Hong Kong Business

Display to 31 July 2013

SALARY SURVEY 2013 see which jobs will get the biggest rises

Property briefing: Time to Buy or Sell?

a sea monster enters Hong Kong’s port is disinflation atan end?

Venture capital briefing: following the money

the devil buys prada

Do Facebook likes = sales?

FROM THE EDITOR

HONG KONG

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This issue of Hong Kong Business brings you a wealth of information about significant sectors in the Hong Kong business and economic scene.

You’ll be surprised that it’s not only mainland buyers boosting sales as locals increased their spending by 7.2%. In fact, Hong Kong has just experienced the highest ever jump in private consumption, with the annualized rise pegged at 4.9%.

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Our channel checks in the offshore renminbi market reveal that while Hong Kong is still the pre-eminent CNH trading centre, it needs to do more to innovate and stay ahead especially with rivals Singapore and Taiwan catching up fast. The Singapore branch of Industrial and Commercial Bank of China commencing RMB clearing bank services on 27 May, making Singapore became the third offshore RMB centre after HK and Taiwan.

Meanwhile, our yearly salary survey reveals that a stark skills shortage leaves employers with no choice but to increase the average salary levels by up to 20% to attract and retain highly skilled workers. While Hong Kong businesses are gaining confidence to hire again, only selected sectors plan to boost headcounts in 2013.

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

Tim Charlton

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HONG KONG BUSINESS | JULY 2013 3

CONTENTS

08 FIRST Hong Kong losing CNY trades

Story 26 Cover Hong Kong recovering slowly from hiring jitters

FIRST 08 Three screens you’re in 09 HK banks to benefit from China’s

48 OPINION Starbucks’ cowardly kowtow ANALYSIS

OPINION 16 Optimizing healthcare assets and development in Hong Kong

deposit insurance scheme

10 Is disinflation at an end?

12 A sea monster enters Hong Kong’s port 14 The devil buys Prada

24 Understanding business etiquette in Hong Kong

40 Using tech to get the most out of

REGULAR 36 Legal Briefing: Labor law changes to hurt HK employers

your next event

32 China’s wealth management

products whipped into line Bold new regulations seek to lower risks borne by Chinese banks offering wealth management products.

42 What you need to know

about investing in Asian property While most people buy homes to live in, many in Asia buy them as investments, writes DBS Chief Economist David Carbon.

38 CMO Briefing: Do Facebook ‘likes’ translate to sales?

50 Numbers Published Bi-monthly on the Second week of the Month by Charlton Media Group Pte Ltd, 19/F, Yat Chau Building, 4 HONG KONG BUSINESS | JULY 2013 262 Des Voeux Road Central, Hong Kong

For the latest business news from Hong Kong visit the website

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ECONOMY

Hong Kong is world’s third most competitive country The IMD World Competitiveness Center in Switzerland said Asian nations are the most competitive in its rankings.

Hong Kong placed third, Singapore fifth and Taiwan 11th.

Malaysia and Australia both dropped one place to 15th and 16th respectively, while South Korea stayed at 22nd and New Zealand slipped one spot to 25th. USA regained its No. 1 ranking.

Finance

RESIDENTIAL PROPERTY

How Hong Kong banks are benefiting from spiking US interest rates Banks benefit from more net interest income initially as interest rates rise, according to Barclays.

The analyst looks at other potential consequences, including system liquidity, deposit competition, loan growth, asset quality, property prices and offshore RMB growth, including stress-testing our estimates under upside and downside scenarios.

Here’s why home prices in Hong Kong are creeping up again While residential property prices are still 2.8% below the peak recorded in mid-March, prices are creeping up again since mid-May (1.38% cumulative increase over four weeks).

DBS noted that the most fundamental reason is the demand-supply imbalance.

Even discounting investment demand, pent-up demand from end-users is enormous.

Tips on how to go back to work after maternity leave

BY WILMA WU The prospect of returning to work after having a baby is sometimes daunting especially as there is a desire to stay at home with the new child rather than commute leaving baby behind. Planning the transition back into the workplace or setting up a company instead need not be a frightening prospect or saga.

Why Hong Kong startups flock to US-based accelerators

BY CASEY LAU With only one real accelerator program in Hong Kong (AcceleratorHK focusing mainly on mobile startups, ChinaAccelerator in Dalian and JFDI in Singapore), where is a startup based in Hong Kong to go for seed funding and mentorship?

They go west!

FROM THE BLOG 4 ways to optimize Hong Kong firms’ websites

BY BRENT PAYNE Getting ahead in Hong Kong business used to be about who you knew. Now, it’s about if a search engine thinks it knows you.

A web page for a business is only the first step. It must be publicized correctly using the top search engine optimization practices so a business gets the most exposure possible.

6 HONG KONG BUSINESS | JULY 2013

FIRST denominated bonds (named Bao Dao or Formosa bond, after the Chinese words for ‘Treasure Island’, a popular reference for Taiwan).

The outstanding of RMB deposits in Taiwan reached RMB60 billion in May, just three months after Taiwanese banks started to offer RMB accounts.

Trading of offshore RMBdenominated bonds in Singapore had a strong and impressive start. Only a week after the kick-off of the clearing service, three banks (including DBS) collectively offered RMB2 billion worth of bonds that were quickly snapped up.

THREE SCREENS YOU’RE IN

9 in 10 Hong Kongers have purchased online, according to reports by research company GfK, and 1.4 million shopped in 2012 alone. That’s a 6-fold increase in a decade, made even more convenient with over half of purchases now made on a tablet or smartphone or personal computer.

It’s called the three screens, and for e-commerce players having a format for each is a must. While personal computers are the most common platform used for online shopping with over 4 in 5 online shoppers saying they have used either their laptop or desktop computer to make purchases, more than half used smartphones and 40% have done so using their media tablets.

Click ‘n shop It is interesting to highlight that Gen Y adoption of smartphone for online shopping is highest.

“The number of online shoppers has grown by leaps and bounds from 218,000 in 2002 to 1,383,000 in 2012,” said Walter Leung, Managing Director for GfK Hong Kong.

Among the top 10 online shopping categories, clothing came out top, followed by accessories, shoes, handbags, facial skincare products, books, hotels, flight tickets, and electronic products. While one-third of the online shoppers spent around HKD200-499 during each transaction, mainly on clothing, accessories, and shoes, over 80% of the total online purchases of local consumers are for items which cost below HK$1,000.

8 HONG KONG BUSINESS | JULY 2013

Hong Kong losing CNY trades

H

ong Kong may be the centre of the offshore renminbi market, but rivals Singapore and now Taiwan are catching up fast. The Singapore branch of Industrial and Commercial Bank of China commenced RMB clearing bank services on 27 May, making Singapore the third offshore RMB centre after HK and Taiwan.

About RMB1.6bn worth of transactions including trade-related remittances and foreign exchange trade were cleared on the first day.

Singapore further cemented its ambitions to become an offshore RMB centre as HSBC and Standard Chartered Bank took the lead to become the first banks in issuing RMB-denominated bond totaling RMB 1.5bn.

Taiwan CNY trades receive a boost Meanwhile, less than four months after Taiwan launched its offshore RMB business, over RMB60bn of liquidity has already been generated, with RMB162bn expected by yearend. Taiwan’s efforts to promote itself as an offshore RMB centre received another boost as Deutsche Bank became the first foreign financial institution to issue RMB-

Hong Kong is still the preeminent CNH trading centre, but needs to do more to innovate to stay ahead.

Hong Kong’s position Hong Kong is still the pre-eminent CNH trading centre, but needs to do more to innovate to stay ahead.

The Treasury Markets Association recently announced the launch of CNH HIBOR fixing.

This will provide a reliable benchmark to price loan facilities and facilitate the development of the offshore RMB interest rate swap market. Meanwhile, banks’ net open positions and statutory liquidity requirement for RMB have also been lifted. Given the loosening of lending restrictions, the demand for offshore RMB financing activities is expected to become more robust going forward, reckons DBS. There are no RMB remittance limits to regions outside of Mainland China, meaning transfers between different clearing banks are allowed and there is no daily limit for RMB remittance back to HK, Macau, Singapore, or Taiwan. Essentially, there is no restriction in offshore RMB fund transfers within countries outside Mainland China.

RMB trade settlement to China’s total trade

Source: DBS

FIRST The size and the scale of China’s banking system and the risks mean that having an insurance scheme may actually calm nerves.

HK banks to benefit from China deposit insurance scheme

T

alks of a credit crunch in China are prompting depositors to think the unthinkable: what happens if my bank goes bust? Even those with a short memory will remember that depositors in Cypress woke up one morning facing the same issue, but at least the smaller depositors were saved by the European bank deposit insurance scheme. China has no such insurance scheme, so in effect depositors are hoping that the central government would come to the rescue by presumably printing RMB and shoring up the banks. That may not happen, and is even less likely so

now that China is in the final stages of preparing to launch its own insurance deposit scheme.

Calming frightened depositors Since the 1960s, more and more countries worldwide have adopted an explicit DIS with the total reaching 111 as of 2011. In China, the stakes are literally huge, with the big four banks - ICBC, CCB, ABC, and BOCaccounting for half of the country’s RMB97.8 tn in deposits as of March 2013, according to Barclays. Chinese banks have failed before, as in the case of Hainan Development Bank’s in 1998, when bank runs depleted

the bank’s reserve as a result of rising concerns about the bank’s operating condition, the PBOC injected RMB3.4bn to bail out the bank.

But the size and the scale of China’s banking system and the risks mean that having an insurance scheme may actually calm nerves than frighten depositors to leave smaller banks.

If it does go ahead, it will provide a level of solace to the 99% of depositors who have less than RMB250,000 in their accounts. But those with larger deposits must now also be wondering if this is setting them up for something more ominous, should their bank go bust.

This is even more pertinent now that much bank deposits are really collected through wealth schemes, which would also not be covered by the insurance. With a distinction to be made between ‘insured deposits’ and those not insured, it is not unreasonable to think that those with more money and klout in China would be more worried.

Coverage limits and coverage to GDP per capita ratio around the world in 2010 (US$)

Source: FSB, World Bank, Barclays research

The Chartist: commercial property loans in hong kong Hong Kong banks just got a new reason to pop their champagne. Barclays said property development and investment loans account for between 12% and 25% of Hong Kong banks’ loan while the proportion covered by collateral ranges from 67% to 95%. They do not expect material losses in case of a commercial property downturn.

Hang Seng Bank’s Hong Kong Economic Monitor says negative real interest rate and rising property prices have played prominent roles in fuelling consumption growth over the last few quarters.

Investment will become a main source of uncertainty among the GDP components.

Leading indicators for business investment

Hong Kong commercial property development and investment loan as % of total loans - FY12

Sources: Census & Statistics Department of HKSAR, HSBC, Markit, Hang Seng Bank

Sources: Census & Statistics Department of HKSAR, HSBC, Markit, Hang Seng Bank

HONG KONG BUSINESS | JULY 2013 9

FIRST

Is disinflation at an end?

H

ong Kong has just experienced the highest ever jump in private consumption, with the annualised rise pegged at 4.9%. More impressive still is that it’s not only mainland buyers boosting sales; locals increased their spending by 7.2%. Nonresidents now account for 17% of consumption in Hong Kong, twice the ratio in 2001. The inflation rate seems to have stabilised at about 3.8%, although this is rather higher than where Deutsche Bank economist Juliana Lee thought it would level off.

Major inflation drivers Housing and food are the main drivers of inflation, accounting for 32% and 28% respectively of the CPI. The housing price index is mostly rent, which roughly follows actual rents with a 12-month lag. So we can forecast the coming year’s housing inflation tolerably well. We can therefore expect housing inflation to face at least a little upward pressure in the coming months.

DBS economists reckon the greater worry is rental inflation, which continues to rise. Private residential rents fell very mildly over the first 6 months of 2013 but are still up 16.9% YoY. Commercial rents for shopping stock WATCH:

Let them eat club sandwiches

centers and alike shopping centers and alike continue to inflate quickly and the extra costs have been passed on to consumers.

After the Individual Visits Scheme was introduced in July 2003, retail sales volumes grew 8.6% on average per year since 2004 whilst the stock of commercial space, however, only rose 2.0% on average in the same period. Discrepancies between the growth of retail sales and retail space helped explain the surge of retail rents in recent years. And there are no signs that situation will improve, with commercial space estimated to increase only 5.4 million sq ft over from 2012 to 2016, compared to 6.2 million sq ft over 2007-2011, notes Jones Lang LaSalle.

The Big Mac Index is a wellknown ranking that shows the prices of the McDonald’s burger around the world and is a proxy for costs of living. As a guide it’s handy, but as an epicurean it leaves a bit to be desired. So a new ranking based on the price of a club sandwich around the world is handy and perhaps more reflective of the eating habits of readers of this magazine. The top 3 most expensive cities to buy a hotel club sandwich globally are Geneva, Switzerland (HKD236); Paris, France (HKD213); and Oslo, Norway (HKD207).

Non-residents now account for 17% of consumption in Hong Kong, twice the ratio in 2001.

See what Korean firm Mirae did in HK We did not in the business of recommending stocks or investments, but we did take notice when Korean asset management Mirae claimed to have launched the lowest cost exchange-traded funds in HK. ETF’s are increasingly popular among investors as they track an index and have low fees. In Hong Kong, the average annual management fee is 0.5% and total expense ratio is 0.72%. Mirae says its new fund, the Horizons Hang Seng High Dividend Yield ETF, will have a management fee of just 0.18% and a total expense ratio of no more than 0.38%. The Hang Seng High Dividend Yield Index comprises 50 constituents.

10 HONG KONG BUSINESS | JULY 2013

VIP sandwiches The rise of club sandwich prices in Hong Kong has led the city to land in the Top Ten most expensive cities in the world to order a club sandwich at a hotel, according to the latest Hotels.com Club Sandwich Index. In Hong Kong, prices for the humble ‘Club’ ranged from an extraordinary HKD237 in one five-star hotel to a more reasonable HKD86 in a threestar establishment.

Among the Asian cities surveyed, Hong Kong has higher hotel club sandwich prices than Seoul (HKD144), Singapore (HKD120), Beijing (HKD98), and Taipei (HKD88). Hong Kong’s average club sandwich prices have even surpassed those in New York (HKD136).

ECONOMICs

Ian Perkin

Hong Kong’s modest growth not surprising

W

ith half the 2013 calendar year almost over there is precious little sign of a boost external demand coming to the rescue of Hong Kong growth, leaving the domestic economy to carry the burden.There was little surprise therefore that Hong Kong SAR growth in the opening three months of the year came in at a modest 2.8% in real terms when the Government’s First Quarter Economic Report was issued on May 10.

It confirmed that while the external sector still faced an unsteady global economic environment, the domestic sector was relatively resilient. This was despite an obvious slowdown between the final quarter of last year and the opening quarter of this year.

The government figures showed that on a seasonally adjusted quarter-to-quarter comparison, real GDP expanded only by 0.2% in the first quarter, after a 1.4% growth in the preceding quarter.

Total exports of goods grew by 8.8% in real terms in the first quarter over a year earlier, with the Mainland and some other Asian markets showing solid growth. Developed markets, however, were still weak spots, with exports to the US, the EU and Japan all showing year-on-year declines.

Major growth drivers It was the domestic economy that again underpinned growth. Private consumption expenditure grew by a fairly impressive 7.0% in real terms over a year earlier, on the back of good labour market conditions.

Unemployment edged up to 3.5%, household incomes grew 2% in real terms and earnings of lowest income earners were up 3.4%. Investment expenditure however fell back by 2.2% from the

“There was little surprise that Hong Kong SAR growth in the opening three months of the year came it at a modest 2.8% in real terms.”

distinctly high level last year.

The government said the global economic environment, albeit relatively improved from the dire situation in mid-2012, was adversely affected by “a considerable number of uncertain factors”. These included the weak EU economy and continued restrained growth in the US. “In view of the continued sluggishness in demand in the advanced economies, which would continue to

IAN PERKIN Independent Economic Consultant perkin888@hotmail.com

Table 1. Hong Kong budget estimates and forecasts

put a drag on economic activity in Asia, Hong Kong’s trade performance is likely to see some fluctuations in the period ahead,” according to the first quarter report.

“Nonetheless, the sustained solid growth of the Mainland economy should continue to lend some support to intra-regional trade going forward, to the benefit of Hong Kong,” it added.

The annual trade review of the World Trade Organisation issued last month – a report that rarely attracts the same attention as those from the International Monetary Fund or World Bank – confirmed the sluggish global trade situation.

It estimated global trade growth at a mere 2% in 2012 (see table 1). Worse, for economies plugged so deeply into global trade like Hong Kong, it forecast trade growth this year to be just 3.3%. This is well below the 20-year average growth for world trade of 5.3% annually.

The sharp slow down in world trade growth in the past three years (after the initial recovery from the global financial crisis) is primarily attributed to the weaknesses in the developed economies, especially the difficulties in the European Union and the Eurozone.

The impact of the EU is compounded by the slow down in intra-EU trade as well as the EU’s trade with the rest of the world. And the WTO does not see much improvement in the near term.

“Improved economic prospects for the US in 2013 should only partly offset the continued weakness in the EU, whose economy is expected to remain flat or even contract slightly this year,” the WTO says.

Importantly for Hong Kong, however, China is expected to perform relatively well, as its recent trade data has shown.

Global trade growth estimates

FIRST

Fashion retailers still flocking to HK

A sea monster enters Hong Kong’s port

W

hen a terrifyingly large great white shark terrified swimmers in the film Jaws, swimming would never be quite the same again. Likewise, a terrifyingly large sea monster started entering Hong Kong’s waters in July and is inducing the same fear among Hong Kong’s shipping lines. At a record 400 metres long and 59 metres wide, the new Triple E class container ship being introduced by Maersk can take 18,000 standard shipping containers at one go. It is the Jaws of the industry, and is cheaper by up to 30% than other container ships plying the Asiato-Europe routes. But rather than lowering rates, Maersk has decided to double its asking rates from US$750 a container to US$1,481 on the AsiaEurope route from July 1.

Shipping rate spikes Competitors such as OOIL also announced large increases in shipping rates. This tends to fly in the face of the economics of supply and demand, yet Barclays analyst Jon Windham reckons that the industry is about to end a savage 12-month-old price war.

“We view these announcements as signals that the industry is likely ready for cooperative price increases and an end to the 12-month-old price war. In our view, it is important that OOIL’s announcement was for a price increase greater than Maersk’s; potentially signaling the competition’s weariness of the price war and desire to raise rates even at the expense of market share. We would expect similar rate announcements from other container operators,” 12 HONG KONG BUSINESS | JULY 2013

noted Windham. Perhaps the most important impact of the Triple E’s vessel delivery is psychological. The potential for Maersk to be operating on the Asia-Europe route at a substantially lower cost per unit than the industry might make the rest of the industry more docile and willing to accept Maersk’s pricing leadership.

In other words, reckons Windham, Maersk might have finally “instilled” a degree of discipline on the industry.

China Shipping Container Lines has also ordered 18,000+ TEU vessels but they will not be delivered for another 2 years.

Perhaps the most important impact of the Triple E’s vessel delivery is psychological.

The dilemma In the meantime, the big question is whether the shipping companies can make the rates stick or whether smaller competitors will use the price hikes to undercut the competitors.

By June 2013, rates were stuck at US$640/TEU, a level at which all of the liners would be operating at a loss.

Still the temptation for competitors to undercut rates again when volumes get tough will weigh on the industry.

CSCL share price performance and Asia-to-Europe freight rates

Source: SSE, Bloomberg, Barclays Research

Hong Kong shops may have seen the highest rental surge over last year but its attractiveness to foreign brands as a major gateway to China has not waned.

British brand TOPSHOP has become the latest Western brand to open its first flagship store in the city in a bid to crack China’s lucrative retail market.

Thousands of Hong Kong fashion fans queued at the 14,000 sq ft flagship in Asia Standard Tower located at Queens Road Central. According to Philip Green, CEO of Arcadia Group which manages TOPSHOP, BHS, and Dorothy Perkins, the management is currently looking to open two more stores in Hong Kong.

TOPSHOP till you drop The flagship store will trade its latest fashion collection across two floors. The ground floor features two distinct rooms. The first room showcases TOPSHOP fashion lines against a palette of raw concrete and gloss white panels, whilst the second room features the brand’s accessories and makeup collections. A by-appointment Personal Shopping area offers the full VIP treatment in a dedicated suite off the main floor. The second floor features a shoe lounge with custom glass fixtures.

LAB Concept, a subsidiary of luxury department store Lane Crawford, which opened a new contemporary fashion destination in Queensway Plaza, Hong Kong in 2012, will manage the TOPSHOP business. A TOPSHOP corner will also open in LAB Concept at Queensway Plaza later this year.

HONG KONG BUSINESS | JULY 2013 13

FIRST The Analysts’ call

Will Prada’s 75-store opening plan work?

Nomura – Tanuj Shori

The devil buys Prada

W

hen times get tough, the tough goes shopping. That at least is the conclusion one could take from Hong Konglisted Prada, the Italian makers of handbags and accessories desired and purchased by women across the world. The group continues to perform well despite or perhaps because of financial uncertainties.

One interesting point of note is that leather goods - by which one may read handbags - remain the stellar

The cost to make a Prada item is only a quarter of the final selling price. line item posting a growth rate of 29% over the year. By comparison apparel sales were down 5% and footwear was down 12%. Perhaps a switch to Charles Louboutin or Jimmy Choos could be blamed for the footwear sales, but analysts reckon that when times are tough nothing says “I’m doing OK” than a new handbag.

In fact, bag sales are so important to Prada that despite the fall in shoes and apparel, the group managed to increase sales by 18% over the year.

And if you have ever wondered why those bags are so expensive, the answer is explained in part by the gross margin, which actually increased 1.3% to 73.6%. That means that the cost to make a Prada item is only a quarter of the final selling 14 HONG KONG BUSINESS | JULY 2013

price. Retail sales for the group grew an impressive 19% and even Europe chipped in with a 7% growth in sales.

The devil may be buying Prada, or having it bought for her, but the same cannot be said for subsidiary brand MiuMiu, which disappointed with a mere 5% increase in sales.

Barclays analyst Candy Huang said management indicated ‘Miu Mius’ development will take more time to see results owing to the uncertain economic situation. While Prada achieved 18% in net sales to EUR638.8mn, ‘Miu Mius’ growth was at 5% to EUR112.7mn. Nomura analyst Tanuj Shori says management will continue to invest in Miu Miu and has confidence on the brand as the brand awareness has been improved. The margin difference between Prada and Miu Miu mainly comes from operating leverage because there is little different pricing strategy between the two brands. “But Prada does not expect any near-term turnaround for Miu Miu,” added Tanuj.

He also reckons that wholesale rationalisation will continue and wholesale revenue may decline high single digit in FY13. Wholesale as a percentage of total sales would gradually drop to less than 10% by 2015, from the current ~15%.

Wholesales revenues are mostly generated in Italy and the US department stores. Prada is converting wholesale doors to retail in US and Russia.

Prada maintains the guidance on high-singledigit SSSG in FY13 and 70-75 store opening plan including targeting several new markets such as Qatar, Copenhagen, Stockholm, Indonesia, etc. Prada brand’s total store target would be around 400 globally (in line with matured global peers). New stores would be ~60% Prada and rest Miu Miu. Do note that Prada is facing tough comps (1Q12 organic growth of 42% and SSSG of 19%), which would make it difficult for Prada to potentially surprise in coming results.

However, high-single-digit SSSG would still be faster than weighted average of 3% for the luxury sector thus far (for the luxury sector average, SSSG slowed down from 6% in 4Q12 to 3% in 1Q13).

Growth has picked up in the US and Japan. In Japan, despite facing weaker yen headwinds, Prada is not raising the prices.

Instead, Prada’s strategy is to put through more higher-price items to support the margins in the country. There was some inflation adjusting price hike in HK and none in Europe.

Barclays – Candy Huang

Prada delivered 13.5% y/y earnings growth, 6% below our forecast due to weaker than expected wholesale (down by 9% y/y) and currency losses. Retail sales were solid at 19% y/y (+21% organic).

Nevertheless, EBIT margin increased modestly by 1ppt y/y despite additional contribution from higher margin retail business (88% vs 85% in 1QFY13 from net sales). Going forward, further margin upside could be limited given moderate SSS outlook and high base (management-guided high-single-digit SSS for FY14, from 14% in FY13).

Prada opened a net of one self-operated store in 1QFY14 to 462 stores. The only store opened is a ‘Prada’ store. For the past 12 months, the company opened a net of 67 stores, or 17% y/y. The company has also opened four franchise stores in 1QFY14, hence total number of stores reached 491.

HONG KONG BUSINESS | JULY 2013 15

OPINION

KAREN PROSSER

Optimizing healthcare assets and development in Hong Kong

BY KAREN PROSSER Head, Social Infrastructure EC Harris Asia-Pacific

patients at a later date.

Recurrent expenditure in essential services across education, medical and social services is also required and is estimated to reach HK$170 billion this year, which represents an increase of 10 percent compared with 2012. This is not an insignificant amount and is likely to drive a renewed focus on understanding where operating costs are incurred and how assets can be better managed to keep this cost to a minimum.

Understanding healthcare assets

H

ong Kong Financial Secretary John Tsang has provided several indications of the increasing importance that government is placing on providing high quality healthcare services to the population of Hong Kong.

Developing an efficient design for modern day healthcare delivery in Hong Kong is crucial but it is also important to look at how this can be delivered. A new building does not always bring improvement in healthcare - examples from the USA and the UK have shown that massive investment in health infrastructure does not always result in increased productivity or better patient outcomes unless optimisation of service delivery is considered at the same time.

By managing existing assets effectively there is room to gain the most benefit from an investment. It is therefore important that from the outset the assets are designed in a manner that fully optimises the space so that every square foot is utilised and aligned with the way clinical services are being delivered A well-designed asset should also provide a good working environment for staff to allow them to move through the building easily and minimises the time it takes to move through the appropriate clinical pathway.

Cost of operating should not be neglected Whilst the cost of building is high, the annual cost of operating an asset is actually higher when the cost per year of the life of the building is taken into account. Failure to factor this in at the very outset could ultimately impact on the cost and quality of service that operators can offer

16 HONG KONG BUSINESS | JULY 2013

Understanding healthcare assets Physical buildings are not the only key to getting value from the investment in healthcare.

Developing a better primary and community care system is just as important as building new hospitals. By investing in community services the workload of major hospitals can also be reduced.

In the recent budget announcement, the HKD 2.54 billion allocated to the Hospital Authority to help meet community demand for medical services is extremely encouraging. Reducing the number of people who visit the emergency departments for minor problems that could be treated in local clinics will reduce the burden on hospital staff and allow them to focus more time on patient care and delivering better health outcomes.

By changing the design and some of the established processes around how an asset is used, it is also possible to make big improvements both in operational efficiency and in costs incurred from delivering clinical services. Hospitals can also address rising operational costs by identifying how a hospital is performing both clinically and operationally against the best in the world. A crucial first step would be to carry out an in-depth review of the asset to understand where exactly costs are incurred within a hospital and then benchmarking this against competitors.

Having this insight on the ‘As Is’ performance of the asset allows owners to identify where improvements need to be made and to identify clear and achievable ‘To Be’ performance targets to work towards.A final step to consider is around implementing a proactive performance management approach to operating a healthcare facility. EC Harris has found that by doing this, property operating costs can typically be lowered by up to 15%, which frees up significant capital to invest in other key areas.

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Design / Build Whole House AV/Smart Home System Home Theater/Mini Cinema Listening Room/Media Room Karaoke/Dancing Room Home Office/Conference Room Retail Shop/Demo Room AV System Boat/Plane AV System Custom AV Entertainment Solution

Financial insight like cloud hosting, stock website themes making design less painful in the beginning, ways to process payments etc.) and people are more comfortable with testing their ideas before charging ahead with an idea that they may have dreamed up in the shower (that is, using methods like customer development or lean startup in order to learn fast).”

Orlando said that funding is still a pain for many startups and investors but new models, such as crowd-funding, can now allow people to test demand for a new service and fund themselves minimally to get off the ground.

Listening to speakers of the Silicon Dragon which took place in Hong Kong last April would also confirm the vibrancy of the city’s ecosystem but not without challenges, especially in securing funding.

Hong Kong startup scene shifts into full gear

6 in 10 entrepreneurs say government support is insufficient.

T

he past few years have seen more and more Hong Kong entrepreneurs eschewing the corporate ladder to take a stab at building startups. A combination of growing government support, lowering barriers for entry and a willingness among Hong Kong’s world-class talent to strike it on their own have helped galvanize the island’s startup scene.

But those who take the big leap can still find themselves mired in daunting dilemmas, like securing that next level of funding that will catapult their nascent startup to the big leagues.

A recent study by Regus would seem to confirm Hong Kong’s status as a favourable place to set up a business where 8 in 10 local entrepreneurs surveyed did not regret and would make the same decision today if they had to. The optimism comes even as respondents pointed to several deterrents 18 HONG KONG BUSINESS | JULY 2013

“There’s fewer venture capital firms competing for big deals in HK.”

to would-be entrepreneurs, the biggest of which are the difficulty in securing credit, market domination by large corporations, and prohibitive red tape. Not to mention, 57% cited lack of government support for entrepreneurs.

Experts also believe that the Hong Kong startup ecosystem has gained strong momentum during the past two years, thanks to major developments which have eased doing business in the city. Paul Orlando, co-founder of AcceleratorHK, said that where in the past it may have taken investment to get a startup to its first iteration, entrepreneurs can today often develop and test their ideas quite cheaply and quickly.

“A few things have changed to enable that to happen. The supporting services that used to be very individualized and expensive are now commodities and inexpensive (think services

Opportunities Melissa Guzy, managing partner and founder of Arbor Partners Asia, said that there is a very high threshold for venture capitalists to be in Hong Kong. Aside from the fact that there’s a good number of great entrepreneurs in the city, Guzy mentioned that there’s fewer venture capital firms competing for big deals here. “For some reason where the Silicon Valley does not want to do funding series and the Chinese venture capitalist would prefer to stay in China, that’s great opportunity for us”. Guzy cites InvestLab, an HK-based provider of financial technology and services which started operations in 2010, as an example of a good startup it invested in after it has been rejected by VCs abroad. “[InvestLab] is actually from US expats that have been in Hong Kong for a long time. They went to Silicon Valley finding venture capitalists to fund their startup and the VC team would say ‘Hong Kong is not China so we’re not going to fund it’. But it turns out that it’s an absolute, terrific company with great prospects.” Guzy said that Arbor Capital has reached agreement with CitiBank to fund the

Financial insight company.

Government support Nisa Leung, partner at Qiming Ventures commended government support to HK startups which makes the city very promising. Leung said that unlike in China, HK is a great place to be in now to get some funding from the government and angel investors. The China government, she said, requires startups to be 100% domestically-owned. So if an entrepreneur holds a US passport, they must always find somebody else to hold that entity for them.

HK’s ICT commission, in contrast, is very keen to attract more returnees coming to HK to start companies not only in mobile apps but also medical devices, she said.

According to Leung, amongst the first deal made by Qiming Ventures was with ConvenientPower, developer of wireless technologies and applications which started operations in 2006. Leung said that one of its products is a mobile phone charger that doesn’t need plug in and now it’s being housed in the Science Park. Leung said that Qiming Ventures is actively looking at other companies in the technology sector, and in medical devices which does not require heavy capital investment.

According to Ana Lo, partner at Softbank China & India, financial technology is a promising sector for startups in Hong Kong given the fact that the city is a financial hub. Another is fine fashion, she said. “Hong Kong is the center for design because it’s a cultural meting pot. It has been the melting pot for hundreds of years and really should not be branded as China’s little brother anymore. It really is a gateway to the world and there are interesting fashion brands that already came out of Hong Kong so any kind of fashion focus e-commerce websites are promising.”

Hong Kong versus Singapore Experts believe the Hong Kong startup scene has greater growth prospects than Singapore. Com-

pared to Singapore, Guzy said that a key advantage of Hong Kong is its top talent. Singapore has a lot of people who have the ability to code without a doubt, but when you’re looking at the Central Operating System (or CtOS) it can be quite difficult in Singapore, she noted.

The opposite is true in Hong Kong. Guzy said that the city has very good CtOS because the investment banks have lots of IT talents that are leaving and starting companies especially in financial technology sector. “I would say the top talent here is very good, world class. They generally have been in Goldman Sachs, Morgan Stanley and one of the other investment banks.”

Leung pointed to HK’s proximity to China as another advantage.

She noted that while Singapore has pumped a lot of money establishing world-class facilities trying to attract investors, the city is quite far away from China market.

“Hong Kong have researchers and fellows who are very close to China, can leverage and can actually do collaborative research together with the universities in China.”

Challenges Rebecca Xu, co-founder and managing Director, Asia Alternatives, said the HK ecosystem seems to be, in terms of the development stage, behind China and India. In HK, startups, she said, do not get a lot of substantial angel funding for A and B rounds. Unlike in China, Xu said that they have what they call ‘super angels’, which she described as successful entrepreneurs who have accumulated a lot of wealth and have taken their time, energy and money to turn around and support less-established entrepreneurs.

Xu added that some of them are still investing on individual basis and a few of them have raised early state venture funds.“It’s good for Hong Kong to attract funding from US, Europe, Mainland China but it needs its own super angels.

It’s important to have a genuine locally-based well developed

“It’s good for Hong Kong to attract funding from US, Europe, Mainland China but it needs its own super angels.”

ecosystem supporting the local startups because the local angels are more likely to fund the local startups since they know these people and they can check on them whether they are trustworthy.”

Arbor Partners Asia’s Guzy disagreed saying that the problem does not lie in the lack of an angel community but it is in getting these young companies to find growth capital, a similar problem faced by Singapore. According to Guzy, HK needs experienced entrepreneurs who have done it before, or experienced venture capitalists who truly understand the business. “We have first to admit that we have shortage. There’s no Sand Hill Road in HK. There’s not a lot of us who are willing to really take that risk. People are much focused on revenue and financial engineering and we have to admit that.”

Guzy said that her two companies are not looking to China for the next round of financing at all but are instead focusing on the US and Europe.

Asia’s main venture capital fund sectors

Source: Asian venture capital journal

Product categories of HK startups

Source: Penn-Olson.com

HONG KONG BUSINESS | JULY 2013 19

analysis: COMMODITIES and asia

The end of the commodity super-cycle

Commodity prices, after enjoying a historical bullrun, are likely to be in subdued territory for years to come, writes Deutsche Bank Chief Economist Taimur Baig.

S

oft commodity price trend in the rest of decade will have profound impact on growth, inflation, geopolitics, and commodity producer-consumer relationship. In this piece we argue that commodity prices, after enjoying a historical bullrun, are likely to be in subdued territory for years to come. We examine the fundamental, cyclical, and structural factors driving this development, with special focus on the emergence of shale gas/oil as a game changer.We then delve into the implications of the end of the commodity super-cycle on Asia.

The risk for heavy exporters Since most Asian economies are net importers of commodities, a benign price outlook would unambiguously lower inflation, raise growth, and improve external balances. Countries heavily invested in the business of 20 HONG KONG BUSINESS | JULY 2013

As the supercycle ends, there will likely be see a considerable tapering of wealth transfer from commodity producers to importers.

exporting commodities, however, will face adverse headwinds.

China, making up for about 25% of global demand for key commodities, has played a key role in commodity price swings in recent years. However, China’s domestic structural changes in the coming decade will likely be a negative for the global energy price outlook. An important factor here is the rapid growth of shale production and technology in the US and potentially sizeable shale gas production in China in the next 4-8 years. China, which imports 60% of its oil needs, will become a major beneficiary of the resulting easing in oil prices as well.

Growth and inflation forecast Our CGE model shows that a 10% reduction in oil prices would push up China’s growth potential by 0.3ppts and reduce its long-term

CPI inflation by 0.2ppts. We obtain similar results for SE Asia. Note that we are not forecasting a commodities “bust.” Notwithstanding the various factors flagged in this piece, there are sufficient pockets of demand and supply side uncertainties globally to provide a floor to commodity prices.

Still, as the super-cycle ends, there will likely be see a considerable tapering of wealth transfer from commodity producers to importers.

Macro implications The All Commodity Price Index of the International Monetary Fund rose by 339% between January 2002 and June 2008, a magnitude not seen since the oil shocks of the 1970s. The index corrected severely with the onset of the 2008/09 global financial crisis, but as crisis-mitigation policies were rolled out globally, and emerging market demand appeared

analysis: COMMODITIES and asia No major pipeline technology or event was seen to improve supply or lower costs of fuels and food.

to be growing insatiably, commodity prices rebounded, and by the end of 2010 prices were close to their alltime highs.

The boom in prices was, strikingly, across the board. Breaking down the broad index into food, metals, and fuel reveals remarkably similar patterns of price movement. No wonder the term “super-cycle” was used liberally to discuss the phenomenon, and flows surged to commodity funds.

What drove the cycle?

There were good reasons for the price increase. Overall emerging market demand was strong through the past decade, as China led the way with seemingly insatiable demand for food, fuel, and metals. It was tempting to look at China’s high-growth track record (with little variation) as a surefire indication of robust demand to persist for years to come. Emergence of India, which also saw accelerating economic growth, was seen as another source of persistently sizeable demand.

The global oil consumption was robust through decade. While nonOECD demand was particularly strong, even OECD countries, seen as mature economies with modest growth and declining energy intensity, saw oil consumption rising each successive year. The dynamic was affected only with the onset of the 2008 global crisis, although even then China’s demand appeared robust through 2011.

There were also palpable Malthusian fears, with commodity

bulls claiming that oil production had peaked precisely when demand was surging in the emerging economies.

As far as food was concerned, arguments were made that the world’s farm lands were reaching their full potential, and that climate change was going to create more frequent weather-related volatility and associated crop failures. No major pipeline technology or event was seen to improve supply or lower costs of fuels and food, and hence it followed that rising commodity prices were likely to be the norm.

An additional argument entered the discourse with the onset of the global financial crisis. Unprecedented policy response to mitigate tail risks raised concern that such exceptionally large injections of liquidity was bound to cause high, if not hyper, inflation, with associated surge in commodity prices.

Most strikingly, gold price rose sharply as inflation hedging and flight to safety became a popular strategy, and flows to commodity funds surged as “real assets” were considered a safer bet.

Global geopolitics was not helpful either. From production disruption on various parts of the middle-east, international sanctions on Iran, Iraq’s slow recovery of production capacity, and fears of an Israel-Iran conflict, there were sustained concerns about oil supply.

What is driving the correction?

There has been a discernible turn in commodity prices since early-2011.

Despite some signs of global tail-risk

abating and recovery of economic growth, the once-irrepressible rise of commodity prices began to lose its momentum, and the trend has been downward over the past two years.

Just like it was the case during the super-cycle, the correction has also been broad-based. Price weakness began with metals in Feb-2011, and was followed by fuel from April-11 onward. Since then, the former has corrected by 28% and the latter by 14%. Food prices have declined by a somewhat morem modest 7%, but their rise was the least during the super-cycle. Futures markets suggest no respite to commodities correction for the time being. The evidence seems to be clear—the commodity super-cycle is over.

Cyclical factors Many of the factors and fears that drove the super-cycle have dissipated in the last few years. EM demand is robust but not as insatiable as once thought, especially with China’s appearing to be slowing down, with a strong recovery becoming increasingly elusive. Fear of a global spike in inflation due to exceptionally loose monetary policy has proven to be unfounded, with expectations remaining muted in both advanced and developing economies. As a result, using commodities as an inflation hedge has lost its attractiveness as a strategy.

Global policy makers also deserve credit for not making any major errors that would have caused trade related friction, tail events in financial markets, or a loss of faith in the existing system of payments and settlements. As the risks abated, commodities began to lose their attraction as a defensive bet. Finally,

Oil consumption growth through 20122

Source: BP 2012 Annual energy report, Deutsche bank HONG KONG BUSINESS | JULY 2013 21

analysis: COMMODITIES and asia Top 10 holders of shale natural gas reserves

Source: DOE, EEIA, Deutsche Bank

while there has been a global cyclical recovery, it has been anything but muted, allowing demand to remain well under check.

Structural factors While expectations of a rather soft global cyclical recovery has become entrenched, and consequently commodities have been losing steam, we argue in this paper that powerful structural factors are at play that would cause commodity prices to remain lacklustre for many years to come.

Firstly, demand projections are muted beyond the cycle. Below are projections of global oil demand, published in the 2013 Medium-term Market Report of the International Energy Agency (IEA). It shows negative oil demand growth in OECD countries for each of the 5 forecast years. Recall that in the past decade, even as growth and energy intensity declined, OECD demand growth was positive.

Now, with an anaemic recovery from the global crisis expected to persist perhaps that rest of the decade, and both environmental regulations and technological advances leading to increased consumption of alternative energy, OECD is seen to be structurally prone to declining oil demand. Even after adding fairly strong non-OECD demand, global oil demand is expected to grow by no more than 1-1.5% a year for the time being.

Secondly, exploration, extraction, and refinement picked up vigorously as the high prices seen during the energy boom increased the profitability and feasibility of various 22 HONG KONG BUSINESS | JULY 2013

projects. Consequently, the supply side began to mitigate any shortages there may have been. Among many other areas, dramatic developments have taken place in the global capacity for refining oil.

The following chart shows IEA’s forecast of new refinery capacity in the pipeline, as well estimates of existing capacity being upgraded in the coming years. The projections point out that between 2013 and 2016 alone, about 7.6mn bbd of capacity will come on stream in the refining industry, a substantially positive supply shock.

A rather striking conclusion can be drawn with latest available data and projections—global oil supply is likely to outstrip global demand for the rest of the decade.

Thirdly, decline in commodity intensity has not been isolated to the advanced economies. Even China, the strongest source of commodity demand, has begun to make efforts toward using alternative energy.

The country has proposed banning the import of low-grade coal, and announced strategies to boost energy production through solar, wind, biofuel, and nuclear means.

Another example is China’s steel consumption intensity. Once a source of seemingly insatiable demand for iron ore, China’s demand has begun to wane, and will likely remain so as we believe the economy’s steel consumption intensity is beginning to peak, just as it had been for Japan when it went through a 15-year cycle of industrialization.

Shale shock: A game changer The fourth factor is so disruptive that

“Powerful structural factors are at play that would cause commodity prices to remain lacklustre for many years to come.”

it warrants its own section. From an obscure technology a decade ago to presently seen as a profound change agent in gas/oil production, shale technology has had a dramatic impact on the commodity industry.

Shale has already fundamentally transformed the US energy landscape, and more changes are in store as the US begins exporting natural gas to the rest of the world and China begins to harvest its own shale natural gas/oil. Energy security, global geopolitics, and patterns of trade could be profoundly altered in the coming years as shale technology matures, environmental concerns are contained, and a hard ceiling is imposed on energy costs.

Exploiting shale resources requires a combination of horizontal drilling and hydraulic fracking (fracking is a technique that involves pumping water, chemicals, and sand to open up cracks in the shale rock), allowing the gas or oil trapped inside to flow.

Initially, natural gas has been the focus of shale development, but oil can be extracted using the same method.

Knowledge of the existence of shale oil and natural gas is not new, but extraction has been costly, both in absolute and relative terms, until recently.

Advances in horizontal drilling and

analysis: COMMODITIES and asia hydraulic fracking, as well as steep gains in US natural gas prices in the past decade made shale extraction feasible. Over the past 5 years, shale’s rise as source of energy production in the US has been dramatic. The US Department of Energy (DOE) projects that shale will continue to dominate US natural gas supply over the long-term, contributing over 50% of total US production by 2040, up from less than 10% in 2007.

China, shale, and the outlook for energy consumption Although its consumption growth has slowed, China’s energy needs are considerable. Crude oil imports averaged 5.5mn bbl/day in 2012, up nearly 70% since 2007. Indeed, China started this year by importing 6mn bbl/day, which was about 2mn bbl/day less than what the US imported in January. The US-China crude oil import gap has narrowed dramatically in recent years.

As Beijing observes its oil import dependence rising every year, energy security has taken greater priority for policymakers. In 2001, crude oil imports represented just under 30% of total oil demand.

That’s grown to about 60% in 2012.

From a demand perspective, China has pursued measures, including energy conservation/efficiency, aimed at curbing consumption growth rates.

From a supply perspective, China is pursuing a policy of diversifying its primary energy mix and its crude oil import sources. China is also looking at increasing its own domestic hydrocarbon resources, notably shale given the extent of its potential resources.

Although the US is the world’s largest producer of shale resources, it is China that is estimated tohold the largest technically recoverable reserves. Indeed, China’s technically recoverable reserves of shale natural gas could well be 50% greater than that of the US. Given technical challenges unique to China’s shale geology and water constraints, most expect that China will fail to meet its target of 6.5bn cubic meters (bcm) of shale/year by 2015 (this has been set by NDRC in the 12th Five Year Plan). Many experts predict that China’s shale

boom is more likely to materialize not this decade but from the next.

BP predicted that outside of North America, China will be the most successful in developing shale natural gas, which is estimated to account for about 20% of total Chinese natural gas production by 2030. Still, BP asserts that even with shale natural gas development, China’s natural gas/ LNG import needs will remain strong given expectations for rapid demand growth.

Optimism China’s domestic estimates, conducted by NDRC, are much more optimistic, essentially looking at 20-40% shale output in total gas production by 2020. This optimism comes from the abundant reserves as well as smooth experiment. As of now, more than 100 wells have been drilled in Sichuan, Chongqing and other areas, yielding a daily production of more than 0.6mn cubic meters.

Several sweet points have been found, among which many wells yielding more than 20,000 cubic meters per day. Local industry experts estimate that by 2015, Shell, PetroChina and Sinopec could each contribute 1bcm, 1.5bcm and 3bcm of production, making the national 6.5 bcm target achievable.

This is confirmed by PetroChina management that Chinese companies are aiming at 1.5bcm by 2015, 20bcm by 2020, and 50bcm by 2030.

Beyond that, as the scale of production and use of new technology will likely to reduce the cost of extraction and production, together with natural gas price reform and production subsidy, we believe the incentives for gas and oil companies will become stronger China’s track record shows that it places very high weight to energy security, so one should expect substantial resources being devoted in the coming years to overcome key constraints like water, expertise, and pipelines. Large stateowned Chinese energy companies are investing in the US with expectations of picking up shale-related skills and expertise, and they are setting up joint ventures with major global energy companies for the same reason. Social and

“Crude oil imports averaged 5.5mn bbl/day in 2012, up nearly 70% since 2007.”

environmental frictions are likely but the authorities have demonstrated in the past that they are capable on overcoming them.

The potential for China’s shale development to exceed expectations in terms of timing and production volumes cannot be discounted. A combination of supportive policy measures – a key one being the reform of natural gas pricing – and technological advances could prompt a shale revolution in China. The Chinese government, together with the private sector, will invest heavily in R&D, exploration, production, pipelines and infrastructure. China has held in June 2011 and October 2012 two rounds of shale gas block auctions, in which the exploration right of 23 blocks have been handed over to successful bidders, with a total shale gas reserve of 20+tcm.

In the second round bidding especially, both non-state owned Chinese entities and Sino-foreign joint ventures were encouraged to participate in the bidding. The third round of auction is expected to start in H2 this year, which will likely include more resource-rich blocks in Northern China.

US vs. China crude oilimport trenda

Source: DOE, EIA, C1, Reuters, Bloomberg Finance LP, Deutsche bank

The super-cycle of food, metals, and fuel prices

Source: International Monetary dun, Deutsche bank

HONG KONG BUSINESS | JULY 2013 23

opinion

KRISTINE STEWART Understanding business etiquette in Hong Kong

by KRISTINE STEWART Director Hong Kong Institute of Etiquette

I

n international business, Hong Kong is a financial centre, bridging the East with the West. Still, in many transactions, etiquette can be misunderstood or overlooked, and a misstep can quickly damage relationships. Through my experience teaching Western etiquette to clients from a range of industries and backgrounds, I have provided three of the most commonly asked questions – or complaints – and how to best deal with these situations in Hong Kong’s business culture.

1. The handshake: Some clients complain that handshakes in Hong Kong are too weak, some say they are too strong, some don’t like the positioning, duration, and so on. Here is what you need to know for an adequate handshake: Stand up (regardless of if you are male/female, junior/superior) and make sure you are standing square to the person you are meeting. Make eye contact, smile, and say their name during the introduction. Hands should meet at the web (the space between your thumb and index finger), not only at the fingers.

Do not do “the politician” (using both hands) to show your gratitude, nor “the bone crusher” (an overly firm handshake) to show your authority or enthusiasm. If someone’s handshake is softer, it does not mean they are weaker, nor does a strong handshake mean one is domineering. Sometimes it just comes down to cultural differences.

C

M

Y

CM

MY

CY

is left is to sign or collect the change.

In some cultures, it is expected that several offers be made before a refusal is accepted. The guests or client may be fully aware that the host is expected to pay the bill but they feel it would be rude not to offer at least once.

3. Defining smart casual and business casual dress: There is no strict definition of smart casual or business casual. In some contexts a suit would 2. Settling the bill: Clients often ask the best be expected and in others tailored jeans would way to settle the bill or what to do in awkward suffice. For men, stick to long sleeved shirts situations when both parties insist on paying. and dress shoes, ties are often not necessary.

In proper etiquette, the host is responsible for For ladies, clothing should be at least knee length and shoulders covered. Accessorize “If you are worried, as the host, that your conservatively with gold, silver, or pearls.

When in doubt, it is best to check with your guest or client will insist on paying, be sure host.

We must appreciate that Hong Kong to pay the bill before the table is cleared.” has a unique combination of business settling the bill. If you are worried, as the host, etiquette. Essentially we follow Western etiquette that your guest or client will insist on paying, standards, but also incorporate Asian etiquette leading to an awkward debate, be sure to pay the characteristics, such as attentive hosting, bill before the table is cleared. graciousness, and the concept of face. When As the meal is winding down, one member of building partnerships in Hong Kong, it is the hosting party should excuse themselves to important to have an awareness of other cultures subtly slip the server their credit card or cash. and a self-awareness of the first impression we That way, when the bill comes to the table, all that put forward when approaching new situations.

24 HONG KONG BUSINESS | JULY 2013

No to the ‘bone crusher’ handshake

CMY

K

SALARY SURVEY 2013 markets globally,” said Matthew Bennett, Managing Director at Robert Walters, a recruitment and outsourcing specialist.

“There are not a lot of new jobs being created with most of the activity focused around replacement roles,” said Bennett.

Business confidence levels in Hong Kong is stabilizing, with more than half of the respondents (55%) in the Michael Page H1 2013 Hong Kong Employment Index viewing the current business environment to be satisfactory, said Andy Bentote, Senior Managing Director at Page Group in Hong Kong and Southern China, a recruitment specialist.

“This is having a flow-on affect to the professional employment market which is set to remain steady over the first half of the year,” said Bentote.

Hong Kong recovering slowly from hiring jitters

A stark skills shortage leaves employers with no choice but to increase the average salary levels by up to 20% to retain highly skilled workers.

A

s global markets improve, Hong Kong businesses are gaining confidence to hire again but only selected sectors plan to boost headcounts in 2013.

Analysts said that Hong Kong employers continue to adopt a cautious attitude towards overhiring, reflected by a heavy demand for replacement hires. Only a few high-growth sectors, such as the regulatory and compliance sector, are upping their staff numbers and offering very lucrative salary packages.

Hong Kong employees looking to snare a raise or a higher bonus should moderate their expectations because companies will be 26 HONG KONG BUSINESS | JULY 2013

“Hong Kong businesses are gaining confidence to hire again but only selected sectors plan to boost headcounts in 2013.”

quite discerning when handing out any compensation increases. Even when raises or bonuses are given out, these will likely be small and further tempered by any shortcomings from the employee’s team and company.

State of employment market Hiring in Hong Kong is slowly picking up its stride as employers catch wind of more positive global business developments.

“The market is still very cautious although we have seen a lift in hiring activity in April and May. This hopefully has something to do with some more positive figures coming out of the US and strong equity

Which sectors are hiring?

Hong Kong’s banking and finance sector will continue to hire, but only to replace staff and not for additional headcount. “According to our 2013 salary guides for banking and financial services, as well as finance and accounting professionals in Hong Kong, the level of hiring in the first half of 2013 is likely to remain stable. Available positions will primarily be replacement roles rather than newly-created ones for many companies in Hong Kong,” Pallavi Anand, Director at Robert Half in Hong Kong, a professional staffing services provider.

Compliance and risk staff are also among the most highly sought after jobs due to the explosion of local and international regulations.

“Professionals with experience in compliance and risk management will continue to be in high demand as companies navigate unprecedented regulatory shifts while growing their core business,” said Anand, citing global and domestic regulations such as anti-money laundering, Basel III, International Financial Reporting Standards and Foreign Account Tax Compliance Act. “The war for talent is making it increasingly difficult for companies to attract and retain professionals with these skills and experience,”

SALARY SURVEY 2013 she added. The bullish outlook for risk and compliance hiring was echoed by Brien Keegan, Director at Randstad Hong Kong.

“There are always pockets of shortages in any market. We do see quite a high demand in the banking sector for risk and compliance individuals,” said Keegan. He further noted brisk demand for front office staff in private banking, corporate banking, and retail banking.

He added that there is “insatiable demand” for merchandising and supply chain talent in the luxury retail space.

Job lookers should also anticipate a hiring spree among Chinese banks, many of which are on an aggressive expansion strategy both locally and internationally. “Emerging Asian banks are expected to be the most active in the job market in 2013. Chinese banks in particular, will ramp up recruitment in 2013,” said Robert Half ’s Anand. She also foresees strong demand for technology staff, including developers and IT infrastructure specialists, finance and accounting talent, as well as tax, treasury and credit professionals “who can add value and improve cost efficiency.”

Meanwhile, the Michael Page H1 2013 Hong Kong Employment Index found that around 38% of employers intend to boost staff numbers during the first half of the year, with most recruitment (71%) expected to occur in front line, revenue-generating areas like sales and account management.

Salary and bonus increases Hong Kong employers plan to reward their staff with modest single-digit salary increases and highly conditional bonuses.

Michael Page found that almost half (48%) of employers surveyed will only roll out 4-6% annual pay hike in 2013. Roughly four in ten (39%) employers plan to raise average salaries even less than 4-6%.

Only one in ten (13%) plan to increase salaries more than 4-6%.

Zooming in to the financial services sector, mostly half (47%) of senior financial services leaders plan to increase salary levels in 2013, said Robert Half ’s Anand, and the increases can reach double

digits for the most in-demand posts. “Within the commercial sector in Hong Kong, 59% of the chief financial officers and finance directors who were surveyed indicated that they are planning to raise salary levels during 2013. While the salaries of some finance and accounting positions will remain static, credit risk and compliance/ anti-money laundering professionals can expect healthy pay increases of up to 30% in 2013,” added Anand.

Staff bonuses, for their part, will be mainly discretionary and based on a combination of factors, not merely based individual performance. This suggests that even high performers may not receive guaranteed high bonuses if their team or company files in tepid numbers.

Michael Page reports that 81% of Hong Kong employers will provide “discretionary” staff bonuses over the next 12 months. 15% of employers will give staff bonuses as a fixed percentage of base salary.

Only 1% will give based on a commission basis, with 3% providing bonuses as a combination of the above three methods. 67% of Hong Kong employers will use individual, team and company performance as a basis for giving out bonuses, Michael Page also found. Only 20% will use exclusively individual performance for bonuses, 11% on team performance, and 2% on company performance.

Employers cutting back on bonuses may be taking a cue from what Randstad Hong Kong’s Keegan describes as a shifting attitude among Hong Kong employees, who are looking beyond bonuses when weighing employment options.“What we’re seeing in Hong Kong more is that there’s real demand for stability and security in the work place as well. It’s not just purely about bonuses, but more about building a career and developing your career as well with organizations,” said Keegan.

Employer challenges One reason Hong Kong employees now place a higher value in having a stable job is that they have gone through the recent job market shocks, which saw recent hires

Andy Bentote

Brien Keegan

Matthew Bennett

Pallavi Anand

let go before more veteran staff.

Employees are clinging more tightly to their current jobs, which makes it an uphill battle for employers to fill in their open positions.“For employers it is getting tougher to attract top tier talent as organisations are keeping very close to their top performers in order to retain them. And there is always the last in first out scenario if the market does dip again which keeps candidates thinking,” said Robert Walters’ Bennett.

“In the past, career choices may have been primarily influenced by financial rewards, but the importance of job security and stability when candidates are making decisions is growing,” reckoned Robert Half ’s Anand. “Candidates also have higher expectations in terms of workplace culture and career development opportunities nowadays.”

Still, Anand said that outright financial benefits continue to hold a certain allure to employees, especially those who know the high value they give to the organization and its worth in the industry.

“While salary is not the only factor employees consider, an attractive and competitive remuneration package can often be the difference between attracting and keeping talented employees and losing top performers with valuable institutional knowledge,” she added.

In the next 12 months, how much do you expect salaries to increase for existing financial services employees?

Source: Robert Half survey of 450 senior financial services leaders in Asia

HONG KONG BUSINESS | JULY 2013 27

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HK$ ‘000

Regional Finance Manager

8+ years

720–930

Financial Planning and Analysis Manager

10+ years

720–930

Regional Business Unit Controller

10+ years

840–1,200

330–480

Plant Controller, China

12+ years

840–1,300

480–540

Country Financial Controller

12+ years

840–1,000

10–15 years

540–840

Head of Financial Planning and Analysis

12+ years

980–1,500

5–8 years

360–450

Head of Mergers & Acquisitions

12+ years

1,000–2,000

Manager

5–8 years

450–720

Regional Financial Controller

15+ years

950–1,200

Senior Manager

8–12 years

600–950

Country Financial Director

15+ years

950–1,300

Role

Role Experience

HK$ ‘000

4–6 years

230–330

Warehouse Manager

5–7 years

Warehouse Operations and Logistics Manager

8–10 years

Regional Warehouse Operations and Logistics

Logistics/Warehousing/Distribution Assistant Warehouse Manager

Assistant Logistics Manager

Director / Vice President

15 years

900–1,400

Group Financial Controller (Listed Group)

15+ years

1,000–1,500

Country Manager

8–10 years

800–1,400

Regional Finance Director

15+ years

1,000–2,000

Regional Director / Vice President

12+ years

1,200–1,900

Chief Financial Officer (Established Company)

18+ years

1,800–3,000+

Manufacturing and Production Material Planning and Control Manager

Global Market/Front Office 5+ years

300–550

Investment Research (Equity and Fixed Income) Analyst

1–3 years

450–700

Associate

3–5 years

700–900

Production Manager

6–8 years

400–650

Factory / Plant Manager

8–10 years

700–1,000

General Manager

12+ years

1,000–1,800

Product Management

Vice President

5–7 years

900–2,000

Director

7–10 years

1,800–2,300

10+ years

1,800+

Research Associate

1–3 years

700–1,000

Senior Research Associate

3–5 years

900–1,200

Product Manager

3–6 years

400–650

Managing Director

Category Controller

6–8 years

650–800

Equity Research

Product Director

10+ years

800–1,200

Procurement Purchasing Officer

3–6 years

250–350

Writing Analyst

5–7 years

1,200–2,000

Assistant Procurement Manager

5–8 years

320–500

Sector Head

7+ years

2,000+

Structured, Commodity and Project Finance 500–750

Procurement Manager

7–10 years

500–650

Senior Procurement Manager

10–15 years

650–1,000

Analyst

1–3 years

Country Head / Regional Manager

15–18 years

750–1,200

Associate

3–5 years

700–1,100

Regional Vice President / Director

18+ years

1,100–1,800

Vice President

5–7 years

1,100–1,500

Director

7–10 years

1,600–2,200

Technologists

3–6 years

200–400

Managing Director

10+ years

1,800+

Manager

6–8 years

450–650

Trader

Senior Manager

8–10 years

650–900

Analyst

1–3 years

500–750

Director

12+ years

900–1,300

Associate

3–5 years

700–850

Vice President

5–7 years

800–1,700

Quality/Compliance/Technical Services

Supply Chain Planner / Analyst

3–5 years

250–300

Director

7–10 years

1,500+

Senior Planner / Senior Analyst

4–6 years

300–360

Managing Director

10+ years

1,800+

Assistant Supply Chain / Planning Manager

5–8 years

330–500

Transaction Banking and Trade Finance

Supply Chain Manager

8–12 years

500–660

Analyst

1–3 years

300–400

Regional Supply Chain Manager (APAC)

12–15 years

600–960

Associate

3–5 years

400–800

Supply Chain Director

15–18 years

780–1,200

Vice President

5–7 years

800–1,400

15+ years

1,200–1,800

Director

7–10 years

1,200–1,800

Managing Director

10+ years

1,800+

300–550

Regional Vice President / Director COMMERCE AND INDUSTRY Finance and Accounting

Corporate / Transaction Banking (Product)

Assistant Accountant (PQ / Qualified)

2–5 years

220–320

Analyst

1–3 years

Accountant (PQ / Qualified)

3–7 years

320–440

Associate

3–5 years

500–650

Financial Analyst / Business Analyst

3–8 years

320–520

Vice President

5–7 years

600–1,200

Senior Accountant (Qualified)

5–10 years

420–580

Director

7–10 years

1,000–1,800

Senior Financial Analyst

5–10 years

470–670

Managing Director

10+ years

1,600+

8+ years

620–870

Country Finance Manager 28 HONG KONG BUSINESS | JULY 2013

SALARY SURVEY 2013 LEGaL SuPORT ROLES Role

Experience

HK$ ‘000 Plus bonus

Paralegals and other legal support roles Law Clerk (eg litigation & conveyancing)

Senior Leasing Manager

7–10 years

560–740

Property Officer

3–5 years

250–370

Property Manager

5–7 years

370–560

Property Manager

7–10 years

560–930

Entry–level

140–240

Corporate Real Estate

Paralegal

0–3 years

180–360

Building Services Engineer

3–7 years

400–560

Paralegal

4–7 years

360–600

Facilities Manager

3–7 years

540–570

Senior Paralegal

8+ years

600+

Leasing Associate

5–7 years

430–800

Translator

Entry–level

132–180

Project Manager

5–7 years

430–800

Translator

1–5 years

156–360

Chief Engineer

7–10 years

620–800

Translator

5–8+ years

300–600+

Country Head of Facilities

7–10 years

620–800

Librarian

Entry–level

132–180

Country Head of Security

7–10 years

750–1,100

Librarian

1–5 years

156–420

Leasing Manager

7–10 years

800–1,000

Librarian

5–10+ years

300–600+

Project Director

7–10 years

800–1,100

Regional Head of Facilities

10+ years

860–1,500

In houe - Financial Services Paralegal

0–5 years

216–480

Country Head of Real Estate

10+ years

1,000–1,400

Paralegal

6–10 years

420–720

Regional Head of Projects / Design

10+ years

1,000–1,600

Paralegal

11–15 years

600–840

Regional Head of Engineering

10+ years

1,000–1,700

Paralegal

15+

960+

Regional Head of Security

10+ years

1,100–1,800

10+ years

-

Regional Head of Strategy / Transactions

10+ years

1,200–1,600

Regional Head of Corporate Real Estate

10+ years

1,600–2,500

3–5 years

370-560

Company Secretary Manager In houe - Commerce Legal Assistant / Executive / Officer

0–5 years

144–360

Developer

Legal Assistant / Executive / Officer

6–10 years

300–600

Project Engineer

Legal Officer / Manager

11–15 years

480–720

Project Engineer

5–7 years

550-800

15+

600+

Project Engineer

7–10 years

740-1000

10+ years

-

Project Engineer

10+ years

860-1200

Senior Project Manager

15+ years

1200-1500

Legal Manager Company Secretary Manager Private practice - Lawyers Newly Qualified

840–948

Project Director

20+ years

1500+

1 year PQE

840–1,100

Contracts Administrator / Quantity Surveyor

3–5 years

370-500

2 year PQE

900–1,248

Senior Contracts Manager

5–7 years

490-740

3 year PQE

960–1,320

Contracts Manager

7–10 years

740-1000

4 year PQE

980–1,560

Design Manager

5–7 years

560-740

5 year PQE

1,080–1,620

Senior Design Manager

7–10 years

740-930

6 year PQE

1,200–1,680

Operations / Construction Supervisor

3–5 years

370-500

7 year PQE

1,380–1,650

8 year PQE

1,500+

Operations / Construction Manager

5–7 years

490-930

Leasing Manager

5–7 years

430-590

Senior Leasing Manager

7–10 years

590-930

PROPERTY AND CONSTRUCTION

Property Officer

3–5 years

310-430

Consultancy

Property Manager

5–7 years

430-590

Partner

1,650–4,000+

3–5 years

250–310

Property Manager

7–10 years

590-990

5–7 years

370–700

Senior Property Manager

10+ years

800-1000

7–10 years

620–1,000

Property Director

15+ years

900-1300

Senior Project Manager

10+ years

800–1,200

Head of Development

10+ years

1200-1500

Project Director

15+ years

1,300+

Head of Development

15+ years

1500-2600

Contracts Administrator / Quantity Surveyor

3–7 years

310–490

Role

Experience

HK’000

Senior Contracts Manager

5–7 years

460–680

Professional Services

Operations Manager / Construction Manager

5–7 years

430–800

Business Development Executive

5–8 years

480–840

Design Manager

5–7 years

490–740

Marketing Executive

6–8 years

480–840

Leasing Associate

3–5 years

310–430

Research Manager

6–12 years

600–1,200

Leasing Manager

5–7 years

370–560

Marketing Manager

8–11 years

800–1,400

Project Engineer

HONG KONG BUSINESS | JULY 2013 29

SALARY SURVEY 2013 COMMERCE

Helpdesk Manager

8–12 years

600–840

Development,Design and Architecture

Service Centre Manager

12+ years

840–1,000

Programmer

1–3 years

180–264

BANKING AND FINANCIAL SERVICES (TECHNOLOGY)

Analyst Programmer

3–5 years

264–360

Development,Design and Architecture

System Analyst

5–8 years

360–480

Analyst Programmer

1–3 years

240–360

Architect – Applications, Solutions, Systems, Data

8–12 years

480–800

Analyst Programmer

3–5 years

360–540

Enterprise Architect

12+ years

800–1,200

Lead Analyst Programmer

5–8 years

540–840

10–15 years

540–960

Architect – Applications, Solutions, Systems, Data

8–12 years

840–1,080

Enterprise Architect

12+ years

1,080–1,440

QA Engineer

1–3 years

216–300

Application Development Manager

12+ years

720–1,200

Test Analyst

3–5 years

300–456

Database management

Team Lead – Testing

5–8 years

456–600

Database Administrator

1–3 years

360–480

Test Manager

8+ years

600–840

Database Administrator

3–5 years

480–600

Senior Database Administrator / Data Analyst

5–8 years

600–780

Application Development Manager Testing

Database Management Database Administrator

1–3 years

216–264

Data Warehousing / Modelling Specialist

5–8 years

600–780

Database Administrator

3–5 years

264–360

Data Architect

8+ years

780–900

Senior Database Administrator / Data Analyst

5–8 years

360–540

Infrastructure/Network

Data Warehousing / Modelling Specialist

8–10 years

540–720

Network Support – 1st / 2nd level

1–3 years

240–360

Data Architect

10+ years

720–900

Network Support – 1st / 2nd level

3–5 years

360–600

Security Analyst / Consultant

3–5 years

360–600

Infrastructure / Network Network Support – 1st / 2nd level

1–3 years

180–264

Security Analyst / Consultant

5–8 years

600–780

Network Support – 1st / 2nd level

3–5 years

264–360

Network Engineer

5–8 years

600–780

Security Analyst

3–5 years

300–540

Network Architect

8–10 years

780–1,200

Network Engineer

5–8 years

360–540

Security Manager

8+ years

780–1,080

Security Consultant

5–8 years

540–720

Infrastructure Manager

8–12 years

720–1,080

Network Architect

8–10 years

540–900

Senior Infrastructure Manager

12+ years

1,080+

Security Manager

8+ years

720–900

Financial Services

Infrastructure Manager

8–12 years

660–900

Event Planner

2–5 years

300–480

Senior Infrastructure Manager

12+ years

900–1,100+

Product Development Manager

3–6 years

480–660

Philanthropy / Corporate Social Responsibility

4–8 years

500–900

Project Co-ordinator

1–6 years

180–420

Market Research Manager

4–8 years

570–930

Business Analyst

3–5 years

400–600

Public Relations / Corporate Manager

4–8 years

720–1,000

Pre / Post-sales Consultant

5–8 years

480–600

PR/Corporate Communications Director

4–9 years

520–930

Senior Business Analyst

5–8 years

600–720

Marketing Communications Manager

5–8 years

830–1,400

Project Manager

6–10 years

600–800

Corporate Sales Manager

6–8 years

520–900

IT Manager

8–12 years

540–840

Internal Communications Manager

6–8 years

600–900

Senior Project Manager

10–15 years

800–920

Events Manager

6–8 years

600–840

Senior IT Manager

12–15 years

840–1,200

Media Relations Manager

8–12 years

900–1,300

Project Director

15+ years

920–1,200+

Internal Communications Director

10+ years

900+

IT Director

15+ years

1,200+

Market Research Director

10+ years

900+

Marketing Communications Director

10+ years

840–1,500

Project and General Management

Chief Information Officer

15+ years

1500+

Head of Events

10+ years

1,000+

1st Level Helpdesk Analyst

1–3 years

180–264

Media Relations Director

10+ years

1,000+

1st Level Helpdesk Analyst

3–5 years

264–336

Product Development Director

10+ years

1,200+

2nd Level Desktop Support Analyst

1–3 years

240–300

Assistant Marketing Communications Manager

3–5 years

360–450

2nd Level Desktop Support Analyst

3–5 years

300–420

Channel Account Manager / Account Manager

3–5 years

420–660

3rd Level Support Analyst

5–8 years

420–540

Senior Product Manager

5–8 years

420–660

Unix Administrator

3–6 years

360–540

Communications Manager

5–8 years

480–840

Network Administrator

3–6 years

360–540

Marketing Manager

6–8 years

480–840

Support Administration

30 HONG KONG BUSINESS | JULY 2013

SALARY SURVEY 2013 Sales Manager / Global Account Director

6–12 years

600–1,200

Regional Retail Operations Manager

8+ years

550–750

Division Manager / Sales and Marketing Manager

8–11 years

800–1,400

Regional General Manager

10+ years

1,200+

Marketing Communications Director

9+ years

800–1,400

CORPORATE SECRETARIES

Vice President, Sales and Marketing

10+ years

1,000–1,500

Private Practice

Managing Director / General Manager

12+ years

1,500+

Clerk (Search and Filing)

Entry–level

120–192

Sales Director / Business Development Director

12+ years

1,000–1,800

Company Secretarial Assistant

1–3 years

168–216

SALES, MARKETING & RETAIL

Senior Company Secretarial Assistant

4–6 years

220–310

Advertising Agencies

Company Secretarial Supervisor I / II

7–10 years

310–420

10+ years

400–650+

1– 3 years

180–280

Account Manager

5–8 years

360–540

Company Secretary Manager

Account Director

8–10 years

480–720

Financial Services

Group Account Director

10–12 years

660–900

Company Secretarial Assistant

Business Director

10–15 years

930–1,200

Company Secretarial Officer

4–7 years

280–60

Managing Director / General Manager

15+ years

1,200+

Senior Company Secretarial Officer

7–10 years

300–420

Assistant Company Secretarial Manager

10–15 years

400–600

Assistant Key Account Manager

1–3 years

300–450

Company Secretarial Manager

15+ years

500–800

Assistant Brand Manager / Assistant Product

2–3 years

300–400

Company Secretary

20+ years

800–1,400

Brand Manager / Product Manager

3–4 years

380–520

Inhouse Commerce

Key Account Manager

3–6 years

400–650

Company Secretarial Assistant

1–3 years

180–300

Trade Marketing Manager

4–6 years

480–700

Company Secretarial Officer

3–6 years

216–360

Senior Brand Manager / Senior Product Manager

4–6 years

560–780

Senior Company Secretarial Officer

6–8 years

300–504

Public Relations Manager

6–8 years

520–830

Assistant Company Secretarial Manager

8–10 years

420–720

Marketing Manager

6–8 years

650–850

Company Secretarial Manager

10–12+ years

540–780

Research, Product Development and Planning

6–10 years

720–930

Company Secretary

12+ years

720–1,200

Business Manager

7–10 years

800–1,000

Private Practice (International Law Firms)

General Sales Manager

7–10 years

820–1,200

Law Clerk (eg litigation & conveyancing)

Entry–level

140–240

Public Relations Director

8–12 years

820–1,200

Paralegal

0–3 years

180–360

Marketing Director

8–12 years

960–1,400

Paralegal

4–7 years

360–600

Sales Director

10+ years

1,000–1,500+

Senior Paralegal

8+ years

600+

General Manager

12+ years

1,500–2,000+

Translator

Entry–level

132–180

Translator

1–5 years

156–360

Consumer Products

Buying Merchandise Merchandiser / Buyer

2–5 years

200-300

Translator

5–8+ years

300–600+

Senior Buyer / Assistant Manager

3–6 years

300-400

Librarian

Entry–level

132–180

Manager

6–8 years

400-650

Librarian

1–5 years

156–420

General / Divisional Manager

8–10 years

650-950

Librarian

5–10+ years

300–600+

Director / Vice President

10+ years

950-2,000

In house Financial Services Paralegal

0–5 years

216–480

Paralegal

6–10 years

420–720

Paralegal

11–15 years

600–840

Paralegal

15+

960+

Company Secretary Manager

10+ years

With or Without

Design Designer

2–5 years

150–325

Senior Designer

5–7 years

360–455

Manager

7–10 years

520–650

Chief Designer

8+ years

700–1,000

Senior Manager

10+ years

600–900

Director

12+ years

1,000–1,500

Visual Merchandiser / Senior Merchandiser

3–5 years

200–350

Sales Supervisor / Assistant Manager

3–5 years

250–320

Store Manager

3+ years

320–650

Visual Merchandising Manager

5–7 years

400–700

Retail Operations Manager

7+ years

450–600

Country General Manager

8+ years

850–1,200

Retail operation and store management

Source: Salary & Employment Forecast, Michael Page International

HONG KONG BUSINESS | JULY 2013 31

ANALYSIS: china’s bank regulations

China’s wealth management products whipped into line

Bold new regulations seek to lower risks borne by Chinese banks offering wealth management products.

M

ost analysts view the landmark controls as a long-term positive for the burgeoning RMB 9.5 trillion wealth management products market. The tightened oversight proposed should address the growing public concerns on the potential risks when investing in WMP products, which investors once thought to be guaranteed moneymakers – that is until recent sensational comments emerged likening it to a “Ponzi scheme,” and a multi-million dollar default put WMP investors on edge.

New WMP regulations On March 27, the China Banking Regulatory Commission announced new regulations for Chinese banks’ WMP business. This marked the first time the banking regulatory agency had put in place controls for the booming segment.

The set of new regulations, which

32 HONG KONG BUSINESS | JULY 2013

“China Banking Regulatory Commission announced new regulations for Chinese banks’ WMP business.”

were issued collectively as CBRC Notice No. 8, will increase oversight of the growing WMP market which recorded RMB 9.5 trillion in peak assets under management (AUMs) in the first quarter of 2013, said Mike Werner, senior analyst at Bernstein Research.

The notice will also place limits on WMP exposure to non-regulated credit assets while improving the transparency and operational structure of the market.

Werner and other analysts said the new restrictions are not meant to curtail the market’s growth potential, but are instead meant to protect banks from the increasing credit and capital risks attached to WMPs. “We believe the ultimate purpose of these measures is to ensure that the WMPs originated by the banks are limited in their risk exposures,” said Werner.

“The regulator attempts to avoid

the scenario where WMP defaults cause a number of banks, in order to protect their reputation, to backstop investor losses on these products. By introducing the measures in Notice No. 8, the CBRC is mitigating the risk that banks will use depositors’ funds as a backstop for the risk-taking activities of investors.”

The worst-case scenario Werner described above – of WMP defaults and the possibility of banks using depositor cash to pay them off – came to fore late last year with a highprofile WMP default in Huaxia bank.

The bank failed to pay off investors that were promised double-digit rates of returns by November last year for their estimated $22.5 million WMP deposits. Public protests ensued that triggered discussions on the trustworthiness of WMPs as an investment vehicle.

It did not help that Huaxia bank’s default came just a couple of months after the Bank of China ex-Chairman Xiao Gang likened WMPs to a Ponzi scheme, a fraudulent investment operation, further shaking confidence in the short-term, high-return products.

Chinese banks often market WMPs as higher-paying alternatives to

ANALYSIS: china’s bank regulations deposits, but investors often assume wrongly that they carry comparably low risks.

While deposits are guaranteed up to a certain amount, WMPs are often not in the event of defaults. Before the new regulations were rolled out, banks that suffer from a WMP default faced the dilemma of either yielding to public pressure to cover the repayment or risk a big reputational hit that may ultimately lead to bank runs.

“CBRC imposed a new regulation where the total size of non-standard assets should be kept below 35% of the outstanding balance of WMPs.”

Smaller banks feel the pinch CBRC is hoping that the new controls imposed by its Notice No. 8 will lower these credit and capital risks inherent in WMPs. But there is a price to pay for the transition to a more regulated regime – one that smaller Chinese banks will primarily bear, according to Bernstein Research’s Werner.

CBRC imposed a new regulation where the total size of non-standard assets should be kept below 35% of the outstanding balance of WMPs, or 4% of total assets on the banks’ audited prior year financial statements, whichever is lower.

Werner said all of the large “Big 5” banks, namely Industrial and Commercial Bank of China, China Construction Bank, Bank of China, Agricultural Bank of China, and Bank of Communications, were already in compliance with this.

But many of the smaller listed banks were not in compliance and had substantially higher non-standard asset levels due to their aggressive Non-standard assets of the industry, biggest 5 banks & smaller banks

Source: Bank IR teams, corporate reports, PBOC, CEIC, Bernstein analysis

interest rate environment, and many cash-flush Chinese have been lured to WMPs with the promise of high average rates of returns at a conveniently short payback period.

Yan said aside from individual investors, there is also strong financing demand from property developers, small- and medium-sized enterprises and local government financing vehicles.

Banks themselves are pushing WMPs aggressively in the face of intensifying deposit competition and funding needs for banks’ off-balance sheet lending under the tight loan quota and loan-to-deposit ratio requirement of 75%. Yan said banks are also very keen on diversifying their non-interest income revenue streams, a gap which high-margin WMPs fill up nicely.

The new rules should cool the heels of banks in this last regard, as banks face tighter restrictions in their ability to funnel their WMP proceeds to trusts.

“This will hurt trust companies’ ability to obtain cheap funding through the banking channels and will weaken liquidity at the trust Growth slowdown companies as they lack access to The new regulations will also have cheap financing,” said Bernstein’s an unintended effect of temporarily Werner of the WMP notice. decelerating the fast-growing WMP Werner cited the new rule which market, said Werner. specifically prohibits banks from “Not only will Notice No. 8 slow providing direct or indirect, explicit the growth of the WMP market or implicit guarantee or buyback in the near-term, but cost of full promise on any non-standard assets. compliance by the banks will erode He then said this new rule is expected the profitability of the business.” to cover “rights to income” – a term But the profit hit will not be big created by trust companies that enough to dissuade Chinese banks. basically enables banks to finance This is because WMP operations have the trust asset projects using WMP naturally high margins, which should proceeds, circumventing previous make the business still very attractive restrictions – as part of regulated nonto banks after they fully comply with standard assets. the regulations.

Werner confirms that banks The lucrative income on WMP have complied with the new rule products is just one of the several key by no longer channeling funds drivers to the trillion-yuan banking from the issuance of WMPs to trust business, according to May Yan, companies. As a result, CBRC will equity research analyst for Asia Exhave effectively clamped down a huge Japan Banks at Barclays. chunk of funding for trust businesses.

“Funds channeled from bankGrowing demand originated wealth management Its market expansion is also products represent the cheapest motivated by growing demand source of funding for trust from investors looking for low-risk companies. If they were to issue investment products whose yields third party products instead, then exceed time deposit rates. China trust companies would need to offer has a prevailing low-negative real substantially higher yields to investors participation in issuing WMPs. “The size of non-standard assets packaged into the WMPs they issue breach the upper limits set under Notice No.8,” said Werner of smaller listed banks. “We estimate the breached amount of nonstandard assets to be RMB 750-800 billion, equivalent to 9% of total WMP AUMs but less than 1% of the total RMB 100 trillion of credit outstanding in China.”

The Bernstein Research analyst cited how non-standard assets at Minsheng, CITIC Bank, and Merchants Bank breached the upper limit by RMB 52 billion, 28 billion and 11 billion, equivalent to 1.6%, 0.9% and 0.3% or their respective asset base.

“Smaller banks will need to change the mix of their WMP AUMs to comply with the new rules,” warned Werner, adding that smaller banks will also suffer from revenue headwinds and margin pressure as they implement costly credit management and administrative systems to ensure compliance.

HONG KONG BUSINESS | JULY 2013 33

ANALYSIS: china’s bank regulations or else face weaker margins. This would certainly add to their overall funding costs,” said Werner.

This reduction of funneled funds to trusts is considered by some analysts as a step forward to combating the risks of China’s shadow banking system.

Jian Chang, economics researcher at Barclays, said regulators are now facing the challenge of balancing the economy’s financing needs against the rising financial and fiscal risks from both shadow banking activities and the local government investment vehicle debt build-up.

The response to this challenge in 2013 will be notable regulation, but far from the milestone strides seen in the past, said Chang: “While we expect greater regulatory oversight of the shadow banking sector and local government borrowing, we do not envisage any tightening as significant as that during 2010-11.”

Positive investment impact Overall, analysts expect the new rules to shape up WMPs into less riskier and more attractive investment options. Banks will also benefit by reducing the risk premium they bear by offering WMPs. Some analysts even foresee the tighter regulation regime as helping propel China’s longterm economic growth as the market sheds its fears of a WMP-led financial crisis.

“We view the recent release of Notice No. 8 by the CBRC as a positive for the systemic nature of this business. And while the small banks may see minor revenue and earnings dilution as a result of the measures, the measures go a long

way to improving the structure of the market and reducing overall credit risk of these products,” said Bernstein Research’s Werner.

Investor concerns “This should ease investor concerns that: One, the banks will backstop investor losses in these products; two, the WMP market exposes the banks to systemic risk; three, there is no transparency in this market; and four, the practices by some banks’ WMP businesses are little different from a ‘ponzi scheme,’” he added.

“While the equity market’s reaction to the new measures has been negative for the Chinese banks, our views on the banks have improved as a result of Notice No. 8. The measures in the notice will improve the structural foundation of the WMP market and improve its transparency.

We believe this will have the effect of reducing the risk premium on the Chinese banks as these rules make it significantly less likely they will be forced to bail out investors in these products,” he said further.

There are fears though that the new rules will pummel bank earnings, which were dismissed by Ting Lu, a China economist at Bank of America Merrill Lynch.

“Markets seemed to be shocked, believing that these new controls on bank WMPs would hit the sector’s earnings severely, tighten credit supply and deal a severe blow to fixed asset investment and commodity demand. But we believe the scare is overdone.”

Higher investor confidence Lu said that new CBRC rules on

“New regulations address the major risks surrounding China’s financial innovations.”

WMPs, by themselves, will have little impact on system-wide credit supply and thus have very limited downside impact on China’s growth in 2013.

Instead, he viewed the new rules in a more positive light, predicting it will boost the country’s long-term growth potential through higher investor confidence in the health of China’s financial system.

Lu explained that new regulations address the major risks surrounding China’s financial innovations, such as the incorrect belief of small investors that their investments in bank WMPs and non-bank channels such as trust companies are guaranteed by the government similar to bank deposits, and the tendency of small banks to take advantage of this confidence by cheating them into buying highly risky products.

“That is why we believe the CBRC’s new measures will benefit the longterm stability of the Chinese economy in general and the financial sector in particular,” said Lu. “To put it another way, innovation without catching-up regulations could lead to a financial crisis, while overly strict regulations without innovation would result in economic stagnation, in our view.”

“Overall, we believe the new regulations are a move in the right direction. The cost of those new measures is that some efficiency could be lost as smaller banks’ room for expansion will be affected. However, markets will at least perceive a lower probability of financial crisis in China, in our view.”

Amount of non-standard assets in breach of the industry, biggest 5 banks & smaller banks

Source: Bank IR teams, corporate reports, PBOC, CEIC, Bernstein analysis

34 HONG KONG BUSINESS | JULY 2013

opinion

Tim hamlett

Love your locusts

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

A

nasty little accident befell Mr Alex Lo the other day. Mr Lo has often provided provocation for a piece here, because the poor man has to write every day. This is a lot. Bernard Levin used to write three days a week. In my prime I could manage seven columns a month.

Mr Lo has to do his thing on Page 2 five days a week, so thought is sometimes a touch hasty. Anyway on Monday he did a piece on the international story which announced that Hong Kong people were global leaders in racism. It then transpired that there was a mathematical error in the original information. So Hong Kong people are not racist after all.

On Tuesday Mr Lo apologised and will, perhaps, be more sceptical about social science in future. Still, this is the sort of accident which could happen to anyone. As a columnist, you comment on what appears in the news. If that turns out to be wrong then your comment may turn out to be unjustified. It’s a normal hazard.

However, on the tail of his musings on racism, Mr Lo wandered into another matter. Hong Kong people, he said, like to “direct their animus towards the mainland Chinese”. This was not racism by the dictionary, but “just as shameful”. And he went on “we think we are just morally, politically and culturally superior, mostly because we know little or nothing about what’s really happening on the mainland beyond cliched narratives found in the mass media.”

I cannot resist the thought at this point that the last sentence qualifies as a cliched narrative in itself. I am not sure which part of this to disagree with first. Let us start with the cliched narratives.

Turning to the China pages on the same day we find stories on pollution in Beijing, graduate unemployment, the suspected hijacking of a fishing boat by the North Korean navy, local governments cracking down on environmental protests, an academic suggestion that the Chinese Communist Party would be healthier if there was an official way to leave it, a graft scandal, and a long story about a security equipment exhibition which notes among other things that China spends more on internal security than it does (officially) on defence. This is a normal day’s crop, I suppose.

And it would, perhaps, lead Hong Kong people to suppose that in some ways we are superior, because we have the rule of law, fair elections and freedom to protest, and in other ways we are not. That does not look like a particularly misleading picture to me. China is a police state. That is not a cliched narrative; it is a fact.

In any case, why should we suppose that Hong Kong people get most of their ideas about the mainland from the mass media? Most Hong Kong people are free to visit the mainland any time. Many of them do so at least once a year.

Some of them go much more often. Mainland friends, relatives, fellow students and recent immigrants are all over the place. It seems to me extremely unlikely that “we know little or nothing” except what we can glean from the media. In fact, most people have no difficulty in detecting that the picture of the mainland presented in, say, the China Daily is missing some important features.

Trudging on through the errors we come to the claim that having a jaundiced view of mainlanders is not quite racism but just as bad. No it isn’t. Racism is a poison which leads to prejudice, discrimination and oppression. Having a derogatory stereotype about people from some parts of your own country is a minor sin as long as you can keep a sense of humour about it.

Hong Kong people do, I agree, have a somewhat derogatory stereotype about mainlanders who turn up in Hong Kong. This has nothing to do with ignorance of the mainland.

It is because of the spectacle of whole blocks of flats sitting empty while the mainland moneylaunderers who own them wait for prices to go higher, of whole streets devoted to selling overpriced luxury goods, and people behaving badly on public transport. Like all stereotypes, this is unfair, and like most stereotypes it contains a grain of truth. Most of us have been elbowed aside by a pushy PTHspeaker on the MTR by now.

But this sort of friction is an almost universal consequence of mass tourism. When I worked in Blackpool they had a thing about Glaswegians. The Glaswegian reputation for excessive drinking and ensuing violence was not entirely unjustified. During the relevant fortnight the Glasgow police used to send a deputation down to the Blackpool railway station so that those of their regular customers who were already fighting drunk when they got off the train could be sent straight back home.

But on the whole, people did not take this too seriously and sober Scots were treated just like anyone else. The situation is more delicate if the visitors are conspicuously well off. As a student my favourite holiday playground was Yugoslavia, as it then was. It was important when visiting there to establish that you were not German.

The Germans visited in large quantities and they were all much better off than the average local citizen. This does not go down well.

So in some ways it may be convenient that Hong Kong people are not too impressed by mainland visitors. At least we are not jealous. We love our locusts.

We are not jealous.

HONG KONG BUSINESS | JULY 2013 35

legal briefing

Labor law changes to hurt HK employers The first pay rise in over two years will benefit around 200,000 workers in the city but leaves employers wailing over increased cost.

I

n an aim to make Hong Kong a little more “employee-friendly”, the city’s statutory minimum hourly wage rate was increased effective 1 May 2013 by 7.1% to $30 per hour. Experts note that the first increase since the statutory minimum wage was introduced in 2011. It is set to benefit about 223,100 workers in the city but will certainly hurt employers over increased cost. Employers are also warned over proposed two significant changes to employment law in Hong Kong which are likely to lead to increased difficulties and costs if passed.

Who are to benefit from the adjusted statutory minimum wage?

Hogan Lovells partner Allan Leung said that the ordinance covers all employees, except livein domestic helpers, student interns, and work experience students during a period of exempt student employment.

What are required of the employers?

The method of calculation and the key requirements of the Ordinance will not change but starting May 1, employers must keep records of the total number of

“Another increase in the minimum wage is likely to push wages up further, possibly by as much as 10%.” hours worked by employees whose net wages in any wage period are less than $12,300 or an increase of HK$800 from the previous minimum said Leung.

Where an employee is ordinarily receiving on average more than $12,300 per month, Leung said that the exclusion of paid unworked time - e.g. paid rest days, paid annual leave, etc - may reduce the employee’s “net wages” to less than $12,300, so that the record keeping requirement under the Ordinance will apply.

What’s the penalty for employers not complying with the new rule?

Leung explained that if the salaries paid in a wage period are less than the statutory minimum wage, the employee is entitled to be paid the differential.

Failure to pay the statutory minimum wage, he said, renders an employer liable to a fine of HK$350,000 and imprisonment for 3 years.

How will the increase affect employers?

36 HONG KONG BUSINESS | JULY 2013

According to Nicholas Chan, a partner at Squire Sanders, since the introduction of the Statutory Minimum Wage, average wages in the Hong Kong retail industry have increased by 13% and concerns have been expressed that another increase in the minimum wage is likely to push wages up further, possibly by as much as 10%.

Allan Leung

Nicholas Chan

Gareth Thomas

What are other proposed changes to employment law that could hurt employers?

Gareth Thomas, partner at Herbert Smith Freehills first mentioned of proposed changes that will make it more difficult for employers to dismiss an employee without having a recognised good reason. Under the existing provisions, Thomas explained that if an employee is found by the Labour Tribunal to have been unreasonably dismissed, the Labour Tribunal may either make an order for terminal payments or make an order for reinstatement/re-engagement but only if the employer consents.

The proposed change, he said, envisages that, in a situation where the Labour Tribunal considers that reinstatement/re-engagement of the employee is appropriate, it will be able to make a compulsory order for reinstatement/re-engagement without securing the consent of the employer. In the event of non-compliance with the order, the employer, he added, will be ordered to pay a further sum of three times the employee’s monthly wages, capped at HK$50,000.

The second change, Thomas said, will significantly increase the cost of terminating a long-serving employee’s contract. According to Thomas, currently when an employer makes either a severance or long-service payments, it has the right to off-set the amount of such severance/long-service payment by the amount it has contributed throughout the employee’s employment to that employee’s MPF fund. This said, can be done by either reducing the amount of the severance/long-service payment by the amount of employer MPF contribution or by paying the full amount of the severance/long-service payment and then applying to the MPF provider for reimbursement of the employer’s contributions from the employee’s MPF fund. Thomas said that this invariably means that employees often walk away with little or no severance/long-service payment despite years of service.

According to Thomas, the change currently being debated would mean that this off-set mechanism would be abolished and employees would be entitled to receive their full severance/long-service entitlement as well as their MPF fund in full.

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CMO Briefing

Do Facebook ‘likes’ translate to sales?

Find out if a HK company’s Facebook presence actually makes or breaks its brand.

W

ith Coca-Cola recently admitting that having close to 62 million fans on Facebook does not actually drive direct sales and in fact only affects it by 0.01%, we set out to investigate if Hong Kong companies are actually benefitting from their Facebook presence. Eric Schmidt, senior manager-marketing strategy and insights at Coca-Cola, said in a conference, “We didn’t see any statistically significant relationship between our buzz and our short-term sales.” So the question is, do Facebook ‘likes’ translate to sales?

Or is Facebook just an avenue for customers to vent out their complaints and offensive comments for the entire world to see?

Trends in Facebook marketing With high smartphone penetration in Hong Kong and more users accessing social media platforms from their mobile devices, more brands are actually engaging with customers on the platform to grow its business, says Doug Stotland, Director at Facebook.

Facebook gives brands the opportunity to interact with their customer and thereby directly address their concerns. Bastian Purrer, CMO at Zalora Southeast Asia, says this helps them to facilitate individual purchases, to build trust and to understand trends and demand. It also strongly increases their visibility, because Facebook is where users really spend a bulk of their time. “This also gives us the opportunity to positively influence the perception of our brand. Additionally the targeting opportunities enable us to dive deeper and analyse our users based on their demographics and interests,” he adds. Purrer reckons it is crucial to have a multi-leveled communication - not just the brand speaking to the consumer, but to also spark conversations and to reach out to the customer and

38 HONG KONG BUSINESS | JULY 2013

70% of ad campaigns on Facebook show a return on ad spend of 3x or better.

listen to his or her needs and concerns. In some of Zalora’s markets, customers are used to purchasing products directly on the platform, in so called “Facebook Shops”. Therefore, Purrer reckons it is crucial for an e-commerce company to have a strong presence and fast access to the products directly from the user’s feed. “Of course the high influence on brand perception also includes high risks, whereby one wrong sentence or post can strongly affect your reputation,” he warns.

According to Facebook’s Stotland, on average, 70% of ad campaigns on Facebook show a return on ad spend of 3x or better, and 49% of campaigns show a return on ad spend of 5x or better. “We have worked with some of the biggest global brands that include Samsung Mobile USA, Nissan Australia and Ocean Park Hong Kong, and we have seen great results generated out of their ad campaigns on Facebook.”

Zalora’s Purrer argues Facebook is indeed driving significant sales - directly and indirectly. “The key to this is to get engagement around the content we create and the products we offer, and not solely to rely on increasing the number of fans of our page - especially due to the way the Edgerank algorithm works. If we solely focus on the latter, it is akin to having a full-house concert, but with everyone plugged into their music players/phones,” he adds.

Success stories through Facebook Facebook helps brands to reach their target consumers more effectively through Facebook’s 3R approach – Reach (How many people saw my message, who are they and how often), Resonance (Brand awareness, brand recall, and purchase consideration) and Reaction (sales). “We have developed features that allow brands to maximize their marketing budgets by reaching audiences that matter and deliver measurable outcomes,” says Stotland. Brands that are seeing great results on Facebook include Ocean Park, a theme park in Hong Kong. For the first time, they promoted an annual event on Facebook using Offers, discounting the standard price by 20%. In one month the Offer reached 2.7 million users, which represents 70% of the internet population in HK, and 162,000 claims were made. “We are overwhelmed with the campaign results as it truly proves the power of social media. By understanding our consumer insights and behavior, we created a strong communication platform on Facebook and with the use of Facebook Offers, managed to convert a simple social action into real business sales,” said Vivian Lee, Marketing Director, Ocean Park Hong Kong.

Interacting with customers is a given advantage for using Facebook, but more than that, the site helps companies to facilitate individual purchases, build trust and understand trends and demand.

Though we do not have tools yet to accurately measure Facebook’s effectiveness and impact on sales, having millions of fans or likes must definitely have some value in it. Besides, which company wouldn’t want to be ‘liked’ by their customer?

HONG KONG BUSINESS | JULY 2013 39

OPINION

LAWRENCE CHIA

Using tech to get the most out of your next event

Use of social media

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s Asia’s World City, Hong Kong plays host to a huge variety of events. While highly successful, some of these events may not be taking full advantage of the amazing technological and social opportunities offered by our incredible city.

How can you make sure your business squeezes every drop of potential out of your next big event?

Traditions can be hard to break and like people, some companies are resistant to change.

‘Tried and tested’ formulas, successful in the past, are still relied upon to generate future business. But the world is changing faster than anyone could have predicted. Driven by the incredible pace of innovation, particularly in the field of technology; some tried and tested events practices are in need of a little freshening up.

That’s not to say that the convention, the product launch and the trade fair are becoming obsolete by any means, there certainly has been no drop off in venue bookings in the city!

However, smart, hyper-advanced cities like Hong Kong, have an incredible suite of tools and excellent connectivity available to companies.

These can complement and augment conventions and exhibitions and dramatically expand their scope. With the right hardware and software, the sky is the limit. Here are a few examples.

Thanks to live streaming, social media and

BY LAWRENCE CHIA

the use of telepresence technology, a local event can multiply its audience by orders of magnitude and extend its reach around the world through simultaneous attendance. Using their own computers or tablets at a distant location, this virtual audience can view and take part in presentations and panel discussions, or simply enjoy the show.

Mobile has now become an unstoppable global force. In late 2012, smartphone sales outpaced PC sales for the first time. To engage this audience, there are now several ‘must-haves’ for the modern event: mobile-optimised websites, event-related apps and scannable QR codes are a start. These allow ‘on-the-go’ engagement above, beyond and after the event. Asking visitors to capture a QR code which links to a mobile version of their product brochure should definitely be at the top of exhibitors’ to-do lists.

Similarly, social media is now an integral part of life for the younger demographic and a highly significant force to be reckoned with. There are infinite ways for an event to harness its power – from online competitions to event-related apps and check-ins, to providing more information on products to business partners. Not to mention the incredible success of LinkedIN as a professional services B2B networking platform.

With our close ties to mainland China, Hong Kong has seen a spike in the use of homegrown communication channels like Sina’s Weibo and Tencent’s Wechat, which now have huge influence over the mainland market. Weibo now has over 400 million global users, while WeChat now has 300 million, having added 100,000 in the past few months alone. Each of these platforms has services to amplify live events.

As strange as it may seem, much of this new technology is designed to make events more personalised and to enable individuals to get exactly what they need out of an event. Trust me, a great many forward-thinking CEOs are paying very close attention to these developments and, for the most part, are embracing them wholeheartedly.

Because at the end of the day, events are about bringing people together. If technological tools can help us do that more efficiently and in greater numbers, then it makes good business sense to use those tools. So, for your next event, plan carefully and think hard about how technology can work with tradition to make your event go the extra mile.

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ANALYSIS: ASIA PROPERTY

What you need to know about investing in Asian property While most people buy homes to live in, many in Asia buy them as investments, writes DBS Chief Economist David Carbon.

O

ften they are blamed for driving house prices higher than they ‘should’ be. Singapore and Hong Kong are home to Asia’s wealthiest investors and highest home prices. Is there a connection? More generally, from an investment return perspective, how have home prices compared to, say, equities?

In Hong Kong, equities and property have offered similar returns over the long haul. Since 1985, equities have risen by 10.6% per year, a tad more than the 9.8% return delivered by property. Rental payments and equity dividends are missing from this picture but assuming they are broadly similar then the conclusion wouldn’t change: from an investment point of view, property does not appear overvalued rela-

42 HONG KONG BUSINESS | JULY 2013

“In Hong Kong, equities and property have offered similar returns over the long haul.”

tive to equities.

Ditto for Singapore In USD terms, (to make returns comparable with Hong Kong), both property and equities have returned 8.1% per year since 1985. Assuming again that rental payments and equity dividends are similar, then like Hong Kong, Singapore property prices do not appear overvalued relative to equities. As long as we have these long-run pictures in front of us, it’s worth making a couple of additional points.

The first regards Hong Kong, and the fact property prices there have climbed so much more in recent years than in other countries. It seems reasonable to view much of Hong Kong’s rise as a rebound from the SARS epidemic

that peaked in mid-03. Yes, prices have soared by 4x since then but compared to 1997, they are up by only 40%.

Moreover, from a purely technical / price perspective, 1997 does not appear overvalued looking back over the data today.

Similarly for Singapore. It is often exclaimed that property prices (and rents) have soared of late. And they are, in fact, up by 55% since mid-09. But that puts them only 18% higher than 1996 levels. Of course one could argue that Singapore’s prices were ‘too high’ in 1996. To some extent we’d agree. But deflate the 1996 levels to something ‘more reasonable’ and today’s prices still don’t seem out of line with what prevailed 17 years ago.

ANALYSIS: ASIA PROPERTY How much is that house in the window?

Price changes are one thing. What about prices themselves – the levels? How much does a house cost in Chinese yuan, or Indonesian rupiah or Sing dollars? And can anyone afford to buy one anymore?

Asia’s houses aren’t cheap, that’s for sure. The average 100 sq meter (1055 sq ft) home in Hong Kong would run you US$1.4 million today. And that’s not a big house, either, even by Asian standards.

But it’s already so expensive that the average family in Hong Kong lives in a 60 sq meter house instead. That’s barely one quarter the average US home size (208 sq m / 2200 sq ft). Prices are lower in Singapore but the average 100 sq meter home will still run you US$870k.

In Taipei, 100 sq meters costs half a million USD and in Bangkok, $180k. In spite of all the hoopla, China is still cheap. A 100 sq m home costs less than $100k.

A bargain at twice the price?

Perhaps. But much of the apparent economy owes to the China figure being a national average.

A home in Beijing or Shanghai would cost 3 times more. That’s still cheap compared to Taipei, HK or Singapore and only 30% more expensive than Bangkok.

By this gauge, China doesn’t appear overpriced at all. Homes are still cheapest in Malaysia ($42k per 100 sq m) and the US ($85k), where land is abundant. Again,

though, these are national prices; houses in Kuala Lumpur or New York City would cost 2.5x-4x more.

How many years to buy a house?

Numbers are just numbers until you put them next to something, like wages or income. How many years do you have to spend behind a desk in Singapore or Bangkok before you can buy one of these houses? That’s the ‘real’ price of a home (and one measure of the ‘real’ wage). We’ve already seen that Hong Kong’s houses are by far the most expensive in Asia in nominal dollar terms. But the gap is even wider in real terms.

In Hong Kong, it takes almost 40 years for the average person to buy the average 100 sq m house.

That’s 2.5x longer than it takes in China. And here, measures are not being distorted by national averages. Prices in Shanghai may be three times the national average but so are wages. Hong Kongers really do have to work 2.5x longer than they do in China before they can buy that 100 sq m home. This puts a whole new spin on ‘real’ income. Hong Kong is purported to be far richer than China, and most other places in the world.

But in terms of houses/housing, Hong Kong’s ‘real’ wages are 2.5x lower than China’s! Elsewhere in Asia, ‘real’ wages in housing terms are comparable to China’s.

It takes the same number of years (15) for the average Singaporean to buy a 100 sq m home. Ditto for

“Plainly, something’s missing – housing prices alone, either in nominal or ‘real’ terms, tell us nothing about what’s about to blow.”

Thailand. Prices are cheaper (real incomes are higher) in Taiwan, where it takes only 9 years to buy a home. Incomes are higher yet in Malaysia (4 years to buy a home) and the US (1.7 years).

Housing compression It comes as no surprise that where housing is expensive, people live in smaller houses, and viceversa. In Hong Kong, where it takes 40 years to buy a 100 sq m home, people live in 60 sq m homes instead. In Singapore and Taipei, the norm is in fact 100 sq m. In Malaysia, where houses are cheaper, people opt for 130 sq m homes.

And in the US, where housing is the cheapest of all, 208 sq m is the norm. When you recalculate how many years of work it takes to buy what people actually buy, the expenditure range gets compressed. At the high end, Hong Kong’s number shrinks to 23 years from 39; at the bottom end, the US number stretches to 3.5 years from 1.7. But it’s still a wide range and it begs an immediate question.

Real home prices as a bubble gauge If Hong Kong’s house prices are so high, and US prices are so low, why did the biggest bubble cum collapse in 100 years occur in the US and not in Hong Kong?

Plainly, something’s missing – housing prices alone, either in nominal or ‘real’ terms, tell

Singapore - property prices and equity markets

House price to income ratios times, median home price to per capita GDP, ‘12 - 1Q13

Source: DBS Group Research

Source: DBS Group Research

HONG KONG BUSINESS | JULY 2013 43

ANALYSIS: ASIA PROPERTY HK and SG - house price to income ratio

Source: DBS Group Research

us nothing about what’s about to blow. That hurts. If you can’t compare Hong Kong or Singapore to Thailand or the US, how do you get a feel for risk?

You do the only thing left: compare Singapore today with Singapore yesterday, Thailand today with Thailand yesterday, and so on. Let’s start with Asia overall.

We began this report by showing a chart of Asian property prices – reproduced below left for convenience – rising to US crisis levels and asked if Asia might be headed for a crash too.

Deflating prices by incomes the answer would seem to be ‘no’.

Asia’s home prices have risen rapidly since 2000 but incomes have risen even faster. Today, home prices are 22% lower, relative to incomes, than they were they were back in 2000. By this gauge, Asia has little to fear on the property front – homes are become more affordable, not more expensive.

Importantly, this is true for most individual countries, not just for the average. In Singapore, price:income ratios have drifted upward a little bit since 2006 or 2009 but not by very much. Prices are 10% higher than they were in 2006, but they are 15% lower than they were in 2000. In the 5 years since 2007, prices have essentially run parallel to incomes. Asia’s exceptions are Taiwan and Hong Kong.

The situation is more serious in Hong Kong. There, prices are up by 78%, relative to incomes, 44 HONG KONG BUSINESS | JULY 2013

compared to 2000 levels. When affordability drops so far so fast, something needs to be looked at.

The first thing to check is whether 2000 is a good base year for comparison. If one takes a longer-term view, for example, does the picture change? The answer is, yes to some degree.

Expensive housing Prices (relative to incomes) today are no higher than they were in 1997 and not much higher than what prevailed for the six years between 1991-1997. One could argue that the Asian financial crisis of 1997 brought prices down to where they “ought to be”. But that’s too simplistic. The Asian financial crisis was not about Hong Kong (or Singapore).

It was about Thailand, in the first instance, and then Malaysia, Indonesia and Korea. The drop in currencies values and asset prices in Singapore, Hong Kong and Taiwan was collateral damage – spillover from the “Crisis-4” countries. Hong Kong, Singapore and Taiwan weren’t the center of anybody’s attention.

The question remains: were prices in Hong Kong too high in 1997 (on the cusp of the Asian financial crisis) or too low in 2003 (at the peak of the SARS epidemic)? Mostly the latter, we think, but housing there is still among the most expensive in the world, in absolute terms and relative to income.

Home ownership rates for

“Asia’s housing debt as a percentage of income has risen steadily over the years.”

residents are only 59% compared to Singapore’s 90%, a fact that is surely related to affordability and probably to a less equal income distribution as well. Thus, while from a financial market perspective, Hong Kong’s housing situation is probably not best described as a bubble, social tension related to housing affordability appears to be on the rise.

Leverage Housing risk isn’t necessarily about prices per se. In the US, the bigger problem was the underlying build up of leverage and debt, which ultimately could not be sustained.

How does Asia look from a debt perspective? How burdensome are housing payments today and how burdensome might they become once interest rates start to rise?

Who in Asia is most vulnerable to a potential ‘interest rate shock’?

Asia’s housing debt as a percentage of income has risen steadily over the years. For the most part, that’s normal. Housing is a ‘superior’ good. As incomes go up, housing expenditures tend to go up even more. The fact that housing debt, even as a percentage of income, is rising across the region is not, by itself, cause for alarm.

As always, it’s a question of ‘how

ANALYSIS: ASIA PROPERTY far how fast’ and whether the debt can be serviced in bad times as well as good.

In Singapore and Hong Kong, Asia’s richest countries, housing loans have grown to about 45% of GDP. Singapore’s debt has clearly grown faster than Hong Kong’s but Singapore’s per capita income has grown faster too. Back in 1967, both countries had a per capita income of US$5200 (at today’s prices and exchange rates).

Today, Singapore’s GDP per capita is US$57k, 50% higher than Hong Kong’s US$38k.

Debt has risen steadily in China and Korea too, though it’s much lower than in the wealthier economies. China’s debt load is about half as large as Korea’s; Korea’s is two-thirds as large as Singapore’s and Hong Kong’s.

Beyond illustrating the ‘superior good’ aspect of housing across countries, the key message of this is that US housing debt, even 5 years after the crisis, still stands at 85% of GDP – nearly twice as high Singapore, Hong Kong and Taiwan, and 3x to 5x higher than other Asian countries.

High debt/leverage is what caused the US bubble and its collapse. When interest rates rose –

Fed funds rose by 425 basis points between mid-04 and mid-06 – borrowers found it increasingly difficult to service their debts.

By mid-06, the jig was up.

Home prices began to fall. Banks would not / could not extend refinancing. The value of mortgage backed securities plummeted.

Companies that couldn’t possibly insure against such losses but did anyway went broke. The rest is (not yet) history.

For Asia, the good news part of the story above is that regional debt loads remain far lower than they were in the US. It is not unreasonable to conclude that risks in Asia are lower accordingly.

Debt burdens and interest rates Debt loads aren’t a big problem when interest rates are zero. (“Roll it over Joe, and call me next year.”)

It’s when you can’t make the payments that trouble begins and what used to be a hidden bubble isn’t so hidden anymore. How burdensome are Asia’s housing payments today and who will be in trouble when today’s rockbottom rates start to go up?

To answer the first question, we calculate the annual payment required to retire the stock of

“In Singapore and Hong Kong, Asia’s richest countries, housing loans have grown to about 45% of GDP.”

outstanding housing loans in each country, at the prevailing interest rate and subject to the condition that principal and interest are repaid in full over the next 20 years.

Who’s got Asia’s biggest payments? By this gauge, it turns out to be Taiwan, where 2.9% of GDP goes to pay housing principal and interest. But Hong Kong and Singapore are almost identical, paying 2.8% and 2.7% of GDP to service housing debt each year.

Malaysia’s and Korea’s burdens are in the low 2 percent range.

Thailand’s burden is an even lower 1.8% of GDP. Where does China fall on this ladder? Near the bottom with annual housing payments of only 1.4% of GDP. Worry? It wouldn’t seem so.

Especially when one compares Asia’s debt burdens with the US. There, payments are running at 5.4% of GDP, nearly 6x higher than in China, and 2x higher than in Hong Kong, Singapore and Taiwan.

Again, this has to be good news for Asia. The US seems to have blown for a reason and, for the same reason, Asia seems unlikely to.

Who’s vulnerable in Asia?

When rates go up, RRisks remain.

Interest rates have been on the floor for 5 years. What’s going to happen when they go back up?

Who’s vulnerable in Asia?

The simplest way to answer this question is to re-calculate the housing payments made above under the new assumption that interest rates have returned to their pre-crisis level. Who suffers most will depend partly on debt loads and partly on whose interest rates fell the most and will now rise the most.

The key variables behind these calculations are shown in the table below. It comes as no surprise that interest rates in Singapore and Hong Kong have fallen comparatively the most in Asia - by a factor of 2x to 2.1x. Singapore and Hong Kong run currency pegs, which means their interest rates track US rates (in the case of HK).

HONG KONG BUSINESS | JULY 2013 45

MOTORING REPORT

The Road to Success

In the early Nineties BMW made a rather rash bid for Britain’s Rover motor manufacturing conglomerate, intending to capitalize on the volume market alongside its existing luxury range.

T

he BMW Z4 Roadster is almost the antithesis of what BMW – the manufacturer – is aiming at with its automobiles: general, luxury with sporting undertones.

The Z4 appears to fit neither of these definitions, as it is relatively compact, features unusual styling and although it most definitely performs exceptionally well, it does not voice ‘sporting’ as many of its close competitors manifestly do.

Its inspiration, says BMW, came from the legendary Z1 which heralded the modern era of BMW Roadsters when it was unveiled at the 1987 Frankfurt Auto Show. The tradition, however, goes back even further: the 1930s and the classic BMW 328, the winner of the 1940 Mille Miglia, and the BMW 507 from 1955.

Originally built at BMW’s South Carolina plant, the latest ones are now produced alongside a variety of BMW 3-series models at the German manufacturer’s ultra-modern, robotized facility at Regensburg just outside Munich. As an aside, the Regensburg plant turns out 700 3-series a day from its largely automated lines.

Incredible numbers when you think what goes into a modern motor car.

Launched at the 2009 North American International Auto Show in 2009, the latest Z4 is a serious, luxury sporting two-seater,

46 HONG KONG BUSINESS | JULY 2013

available as either a roadster or a coupe: open or closed, take your pick.

The current Z4 range starts with the entry-level model at HK$562,000 which features a two liter, four-cylinder twin-turbo powerplant delivering a healthy 184 bhp at the relatively low engine speed of 5,000 rpm, while torque output, produced over a wide engine band between 1,250 and 4,500 rpm, peaks at 270 Nm. There are a number of options available including cruise control and comfortable sports seats, while top of the Z4 range is a threelitre model, complete with dual-clutch transmission technology, selling at a heady HK$865,000. All models drive through either a ZF 8-speed Steptronic automatic transmission, operated by steering column-mounted paddles, or a dual-clutch seven speed version that

“Leaving aside its performance credentials, the beauty about this car is that it is compact, yet comfortable; attractive, but practical.”

MOTORING REPORT considerably speeds up shifts through the gears. Dynamic stability control and traction control are both standard across the range.

There are twin roll-over bars behind each headrest and, on the coupe, a high-strength roll-over bar in the roof. Run-flat tires are standard on all models. Run-flat technology allows the owner to drive either home or to a BMW center for replacement. Front and side airbags are also standard across the range.

On the road The Z4 is supremely comfortable, with the seats appearing to wrap around their occupants. Visibility is also superb, despite the car’s low lines and lengthy hood. All ancillary controls fall readily to hand.

It is hard to criticize this auto in any respect, but the biggest plus must be that ultra-modern transmission. With seven or eight ratios available, depending on model, and a low peak-power limit, the Z4 always feels to be in the right gear with immediate acceleration on tap.

Top speed is electronically limited to 250 km/h while acceleration from a standstill to the benchmark 100 km/h varies between six and eight seconds, depending on model and engine size.

The suspension soaks up the bumps with tire thump more heard than felt in the regular Z4s, the M Sport models having stiffer, sports suspension as well as a sports shift system. The steering is beautifully direct and there is never the feeling you get with some sports cars that it will do anything less than go where you point it. In short, the BMW Z4 is an exhilarating drive.

Leaving aside its performance credentials, the beauty about this car is that it is compact, yet comfortable; attractive, but practical. It really is hard to fault the Z4 in any capacity. Yes, it’s expensive, but it does maintain BMW’s credo that driving should be both fun and exciting. ‘Designed for Driving Pleasure’ is BMW’s ad slogan for 2013: the Z4 perfectly sums that up.

HONG KONG BUSINESS | JULY 2013 47

opinion

Hemlock Starbucks’ cowardly kowtow

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

A

fter the 2011 Japanese earthquake and tsunami, several apparently educated people I know stopped eating fish. Their logic was as follows: hundreds of residents of areas like Sendai had been swept out to sea and drowned; fish live in the sea and somehow or other consume bits of dead animal matter; therefore if you ate fish at that time, you would be eating dead Japanese people.

I told them (guessing) our seafood doesn’t come from anywhere near those Northwest Pacific waters. I told them all the oceans at times must have human remains in them (Osama Bin Laden would become some soon after). I told them we are all carbon-based life-forms, living off the food chain that starts with carcasses, bacteria and worms, and statistically we all probably contain a few atoms of what used to be, say, Shakespeare and/or Confucius, not to mention long-extinct giant slugs and carnivorous ferns. I even ventured to suggest something like, “What’s wrong with eating a little bit of Japanese person now and then?” All to no avail.

Perhaps it is simply more fun to freak out about mysticism and nonsense than to calmly accept basic science. Certainly, the international media seem to think so, happily picking up on Apple Daily’s expose about a Hong Kong branch of Starbucks making its coffee out of… ‘toilet water’.

The very phrase conveys disgusting images.

Ricky the trainee barista crouches down by the porcelain bowl, scooping God-knows-what out of the pan – and what’s the betting he didn’t even flush it first. Doubly revolting (actually, impracticable) when you recall than many areas in Hong Kong have a separate flushing-water supply piped in from the sea, so it would be salty,

use a bit of therapy. After trundling the stuff back to the serving area, Starbucks filtered it.

And, needless to say, they would have boiled it – because that’s how you make coffee. It’s safe.

The South China Morning Post quotes a Hong Kong University expert who points out that there is a risk of pathogens being transferred from the restroom to the food preparation area. Which is true. But, being carbon-based life-forms that excrete waste products, Starbucks staff, like the customers, will inevitably go to restrooms several times a day anyway, and – on pain of being fired – will no doubt wash their hands, etc, each time, right?

Predictably, the company’s managers start groveling to the press and public about “Starbucks staff, like the customers, will being sorry and how from now on they will inevitably go to restrooms several times a use only hyper-expensive water specially flown in by Boeing 747 from an endangered day anyway.” glacier in Hawaii. It is a pathetic sight: a vast not to say full of bits of tsunami victims. global brand letting itself be pushed around by a So, obviously, that is not what was happening. scientifically illiterate, panic-prone commentariat.

The Bank of China branch of Starbucks was The big boss of Starbucks could have been drawing plain potable water from a regular tap photographed drinking from the infamous tap in a restroom. Yes, there is a urinal nearby. No, and letting his infant children sip from the same the two are not connected by any plumbing. If cup. “If you’re so stupid that you think this water you would be too squeamish to fill a water bottle is dangerous,” he would say, “you’re uncool, and here, you have led an overprotected life and could we don’t want you as a customer.

48 HONG KONG BUSINESS | JULY 2013

Coffee out of toilet water, anyone?

HONG KONG BUSINESS | JULY 2013 49

numbers

Asians still crave grandma’s cooking Lorem

Foods from different regions and cultures

* All respondents of 4,000

Source: Hotels.com

Food products developed by famous chefs or celebrity chefs * All respondents of 4,000

For more information contact: Ipsos, Tim Hill (tim.hill@ipsos.com) and Nicolas Bijuk (Nicolas.Bijuk@ipsos.com); Nielsen, Ellen Cuijpers (Ellen.Cuijpers@nielsen.com) 50 HONG KONG BUSINESS | JULY 2013

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The “Natureza” photo by artist Andrea Laybauer is part of the “Drops” exhibition taking place in Sao Paulo from 03/10/2013 to 04/30/2013. It is a joint initiative by Veolia Water and Cultura Sub Publishers in Brazil, and aims to commemorate World Water Day.

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