be the exclusive domain of traditional media outlets; brands now have the power to tell their own story on their own social channels.”

Of course, Sony needs to further align its stories to fit the social channel for maximum effectiveness and reach. Chang says Facebook stories need to be relevant, engaging and informative to drive deep engagement and foster sharing among audiences.

Market localization Combining the principles of bespoke content and cohesive storytelling, home appliance brand Miele has been using a powerful localized storytelling strategy to penetrate Asian markets. Realizing that countries in the region respond differently to messages, it heavily adapts its content per market to connect with customers while still communicating a consistent brand proposition.

“There are so many factors that differ from region to region when it comes to a consumer’s perception of a product category, such as culture and living environment, and the different brands competing in these areas. In this respect we have found that the most successful forms of marketing are those things that get people talking, and sharing their experiences,” says Richard Green, marketing director at Miele in Hong Kong.

Localized content that speaks to the heart of consumers has the power to turn them from happy customers to brand advocates, argues Green.

“One of our greatest strengths as a company is having very satisfied customers. If we can find ways to harness this customer advocacy we succeed in a way that no form of traditional advertising could deliver.” This led the brand to launch its “Fashion That Never Fades” laundry appliance campaign where real customers from Asia were used in the key visual ads and shared their stories through video and articles.

HONG KONG BUSINESS | NOVEMBER 2014 31

REGIONAL ANALYSIS 1: Population Ageing ageing pressures as their societies continue to experience a rapid increase in the old age dependency ratio and as the median age rises,” Neumann says, particularly referencing China, Hong Kong, Japan, Korea and Singapore.

Asia threatened by an ageing population

Asian economies struggle with severe ageing pressures Asia is running out of time to adapt to the demographic divide.

C

oming from an era of robust economic growth on the back of its promising demographics and labour force, Asia is now threatened by a force beyond its control – its ageing population.

The region is set to experience a drag in economic boom, due to the declining labour force supporting an ever-burgeoning, increasingly dependent, elderly population.

While the worst is yet to come, policy makers are faced with the challenge of dealing with the inevitable demographic trend in Asia and finding ways to offset the pitfalls of an ageing citizenry.

Greying Asia Japan, one of Asia’s promising economic giants, is said to have one of the oldest populations in the world. And some other Asian giants are set to follow in Japan’s footsteps, alarmingly at an even faster rate– among them, South Korea, Hong

32 HONG KONG BUSINESS | NOVEMBER 2014

By 2050, there are expected to be two working adults for every adult over 65 in developed countries and four working adults for every adult over 65 in the developing world.

Kong, Taiwan, and Singapore.

These are just some examples of Asia’s speedy ageing rate, Frederic Neumann, an economist from HSBC Global Research, says. “We have been saying for some time that Asia is ageing at an unprecedented rate– arguably the fastest the world has ever witnessed,” Neumann says.

He adds that while Western countries had time to adapt to the demographic divide and industrialize, Asia is running out of time to do so.

Elena Duggar, group credit officer from Moody’s Investors Service, adds that Hong Kong and Thailand will join Japan in the “super-aged” category–or those with elderly comprising 20% of its populations– by 2025. Meanwhile, Vietnam and Cambodia will be ageing–or those with elderly at 7 % of population–in ten years’ time.

While Europe and North America remains the “greyest” regions in the world, Asia still has to face “severe

Reduced labour force With an ageing population comes a reduced workforce to support an ever more dependent elderly population. This poses serious threats to the economy, as it will be affected by lower labour participation and a dampened savings rate, Duggar says.

“Over the course of the next half-century, Asia’s demographic composition will change inexorably as hundreds of millions of people across the continent enter into the ranks of the global senior citizenry, supported by a thinning contingent of working age adults. This doesn’t bode so well for dependency ratios and long-term growth prospects,” Neumann notes.

For instance, in Japan, Moody’s predicts that for every 100 people in the 15-64 years old working age, there will be 48 people over 65 by 2020. This means that the burden of taking care of one elderly person will be borne by two working adults. Five years later, the median age in Japan is set to increase to 50 years old from its current level of 45, Duggar says.

He adds that East Asian countries like China, Hong Kong and Korea will also face rising ageing pressures. For China, six working adults will have to take care of one elderly person by 2020, but this will decrease to only four working adults by 2030 and two working adults per elderly person by 2050.

Hong Kong and Korea will have three and four working-age adults per elderly person in 2020, and two both by 2030, and one both by 2050.

“Looking ahead, by 2050, there are expected to be two working adults for every adult over 65 in developed countries and four working adults for every adult over 65 in the developing world,” Neumann says of the global trend.

REGIONAL ANALYSIS 1: Population Ageing Development Bank study which found that ageing Asian economies like Singapore, Hong Kong, Korea, Thailand, China, and Taiwan will suffer from the negative effects of an ageing population on their economic growth in the 2010-20 period. “The negative effect of ageing will be due to the negative contribution of the labour force and capital accumulation to economic growth,” Duggar says.

Offsetting the costs of age An ageing population is not only a global trend, it’s also an inevitable consequence of a booming economy that will soon run out of fuel. That is why policy makers must strive to make a dent on the declining working age population by increasing labour participation rates and improving employment opportunities, Neumann says.

Duggar adds that it is only natural for Asia to lose steam from its history of economic growth. This does not leave much chance, however, to overlook the ageing problem.

“Asia’s favourable demographics drove a large share of its spectacular economic growth in the past, especially in East Asia. However, due to its very rapid growth and industrialization, the region is experiencing economic and demographic transformation over a much shorter time period than the advanced economies,” Duggar says.

Urbanization may just be one of the many solutions to improve the labour situation, particularly in China and

As if the threat of a dependent elderly population is not enough, Asia is also faced with the prospect of declining economic growth. This is primarily due to a lower savings rate from a declining working age population, two of the main drivers of Asia’s economy, Duggar says.

Drag in economic growth Duggar adds that in the period 2015 to 2030, Hong Kong and Japan will suffer a 10% decline in their workingage populations. HSBC adds that China’s working age population shrank by 3.45m, “much sooner than many expected, and at a rate that will accelerate in an almost exponential manner over the coming decades.”

A smaller workforce to take care of more elderly people will mean lower savings. Duggar says that in Japan,the savings rate increased until 1975 on the back of a decline in youth dependency ratio, but this reversed from a peak of 23.2% in 1976 to -0.3% in 2012, as more elderly depended on the thin labour contingent.

Similarly, in Korea, the savings rate rose a its peak of 25.1% in 1988 but slumped to 5.1% in 2013. “The reduction in the savings rate is credit negative for the affected economy as it reduces investment and consequently long-term economic growth,” Duggar says. According to Moody’s, among the countries classified as superaged by 2030, Korea, Hong Kong, and Singapore will have the largest declines in growth rates due to rapidly ageing populations. Among the ‘aged’ countries, China is expected to have the largest decline by then.

Moody’s also cite a 2011 Asian

Asian economies like Singapore, Hong Kong, Korea, Thailand, China, and Taiwan will suffer from the negative effects of an ageing population on their economic growth in the 2010-20 period.

Indonesia, where the urban setting is promising for economic growth.

But the long-term solution is “broad productivity growth,” a task easier said than done. “Seeing that there will be fewer workers, one way to offset this is to have each worker simply produce more: a task much harder to achieve than it seems,” Neumann says.

Moody’s also suggests the experience in Germany, where in 2002 to 2005 the goverment initiated reforms that reduced unemployment benefits and increased incentives for the unemployed to find jobs, boosting the labour force participation rate after 2003 in all working-age cohorts, particularly among the 55-65 age group. Moody’s emphasizes the need to improve the participation of women amid declining birth rates.

“The policy response in Germany clearly shows that the ageing of the population does not have to imply a reduction in the labour force. Labour force participation rates respond to policies designed to lengthen the employment duration of older, more experienced workers,” Duggar says.

In the end, it is up to policy makers to find a long-term solution to the age problem by taking advantage of the trend, instead of problematizing it. “In spite of the challenges, there are also numerous opportunities across a variety of sectors and industries. It boils down to whether investors can position themselves correctly to take advantage of these trends,” Neumann says.

Among countries classified as ‘super-aged’ by 2030, Korea, Hong Kong, and Singapore will see some of the largest declines in growth rates due to rapidly aging populations

Source: TheCEIC, Conference Source: HSBC Board, WDI, Moody’s Investors Service

co-published Corporate profile

Mobility for the modern professional See how Hyperlink Holdings makes life easy for immigrants to Hong Kong.

I

n today’s business and professional environment, rapid globalisation is no longer uncommon, and is in fact already the norm. Advancing one’s career in a globalised environment often entails the mobility of leaving home and moving to other countries, and staying there for a significant amount of time. For many experienced expatriates, one of the hardest parts of migrating internationally is the aggregated frustration over the multitude of errands that have to be done for a smooth transition – finding a house, learning the commute, ‘migrating’ finances, etc. And as with any painstaking problem, a business opportunity is bound to arise eventually. And Hyperlink Holdings was the first to capitalise on it, successfully.

Hyperlink Holdings is an immigration services company that offers prospective immigrants to Hong Kong services that aim to ease the transition. These services, in broad strokes, involve assisting customers with documentary requirements, housing and transportation, as well as cultural assimilation.

34 HONG KONG BUSINESS | NOVEMBER 2014

“Hyperlink Holdings’ main value proposition is based on a classic principle wherein the whole is greater than the sum of its parts.”

Hyperlink Holdings brands itself as the one stop shop for professionals immigrating to Hong Kong. The company has a solid six years of experience in the industry, and it primarily serves immigrating professionals from Mainland China.

Hyperlink’s business model is no short of the gold standard in crisp simplicity: it is to be present in every step of the transition. This is so because the company was able to plot out the major considerations that are relevant to professionals immigrating to Hong Kong, and then organizing the business around that linear process.

Firstly, the company offers extensive services on everything that has to do with papers and documentation. Most professionals who have experienced immigrating to a new country would be very familiar with the tediousness of immigration bureaucracies, especially those concerning the immigration of finances and investments.

The regulatory differences and requirements that come with migrating finances and investments, and other paperwork can sometimes be very voluminous that only a lawyer would be able to navigate

the process. To this end, one of Hyperlink’s key services is offering one on one assistance on navigating the necessary paperwork in financial and investment transitions.

Aside from securing the status of finances and investments, one key concern for Hyperlink’s customers also involves logistics. Being able to find a suitable home away from home, as well as being comfortably acquainted with the surrounding vicinity, is key to a smooth and fulfilling transition. Hyperlink truly covers all its bases as the company has a Property subsidiary that assists immigrants in finding suitable housing. The company also provides automotive services for any customer wishing to familiarise themselves with the Hong Kong’s ins and outs.

Hyperlink acts as a broker for car sales for the customers, making sure to take care of other related matters such as insurance.

Acting on synergies Hyperlink Holdings’ main value proposition is based on a classic principle wherein the whole is greater than the sum of its parts. Whereas there are indeed other firms who also focus on immigration services,

co-published Corporate profile

it is only Hyperlink Holdings who has mastered the art of aggregating the entire immigration process into a single package deal. More than the fact that these customers’ are usually pressed for time, the exhaustion that comes about from the bureaucracies of moving is often regarded as something that is not worth the hassle. This is the reason behind why more and more professional immigrants are finding it a wiser decision to opt to avail the services of Hyperlink Holdings, instead of taking care of things themselves. The synergies that Hyperlink has created within its company also ensure that its customers don’t overlook other important details about their immigration that they may otherwise miss.

Attention to detail The reason most companies are stuck to deal with mediocrity is the fact that they settle with having just a solid backbone. This is another area where Hyperlink differs significantly.

The company complements their airtight business model with a focus on humanising their services. “For the mainland businessman, their concern is not just professional service, but requires us to provide for more humane and caring services to help them quickly adapt to the new environment, into a new life,” says Samson Cheung, Vice President at Hyperlink.

A clear example of Hyperlink Holdings’ commitment to a genuine service is the way they handle their property business. Unlike generic property companies that simply build

and sell, Hyperlink makes it a point to also focus on their customers’ housing-related needs like interior design, and assisting them with getting acquainted with the general living area – details that most other service companies would tend to overlook. As Cheung shares, “as our customers don’t have any idea about Hong Kong, we take care of them in every single matter like interior design, furniture, transportation, facilities in the living area, and others.”

There are other less formal examples of how Hyperlink Holdings makes known its genuine one on one commitment to its customers.

“For example, we have a customer from Shanxi, and his Shanxi accent caused others to misunderstand his intention. As such, we specifically looked for colleagues to teach him Cantonese,” Cheung shares.

As evidenced by their track record in service, Hyperlink Holdings makes it obvious what their competitive advantage is. Aside from convenience and efficiency, customers also value a personalised and humanised service because this helps make the big transition of immigration much easier. And it is to this end that Hyperlink Holdings has been successful. “We offer a personalised services to them. This is our advantage in the marketplace,” says Cheung.

Focused growth For companies in the industry of immigration services, it is easy to get sidetracked by the multitude of potential new service offerings – there are just so many needs to be addressed. Hyperlink Holdings makes it a point to stay focused on the core of the business model and only launch new services or products that are clearly and logically in line with the company’s brand and purpose.

Moving forward, Hyperlink aims to further personalise its business by offering services that cater to the softer or more cultural needs of their customers. One example of these new services that Hyperlink is eyeing is providing their customers with personal tutors to teach them

“The company complements their airtight business model with a focus on humanising their services.”

Cantonese. As illustrated by the example earlier, slight differences in accents could impair one’s ability to be understandable to new colleagues in a foreign land. Hyperlink has seen that more and more of its customers are having a problem with this particular cultural difference, so the company is planning to integrate this service more comprehensively in the future.

Another area in which Hyperlink is aiming to grow at is aiding the transition for their customers’ children. A sizeable portion of Hyperlink’s customer base caters to professionals who already have families, and whose families will most likely be immigrating with them. As such, Hyperlink Holdings has seen that smoothening the transition for their customers’ children is also an important aspect of the process. The company also provides its customers with advisory services on the local education system and culture, applications to kindergarten or primary schools, and others.

HONG KONG BUSINESS | NOVEMBER 2014 35

REGIONAL ANALYSIS 2: ASEAN’S TRADE WITH CHINA

Is China’s globalisation of huge significance for ASEAN?

How does China’s globalisation affect its trade links with ASEAN countries?

With ASEAN’s trade with China representing 14% of its total trade, how significant can the effects be?

E

conomic relations between China and Southeast Asia have a long history. During the Tang Dynasty (616-907 AD) the overland Silk Road trade route with Europe became increasingly difficult to navigate. As the Tang emperors gradually lost control of Central Asia, cross-border trade from northern China dwindled.

In contrast, southern China thrived as trade was diverted through the maritime Silk Road to the region that is now covered by the Association of Southeast Asian Nations, more commonly known as ASEAN. Trade partnerships were established with kingdoms that we now call Malaysia, Brunei, Thailand and Cambodia; sailing routes were established with what are now modern day Vietnam, Indonesia and Singapore, and then extended to India, the Middle East and Africa.

Centuries later in 1292 Marco Polo 36 HONG KONG BUSINESS | NOVEMBER 2014

“By 2050, ASEAN will rank as the fifth largest economy after China, the US, India and Japan.”

made the distinction between North China (Cathay) and South China (Manji) when acting as a representative for the Chinese in an area later identified as Sumatra. At that time, trade between the region and China was already well established.

A Pacific powerhouse ASEAN is a political and economic organisation which was formed in 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand.

Membership has since expanded to include Brunei, Cambodia, Laos, Myanmar and Vietnam.

Today, like China, ASEAN is an economic powerhouse. If ASEAN were a single country it would have a population of about 600 million, the third largest in the world, and be the seventh largest economy, with a combined GDP of USD2.4trn in 2013.

According to a projection by HSBC’s economics team, by 2050, ASEAN

will rank as the fifth largest economy after China, the US, India and Japan.

This report is the latest in an HSBC series that looks at what a globalising China means for various parts of the world. Whether it is Europe, Latin America, the Middle East, North Africa or ASEAN, the answer is always the same – it is of huge significance for all concerned.

We believe that, despite the geopolitical complexities, trade and particularly investment between China and ASEAN have a lot of room to deepen further, given their growing economic importance as global producers of goods, rising domestic demand and efforts to integrate economically through regional trade pacts. This report identifies major themes that will change the landscape of trade and investment between ASEAN and China in the years ahead and how this could affect the amount of money Asian companies earn over-

REGIONAL ANALYSIS 2: ASEAN’S TRADE WITH CHINA “In 2009 China overtook Japan and the US to become ASEAN’s largest trading partner.”

Foreign direct investment the next growth driver

seas. In ASEAN, the tea and textiles that dominated trade in Marco Polo’s day have been replaced by a vast array of goods, services and investment.

In this respect, the catalyst was the launch of the ASEAN-China Free Trade Area. This pact lowered tariffs for more than 90% of the goods to close to zero.

As a result, in 2009 China overtook Japan and the US to become ASEAN’s largest trading partner and the following year ASEAN emerged as China’s No 3 market behind the EU and the US. For example, around 25% of China’s coal imports now originate in Indonesia, more than any other country. The pace at which trade has grown is remarkable – bilateral trade surpassed USD358bn in 2013, up from only USD37bn in 2000.

A two-way exchange ASEAN’s trade with China represents 14% of its total trade, up from 3% in 1995 and is now greater than its trade with the US and the EU. The larger ASEAN countries, especially Indonesia and Malaysia, have led the way. This is no surprise as Indonesia represents almost 40% of the region’s economic output and is a member of the G20 (McKinsey 2014). At the other end of the scale, China’s trade with Laos, Cambodia, Brunei and Myanmar is still at an embryonic stage. The USD1.7bn sum of total exports to China from these four smaller members of ASEAN is less than one third of the Philippines’ and

one ninth of Vietnam’s alone (as of 2013).

While two-way trade is booming, foreign direct investment (FDI) looks set to be the next driver that will further increase economic ties between ASEAN and China. Surprisingly, while ASEAN and China trade links are robust, investment flows between the two are relatively weak. China’s FDI into ASEAN between 2003 and 2012 was only USD23bn and just USD14bn if Singapore is excluded; that’s less than the USD18bn China invested in Africa during this period.

The fact is that more ASEAN funds are going the other way. From 2003 to 2012, total investment by Thailand, Indonesia, and the Philippines into China was USD7bn, versus USD6bn heading in the other direction.

For example, Thailand’s Charoen Pokphand (CP), one of China’s first foreign investors, has built a conglomerate comprising more than 200 subsidiaries in food processing, retailing and other businesses. Many others companies have followed, from Philippine retailers and Singaporean banks to Indonesian real estate developers and Malaysian hotel groups.

SM Prime, the largest shopping mall operator in the Philippines, owns five malls in China with two under construction, and 30% of its 2013 capex was for China properties.

China’s investment wave Chinese FDI to ASEAN, which has increased steadily since 2003, has

shifted focus in recent years from energy related mining and agriculture, to real estate development, manufacturing and services industries, including finance, trade and logistics.

In some cases, these flows are staggering. For example, China’s investments in Laos in 2012 exceeded 15% of national GDP. In Cambodia, a similar picture emerges.

Chinese state-owned enterprises (SOEs) have also played an important role in this investment wave.

They have been active in investing in upstream oil & gas, utilities, metals & mining and infrastructure across ASEAN, while real estate represents more than half of Chinese private sector investments in the region.

At ground level, the rising cost of labour in China is becoming an increasingly important factor in deciding where to invest in labour intensive manufacturing as China moves up the high-tech, value added ladder.

Caijing, a leading Chinese language business publication, last month reported that according toa survey by the Chinese Manufacturers’ Association of Hong Kong, nearly 30% of the manufacturers interviewed would reduce their investment in the Pearl River Delta, the key factory hub in southern China, over the next three years. The survey also found that 32% of the manufacturers were planning to move production to countries with lower costs, such as Vietnam. This reflects China’s competitive challenge in labour-intensive manufacturing.

Singapore has long played a central role in the wave of investment from China. It received more than half of China’s FDI to ASEAN until 2010s, when investment in Indonesia, Myanmar and Thailand took off. Sin

China’s share of total ASEAN exports and imports is rising

Note: UNCTAD, HSBC

HONG KONG BUSINESS | NOVEMBER 2014 37

REGIONAL ANALYSIS 2: ASEAN’S TRADE WITH CHINA gapore still has a major role in financing the trade and investment flows across ASEAN and China, emerging as a regional hub for offshore RMB business in the process. The key facilitators behind bank credit flows are development banks and policy banks, represented by the Asian Development Bank (ADB) and the ExportImport Bank of China (Exim).

Since 2011 the ADB (Japan and the US are the biggest shareholders) has had a particular focus on the development of the Greater Mekong sub-region. The overall pipeline of projects for this region is estimated at about USD51.5bn, to be financed by the ADB, regional policy banks and regional governments.

In a separate initiative, China’s Exim bank has provided credit support to build or renovate 24 highways, three railways, one port, three airports and nine bridges in the Mekong region and ASEAN. Projects include Cambodia’s national rail system, the Second Penang Bridge in Malaysia and the Luang Prabang Airport in Laos. Note that Exim extended more

“Since 1995 trade between China and the ASEAN economies has grown an average of close to 20% a year, reaching USD358bn in 2013 or 14% of total ASEAN trade.”

Trade with China as a % share of total

Note: Data for year 2013 Source: UNCTAD, HSBC

ASEAN exports to China have risen since 1995

Source: UNCTAD, HSBC

38 HONG KONG BUSINESS | NOVEMBER 2014

loans to developing countries than the equivalent arms of the World Bank during the financial crisis of 2009-10 (source: Financial Times, 17 January 2011).

Meanwhile, China has also proposed the setting up an Asia Infrastructure Fund, resembling the ADB in form and function. With up to USD100bn in start-up capital, this could emerge as another source of funding for projects in ASEAN. Investment implications The intensification of trade and investment links between ASEAN and China offers multiple investment opportunities. It is also having an impact on how markets behave across the region. While the Chinese banks have followed their domestic customers abroad to offer cross-border services, ASEAN based banks are active in M&A businesses with Chinese companies. Singapore has emerged as a regional hub for offshore RMB and some Singaporean banks have acquired Chinese banks. For example, Malaysia’s Hong Leong has taken a stake in Chengdu Bank.

Real estate investments led by private developers are flourishing.

Chinese companies have purchased land, participated in single site sales and conducted M&A transactions in Malaysia and Singapore. The trend is likely to expand into Thailand, Indonesia and the Philippines. ASEAN companies that have solid branding in China will also see stronger demand from Chinese customers and vice versa.

Many Chinese exporters are shifting to ASEAN to capture lower production costs and expand in local markets. As this trend continues, we should expect more ASEAN joint ventures with Chinese players, especially in sectors such as textile, automobile and telecom.

Trade and investment links also increase interdependence and, in turn, raise the correlation between markets.

Equity market indices in Indonesia, the Philippines, Malaysia and Thailand have the strongest correlation with normalised HSBC China Manufacturing PMI; Singapore’s Strait Times Index and Malaysia’s Kuala Lumpur Composite Index have

the closest correlation with the MSCI China Index.

Naturally-fit trade partners China and ASEAN are a natural fit as trade partners. The links have strengthened in the last 20 years thanks to regional trade pacts, supply chain integration and rising incomes.

Since 1995 trade between China and the ASEAN economies has grown an average of close to 20% a year, reaching USD358bn in 2013 or 14% of total ASEAN trade. Surprisingly, while ASEAN and China trade links are robust, investment flows between the two are relatively weak. China’s foreign direct investment (FDI) into ASEAN between 2003 and 2012 was only USD23bn and just USD14bn if Singapore is excluded; that is less than the USD18bn China invested in Africa during this period (Latin America and Europe received the most funds).

China’s FDI has been strong only in the smaller ASEAN economies of Laos, Cambodia and Myanmar. The fact is that more ASEAN funds are going the other way. From 2003 to 2012, total investment by Thailand, Indonesia, and the Philippines into China was USD7bn, versus USD6bn heading in the other direction.

We believe that trade and particularly investment between China and ASEAN have a lot of room to deepen further.

We have identified three major themes that will change the landscape of trade and investment between ASEAN and China in the years ahead: Large regional trade pacts, including the Regional Comprehensive Economic Partnership (RCEP), which is being negotiated between ASEAN and its six free trade agreement partners, including China, and the Trans Pacific Partnership (TPP), which will facilitate regional investment and trade flows; Deregulation of China FDI and saturation of China’s domestic market will see investors look for better growth markets, which will lead even higher growth in China FDI; and rising incomes in both China and ASEAN will facilitate trade and investment in services and consumption goods. By Herald van der Linde, Head of Equity Strategy, Asia-Pacific, HSBC Global Research

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regional economy briefing: india

Food prices in India are rising more than global the average

Modi takes on Indian growth conundrum With the Indian economy recovering, the new government thinks it has the right growth plan going.

I

ndian Prime Minister Narendra Modi came to power in May with the promise of jumpstarting a decelerating economy, characterized by growth that remained below 5% over the last two years. Although still in the early phase of his leadership, the Indian premier is dropping hints about working on a systematic model reminiscent of strategies employed

by Japan and China – the East Asian model – responsible for the rapid modernization of two of the world’s biggest economies.

“The East Asian model of growth is a well-trodden path, and has now been used by a succession of countries to generate and sustain rapid economic expansion. It is also accompanied by risks, especially in the financial system that could derail the whole project. If India succeeds, it would prove to be a major turning point in the lives of 1.2 billion people and would have very significant ramifications for the world economy,” says David Folkerts-Landau, group chief economist of Deutsche Bank.

The new Indian government came to power amidst a backdrop of slowing growth, after the global economic meltdown punctuated stellar growth rates above 9% from 2005-2008.

Edward Teather

Atsi Sheth

40 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014

How was the Indian economy before Modi?

The economy managed a brief bounce following the global financial downturn, but it has since been running below 5 percent for the last two years.

“The once booming services sector has slowed, but it is the manufacturing sector that has performed especially poorly by recording an expansion of barely 1.1% growth in 2012-2013 followed by a contraction of 0.7% 2013-2014,” Folkerts-Landau says.

Some economists blame two things for the protracted slowdown of the Indian economy. Weak external demand and a decline in domestic investment led to a lack of demand, which created a dent in an erstwhile

solid growth trajectory. Exports have been anaemic in the past years and gross capital formation plunged from 38% of gross domestic product in 2007-2008 to 31.4% in 2013-2014. In the same period, capital formation dropped from 32.9% to 28.3%.

Folkerts-Landau points out, however, that these proximate factors do not explain why the economy slowed down while simultaneously also suffering from persistent-inflation and a current account deficit.

Consumer price inflation was an average of 10% every year since 2009, while the current account deficit averaged 3.2% of GDP. “Persistent inflation and a large current account deficit are not signs of weak demand but of the inability of the production capacity of the economy to meet excess demand.

The inflation rate and the current account deficit have moderated somewhat in the latest data, but this is partly due to deliberate monetary tightening, and partly due to stalled projects – not some exogenous lack of

regional economy briefing: india demand for final goods and services.

An investment project stalled by policy paralysis may reduce demand but the resultant economic slowdown it is really a reflection of systemic inefficiency,” Folkerts-Landau says.

What should be on Modi’s to-do list?

Food inflation in India, which contributes greatly to the country’s overall inflation, is much higher than the global average, says Atsi Sheth, senior vice president of Moody’s Investor Service. Since India’s huge population demands a large amount of food, food comprises a significant portion of the average consumer basket. A huge gap in supply and demand does not help in tempering these food price pressures.

“The authorities have yet to set out concrete plans vis-à-vis certain other major constraints on supply.

For instance, it is hard to see how significant private investment in cold storage facilities will be, if current restrictions on foreign direct investment in the retail sector remain in place. It is also not clear whether officials will substitute the previous practice of ad-hoc trade bans on food items with a medium-term trade policy that would enhance predictability in food supply,” Sheth says.

She says that if the gap between food demand and supply does not narrow, food costs will continue to shoot up. As growth picks up, the increasing cost of food could more quickly feed into rising wages, leading eventually to higher non-food inflation as well. “In the absence of a significant increase in food output, the risk that inflation could limit India’s growth prospects remains salient,” Sheth adds.

As the Modi government bats for growth beyond previous levels, it is also confronted with the need to generate employment for millions of Indians. Between 2015 and 2020, the working age population in the country (15 to 59 years old), will jump from 804 million to 856 million. This needs 10 million additional jobs every year to keep up with the demographic expansion. Another problem with India’s employment generation is

the disproportionate share of the workforce still locked in agriculture.

“The share of the primary sector has fallen from 28.5% of the economy in 1990-1991 to 23.2% in 1999-2000 to around 14% of GDP today, but it still employs 49% of the active workforce,” Folkerts-Landau says.

In contrast, the services sector only employs 28% of the workforce despite growing from 43% to 60% since 1990.

He adds that this growing imbalance is one of the reasons that India has been a reluctant urbanizer and two-thirds of the population still lives in rural areas. “Not surprisingly, the children of farmers can see that they are getting cornered into a shrinking segment of the economy and want to opt out. Meeting their aspirations is not merely an economic issue but a socio-political one,” he says.

The government is also tasked with including ease of doing business in its long-term goals. The World Bank’s “Doing Business Report 2014” ranked the country 134 out of 189, scoring poorly in areas that involve interface with the government – paying taxes, construction permits and so on.

What’s in store for the Indian economy?

Despite these challenges, however, the Indian economy has recently showed signs that its slow growth below 5% is now poised to smash the psychological barrier.

“India’s (Baa3 stable) economic recovery, manifested in data last Friday showing annual GDP growth of 5.7% in the quarter ended June, is in keeping with our long-held view that growth deceleration to sub-5% levels over the last two years would reverse over time. This forecast has underpinned the stable outlook on India’s rating amid currency volatility, declining investment and poor market sentiment,” Sheth says.

Economist Edward Teather of UBS Global Research says a pickup in the Indian economy is visible, but unlikely to be rapid.

“And while we expect the new government to make progress on infrastructure (we note the acceleration in construction in the

India’s inflation is higher than in comparable peers

Source: Haver Analytics, Moody’s

GDP data at a glance

Source: CEIC and Nomura Global Economics

“Between 2015 and 2020, the working age population in the country (15 to 59 years old), will jump from 804 million to 856 million.”

latest GDP print), the latest news flow in the coal sector highlights the potential for challenges. The weak monsoon could also be a drag on agricultural activity. We continue to project a sustained but gradual acceleration in GDP growth in FY 15 and FY 16 on average,” he says.

Folkerts-Landau says Modi’s speeches and policy actions present a clear and internally coherent economic model focused on export-oriented manufacturing, heavy infrastructure building and urbanization. If the prime minister’s promises prove to be true, we’ll be seeing mass deployment of labour and capital in India in the coming years.

“Not only are these elements internally consistent, they also look very much like the economic model used by East Asian countries to rapidly modernize themselves. In other words, for the first time since Nehru, we have a wide-ranging, internally consistent economic model,” he says.

OPINION

Christine wright

Growth in Hong Kong banking jobs set to continue

Which jobs are in demand?

T

he Hong Kong Monetary Authority recently announced that it will be putting greater effort into promoting the city’s fund and wealth management industry over the next five years. This initiative will underpin Hong Kong’s reputation as a global financial centre and boost job opportunities in the banking sector.

We are already seeing many job opportunities in fund and wealth management. On the sell side, the continuing move towards electronic and algorithmic trading has meant that Quantitative Analysts with strong programming skills are in demand. On the buy side, the fund universe continues to diversify and both international and regional companies are increasingly turning to quantitatively driven strategies in the hope of maximising returns in uncertain markets.

While investment banking remains volatile, banks are refocusing their resources on growing their corporate banking business where there is a steady stream of income. Experienced Corporate

42 HONG KONG BUSINESS | NOVEMBER 2014

BY CHRISTINE WRIGHT Managing Director Hays

Banking Relationship Managers are in demand, especially those able to bring onboard new clients to immediately impact revenue growth.

Cross-selling and a focus on product lines will be a priority for most banks. Local Corporate and China Corporate Relationship Managers are in highest demand.

Increased business flow resulting from the addition of Local Corporate and China Corporate Relationship Managers has created the need for experienced Commercial Banking Credit Approvers to join the banks to review and approve transactions. As a result of banks’ limited appetite for credit, Approvers will play an important role in balancing the risk and reward for bank portfolios.

Due to the increment of cross border M&A activities, Mandarin-speaking M&A Bankers are highly sought after. Bankers are often required to write a pitch book in Chinese for these M&A transactions, or even negotiate deals with Chinese clients in Chinese.

In the last few years there has been a tremendous growth in wealth within the Greater China region. To illustrate this, China has recently overtaken Japan as the number two country with the most millionaires in the world.

Private banks are competing harder than ever to recruit Private Bank Relationship Managers as they aim to capture this newly created wealth in the region.

Experienced professionals in compliance and anti-money laundering are in very strong demand at the moment. AML/KYC/FATCA Managers who have a strong track record and up-to-date regulatory know-how, such as FATCA, Dodd Frank, EMIR, and MiFID2, are the most highly regarded. Experienced candidates with expertise in front office and middle office compliance are in demand as the compliance function continues to shift towards middle office, and in some cases, even straight onto the trading floor.

As most banks are rolling out their regulatory change programmes, Compliance Change Programme Managers are in demand at the moment. There has been significant hiring activity across the ‘bulge bracket’ banks. The mix of PM and compliance endows these roles with more dynamism, so candidates with very strong interpersonal skills and relevant PM and compliance experience are in strong demand.

ECONOMICs

Ian Perkin

Are there political and economic constraints to growth?

T

he Hong Kong Government’s second quarter economic report issued on August 15 raised more questions than it answered. While growth for the quarter was slower than expected (a real 1.8% year-on-year rather than something more than 2%), it was easily explained. Most of the slowdown in growth was due to less spending locally by Mainland tourists (despite higher numbers) and weaker domestic consumption, part of it as a result of the lower tourist spending. But behind this readily available explanation several bigger questions remained unanswered.

Two of them are political in nature – one on the Mainland and the other in Hong Kong – and two economic. First, to the political questions. The key question related to Mainland politics is whether the lower spending by Mainlanders in the SAR is a result of President Xi Jinping’s crackdown on Mainland corruption and the resultant decline in “conspicuous consumption”. There is certainly plenty of evidence of this effect on domestic Mainland spending and outbound Mainland tourism (numbers and spending) elsewhere around the globe.

If the crackdown is having an impact, the important questions for Hong Kong are: Will it continue? And, if so, will it get worse and for how long?

The second political question is whether the debate in Hong Kong over the method for choosing candidates for the 2017 Chief Executive election, and the associated political uncertainty, is having an impact on confidence and consumption (and perhaps investment).

There is no concrete evidence for this as yet (although there may be some anecdotal indications), but the key concern is whether there may be a bigger impact in the coming six months.

Any such worsening domestically would have serious implications for the Government’s forecast for annual growth, now revised down to 2-to-3% from the original 3-to-4%.

The first economic question of interest – and one which relates to the medium-to-longer term rather than the short run – is whether the local economy is now subject to capacity restraints that will cause it to under-perform longer term.

Of particular concern here are the tight labour situation (which has been highlighted by the business community for some time) and the future of investment now the government’s infrastructure outlays have peaked.

Unemployment edged up marginally to 3.2% (from 3.1%), meaning the labour market is still very tight. Wages also continued to rise, being a real 2.1% higher for unskilled workers in full-time employment.

Business has been worried about the labour “constraint” for some time and some worry the private sector may re-think its commitments to the SAR, especially with opportunities elsewhere (on the Mainland and throughout East and South Asia).

Both the labour and investment situation deserve further study.

44 HONG KONG BUSINESS | NOVEMBER 2014

IAN PERKIN Independent Economic Consultant perkin888@hotmail.com

GDP Growth: Hong Kong SAR (%)

Source: HKSAR Government quarterly economic report

A better understanding of Hong Kong’s medium-to-longer term growth potential as a mature, service-based economy within a larger whole (the Mainland) – and any constraints to growth that exist – would be particularly illuminating.

Meanwhile, the Hong Kong administration is clearly focused on the short term and may be worried that even its revised annual forecast (2-to-3%) may already be out of reach.

Taking into account domestic and global economic factors, the lower annual growth estimate seems achievable, requiring a little over year-on-year growth of 2% real in each quarter.

But a more than 3% year-on-year in each quarter, needed to achieve the higher growth estimate, seems to be out of the question unless there is a sharp turnaround in the global (and Mainland) outlook.

Slightly lower inflation (already apparent in the second quarter) should help the outcome, but a more confident domestic situation and better external trade (in goods and services) would do most to help.

More recently, a global economic assessment by the Organisation for Economic Co-operation and Development (OECD) has revised down expectations for major developed economies (Europe, the US and Japan) and for the world trade outlook.

This is likely to be another major restraint on local growth (and perhaps the Mainland) in the short term.

As the Government Economist says in the second quarter report, the risks in the immediate future are on the downside.

“Looking forward, the global economy is expected to remain on a moderate recovery path in the rest of 2014,” according to the report.

“This, together with an improving Mainland economy, should entail a somewhat brighter export outlook for Hong Kong in the period ahead, though the scope of rebound might continue to be held back by the rather fragile recovery of the advanced markets.

“At the present juncture, both the local and external environments are beset with increasing downside risks,” it adds.

OPINION

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

Y

ou know, to paraphrase Dirty Harry, in all that excitement I have plumb forgotten the number of Lufsig’s illegal structures.

What was the number of unauthorized adornments for Chez Leung? Was it, as the old song has it, 12 for the 12 apostles, 11 for the 11 who went to heaven, or 10 for the 10 commandments?

Whatever the number was, it was too many for a man to stand up and pontificate publicly about the importance of obeying the law.

Mr C.Y. Leung knows perfectly well that there is a compromise between obeying and not obeying the law: the one he used himself.

You disobey the law until it becomes publicly known and an electoral liability, then you obey and perpetrate a cock and bull story about your ‘mistake’. Michael Chugani’s hyper-sensitive hypocrisy detector must be ringing like mad at this point. Whether that produces any published results remains to be seen.

Another man with numbers problems is my old friend Robert Chow Yung. The point which he seems to have overlooked is that comparing one number with another only works if both the numbers were collected the same way. Farmer Giles says he has 200 animals on his farm: 50 cows, 50 sheep and 100 chickens. Farmer Jones responds that he has 2000 animals on his farm: 50 cows, 50 sheep and 1,900 cockroaches.

Clearly it would be foolish to conclude from this exchange that Farmer Jones is in the lead. But Mr Chow just cannot resist counting the cockroaches. I do not know whether more people support Occupy Central or the Campaign for Peace, Silent Majority… whatever it calls itself this week. I do know that no useful conclusions can be drawn by comparing the number of people who participated in the “plebiscite” and the number of people who participated in the “petition”, because the conditions under which names were collected were quite different. Mr Chow’s lot were willing to accommodate tourists, children, and people who wanted to ‘vote early and vote often’, as they used to say. This produces a higher number but makes comparisons impossible.

The same goes for today’s march. Numbers of marchers on these occasions are notoriously difficult to establish and even more difficult to interpret. But whatever number we eventually accept it cannot be usefully compared with the turn-out on 4 June or any other date, because on those earlier occasions the number was not affected by shameless offerings of bus rides, museum visits, lunch boxes or free post-protest dinners. We do not need to explore the possibility of undue pressure being exerted by employers, or offers of actual cash: what is readily admitted is enough to prevent this event from being compared usefully with others in which bribery was not on display.

Still on numbers of people at protests, we come to the curious aftermath of the propolice demonstration the other week. All these years we have supposed that the police were politically neutral, and the reason why their estimates of numbers were always much lower than those provided by organizers of the event concerned was something entirely innocent:

46 HONG KONG BUSINESS | NOVEMBER 2014

maybe the police counting method was more conservative. But after the pro-police demonstration the normal order of events was reversed. The police number was about twice as big as the one offered by the organizers. This was a small demonstration – the organizers’ figure was 2,000-something – so there is a desperate shortage of innocent explanations for this. It seems that the police figures are just wild guesses like everyone else’s, and like everyone else the police tend to see what they want to see.

Finally we come to the week’s most surprising number, the majority vote of no confidence in the chairman of the Law Society.

This was followed in all channels by the information that the rules of the Law Society do not require a chairman to resign if a vote of no confidence is passed.

This brings to mind the story, for which I am indebted to Bernard Levin, of the domestic helper who came home one day to find an alligator in the bath. She resigned, explaining that “I cannot work in a house with alligators. I did not mention it because I did not think it would come up.” I am sure the drafters of the rules of the Law Society never considered the question of what would happen if a motion of no confidence in the chairman was passed. They assumed that the chairman, as any gentleman would, would resign. Off you go, Ambrose.

Let’s play the numbers game!

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OPINION

Hemlock

Property bizarreness gets weirder

T

he South China Morning Post’s ‘Public Eye’ column echoes my point that Hong Kong’s pro-democracy activists would accomplish much more for the city if they channelled their energy into protesting the damage poor governance does to people’s lives.

Specifically, the systematic impoverishment of nearly everyone by property and related cartels.

The SCMP turned the argument into a democrat-bashing exercise, with the obligatory claim that Occupy Central’s planned downtown sit-in will harm the innocent public. (No traffic and maybe a day off – the horror!) But the main point is valid. The pan-dems’ usual response to this sort of charge seems to be that we need universal suffrage first: solving cronyism and other wrongs will naturally follow. But it has been nearly 30 years.

The latest real-estate bubble is related to distant central banks’ money-printing, and former Chief Executive Donald Tsang’s determination to maximize developers’ profits by (among other things) curbing land supply. Add ‘hot money’ from China, maybe Russia and elsewhere, as in London, Vancouver and other cities. On top of that is the local investor psychology, cynically exploited by the property tycoons, helped by bureaucracy. The drip-feeding of units onto the market and high-pressure sales practices wouldn’t work without people desperate to buy.

Big developers (with official blessing) have recently scrapped planned luxury projects to build much tinier apartments. At this rate, the only homes the middle class can hope to afford are ones that are too small to live in. Maybe, with an ageing population and declining household size, the city will need a larger proportion of micro-flats in its housing stock.

Or maybe we are on course for a situation where only the publicly housed poor and the top 10% of the rich will be allowed space to have kids. Our planning and other officials aren’t saying which.

The government could set tighter controls on what developers produce; requiring that apartments be a minimum size and a maximum price (with resale conditions, as with the Home Ownership Scheme). Instead, the Lands Department behaves as if it’s a private-sector real-estate auctioneer, while housing officials try in vain to cool things down with extra stamp

duty. (Yes – one part of the government tries to make housing as expensive as possible, while another tries to make it cheaper.) If speculators were hoarding vital medicines or food during plague or famine, government would intervene, but keeping apartments empty while people live in cages is sacrosanct. Officials don’t even seem to consider what is ultimately better: expensive or cheap housing? Instead (as in other world cities right now) the nearest thing to a coherent government-wide policy is wringing hands and waiting for the bubble to burst.

You have to wonder: who, exactly, is buying these apartments of 250 or 300 square feet at HK$3.5-4.5 million? Where have they come from? What do they expect? What do they look like? It’s a genuine puzzle.

Strolling down my own street recently, I saw the offerings in a real-estate agency window. An apartment the same size and layout as mine, in the same road, is for sale. I bought my flat a bit over 20 years ago, before Soho and the MidLevels Escalator existed and the neighbourhood was a quiet old blue-collar quarter up the hill from Central. But even so… asking price: 9.9 times what I paid.

The latest attempt at an explanation is the ‘renovation of the nearby Police Married Quarters as a creative hub’ (yeah, right, that’ll make a slum worth US$1.3 million). Multiply this citywide, and we have something that’s too absurd to last.

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

Will HK need a larger proportion of micro-flats?