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RENMINBI ON THE RISE MORE TAXES FOR HK PROPERTY IN 2013 HONG KONG’S NEXT OFFICIAL CONTROVERSY

HONG KONG IS WORLD’S LARGEST WINE AUCTION CENTER HONG KONG BUSINESS | JANUARY 2013 1

2 HONG KONG BUSINESS | JANUARY 2013

FROM THE EDITOR

HONG KONG

BUSINESS Established 1982 Editorial Enquiries: Charlton Media Group 19/F, Yat Chau Building, 262 Des Voeux Road Central Hong Kong. +852 3972 7166 PUBLISHER & EDITOR-IN-CHIEF ASSOCIATE PUBLISHER ASSISTANT EDITOR ART DIRECTOR EDITORIAL ASSISTANT MEDIA ASSISTANT EDITORIAL ASSISTANT CONTRIBUTING EDITOR ADVERTISING CONTACTS

While working on this issue of Hong Kong Business, we found out that interestingly, law firms have now knocked off the banks as the heavyweight players in the battle for grade A office space.

Tim Charlton Louis Shek Jason Oliver Jonnel Martin Herman Queenie Chan Daniela Gujilde Alex Wong Ajay Shamdasani Louis Shek +852 60999768 louis@hongkongbusiness.hk Laarni Salazar-Navida lanie@charltonmediamail.com

For our second attempt to rank Hong Kong’s most important industries, we bring you our top 25 law firm rankings for 2012 in this issue.

Foreign law firms have topped our rankings with only five local firms making it to the list.

We also explored Hong Kong’s local wine industry and found out that Hong Kong is now the world’s largest wine auction centre after getting a whopping US$230 million auction sales.

Rochelle Romero rochelle@charltonmediamail.com

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

Enjoy the issue!

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We will however take the gains.

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

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HONG KONG BUSINESS | JANUARY 2013 3

CONTENTS

11

10

INDUSTRY 24 WINE HONG KONG WINE INDUSTRY

FIRST HONG KONG PROPERTY IN 2013: TAXING TIMES AHEAD

FIRST 10 Hong Kong property in 2013: Taxing times ahead

11 Exit bankers, enter lawyers 11 Outlook 2013

OPINION 12 Will they still need me when I’m 64?

14 The future of the HKD-USD link

FIRST EXIT BANKERS, ENTER LAWYERS

CLIMBS TO THE TOP

ANALYSIS 24 Hong Kong wine industry climbs to the top after cutting duty rates

With US$230 million auction sales, Hong Kong is now the world’s largest wine auction centre.

38 Asian airlines heading for a

REGULAR 18 Hong Kong’s 3rd largest IPO deal 22 How to track your packages online 32 Hong Kong Data Privacy Regime gets more stringent

58 Numbers

profit margin crash

Cost advantage over rivals deteriorate as currencies continue to appreciate.

16 Age is an advantage 28 A case for expecting dads

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

For the latest business news from Hong Kong visit the website

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News from hongkongbusiness.hk Daily news from Hong Kong Hong Kong’s tax system beats Singapore’s MOST READ ECONOMY

Hong Kong’s 2012 GDP growth estimated at 1.2% Gross Domestic Product grew 1.3% year-on-year in the third quarter.

Government Economist Helen Chan said there might be some GDP improvement in the fourth quarter, leading the government to revise its growth forecast for 2012 to 1.2% from the earlier forecast of 1% to 2% in August.

FINANCIAL SERVICES

Hong Kong beats Singapore in tax system efficiency ranking Singapore only came in fifth globally.

A new report from the World Bank, the International Financial Corporation, and PwC covering 185 economies found that the most common tax reform is the introduction or improvement of online systems for tax compliance, which occurred in 16 economies. Hong Kong ranked fourth next to United Arab Emirates, Qatar, and Saudi Arabia.

Beware the Wing Hang Bank doppleganger

pollution and noise.

The Mass Transit Railway Corporation has bought 23 trains for US$25.7 million from China CNR Company. The new trains, which will be used in the city’s transit system, will become operational in early 2014.

FINANCIAL SERVICES

Wing Hang Bank warns of bogus website copying its eBanking services Beware of the website www1.winghghk.com.

According to a release, Wing Hang Bank would like to alert its customers to

a fraudulent internet website at the domain name of www1. winghghk.com.

The fraudulent website attempts to replicate the Wing Hang eBanking services pages of Wing Hang Bank’s website.

The site contains a hyperlink to a login page, which requests customers to input their online banking User ID and Password.

RESIDENTIAL PROPERTY

Home prices fall by half a percent Drop in prices is first in eight weeks.

The Centa-City

TRANSPORT & LOGISTICS

MTR buys 23 Chinese trains for US$2.57m New diesel/electric trains emit less

MTR goes greener with new trains

6 HONG KONG BUSINESS | JANUARY 2013

Hong Kong one-ups Singapore in cheaper healthcare

Leading Index showed home prices inching downwards by 0.55% or the first week-onweek drop after eight straight weeks of gains.

Analysts said the price cooling is the first sign that government efforts to curb soaring real estate prices are beginning to have a meaningful impact.

HEALTHCARE

What Hong Kongers should be thankful for when it comes to healthcare Nearly 60% of Singapore’s healthcare spending comes from citizens’ pockets but not in HK. The Health Protection Gap in the Asia-Pacific region could reach US$197 billion in 2020, according to Swiss Re’s latest study, entitled Health Protection Gap: Asia-Pacific 2012, covering 13 markets in

the Asia-Pacific region: Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, the Philippines, Singapore, South Korea, Thailand, Taiwan, and Vietnam.

ECONOMY

Hong Kong’s fiscal surplus to reach a whopping $8.6b for 2012-13 That is instead of the originally budgeted HK$3.4 billion deficit.

Ernst & Young estimates that instead of the originally budgeted deficit of HK$3.4b, the final result for the year 2012-13 will be a surplus of HK$3.4b.

This turnaround is mainly due to a reduction of expenditures and higher stamp duty revenues. Ernst & Young’s estimated surplus would increase Hong Kong’s fiscal reserves to HK$677.7 billion by the end of 31 March 2013.

HONG KONG BUSINESS | JANUARY 2013 7

News from hongkongbusiness.hk Daily news from Hong Kong Government’s $222.6b spending spree MOST READ ECONOMY

Government spending hits $222.6b Consequently, deficit reached $36.5 billion.

The Financial Services & the Treasury Bureau announced that government expenditure for the April-October period amounted to $222.6 billion, with revenue of $186.1 billion, resulting in a $36.5 billion deficit.

HOTELS & TOURISM

Tourist count surges 11.9% to 4.24m Visitors from Mainland are still a big chunk.

According to the Tourism Board, visitor arrivals to Hong Kong were up 11.9% yearon-year for October to reach 4.24 million. Of these, more than 2.01 million were overnight arrivals, up 3.6% from last year.

Mainland China contributed over 1.28 million overnight arrivals.

Meanwhile, sameday, in-town visitor arrivals rose 20.6% to more than 2.22 million.

Hong Kong’s budget deficit

approved its proposed acquisition of London Metal Exchange.

ECONOMY

HKMA weakens HK$ yet again Sells US$500 million to defend peg to US dollar.

The Hong Kong Monetary Authority again intervened in the currency market selling HK$3.88 billion (US$500 million) in Hong Kong dollars as the local currency repeatedly hit the strong end of its authorized trading

FINANCIAL SERVICES

HKEx gets go-ahead to acquire London Metal Exchange As much as 54 million shares will be placed.

According to Maybank Kim Eng, HKEx announced that the UK Financial Services Authority has

range.

Cathay flies to Hyderabad

TRANSPORT & LOGISTICS

on-year. On a perestablishment basis, total receipts rose 5.2% year-on-year to $18.2 million.

Transport receipts dip 0.5% to $484.2b Operating expenses and employee compensation amounted to $432.2 billion.

The Census & Statistics Department said in an announcement that transportation, storage, and courier services receipts amounted to $484.2 billion in 2011, a drop of 0.5% year-

RESIDENTIAL PROPERTY

Government awards lots Both are residential sites worth a combined HK$5.45 billion.

The Lands Department said the lots have been awarded on a 50-year land grant. A Tseung Kwan O lot was awarded to Hinwood Investment for HK$2.545 billion.

It has an area of 14,954 square metres and is designated for non-industrial purposes, but excluding warehouse, hotel, and petrol station use.

HEALTHCARE

Dipping transport receipts

8 HONG KONG BUSINESS | JANUARY 2013

Hong Konger suspected of contracting SARS-

related virus Investigation into the case involving a 59-year-old man is ongoing.

The Centre for Health Protection of the Department of Health is investigating a case reported by Princess Margaret Hospital involving a 59-year-old man with fever and travel history in the Kingdom of Saudi Arabia.

AVIATION

Cathay Pacific launches direct flights to Hyderabad Airline schedules four flights every week to Hyderabad.

The first direct flight between Hong Kong and the Rajiv Gandhi International Airport in Hyderabad took place on 3 December. The route will be served

by Airbus A-330-300 aircraft.

HONG KONG BUSINESS | JANUARY 2013 9

FIRST Barclays reckons Hong Kong is already in a property bubble but only the increasing of US interest rates, not administrative measures, will prick it.

Over the 27 months from March 2009 to June 2011 mortgage debt expanded by 34%, while property prices rose 78% over the same period. The mortgage debt-toincome multiple for a typical first-time buyer expanded from 6.5x in 2006 to 9.1x by 1H11 as interest rates fell and borrowing capacity increased to support higher property prices.

Hong Kong property in 2013: Taxing times ahead

T

which will hurt agents’ profitability, and lower sell through rate in primary market, which will affect developers.”

Negative impact Nicole Wong and the property team at CLSA Securities reckons the negative impact on investment demand from SSD will see a 20% drop in residential demand. “But as there is no force sellers on the market (due to low level of shortterm investment activities, and strong holding power of both mainland buyers who are the key source of non-local buyers, and strong holding power of developers) most of the demand contraction will be absorbed in form of slower volume in secondary market,

From residential to commercial Some investors may also prefer to change their investment to commercial or industrial property.

Sylvia Wong, an analyst with UOB Kay Hian, notes that Centaline estimates that mainland China buyers accounted for 11.2% of all residential transactions in 3Q12 in terms of volume and 16.2% in terms of value. However, the primary market has been a lot more reliant on Chinese buyers, who contributed to 23.1% of sales volume in 3Q12 and 31.2% in value.

“Chinese buyers have also been particularly important for the luxury segment (>HK$12m), accounting for 28.3% of volume and 33.7% of value of luxury residential sales in the last quarter, and an overwhelming 42.3% and 51.3% respectively of the primary market sales alone,” notes Ms Wong. Corporate buyers, she adds, accounted for 9.7% of transactions in 3Q12, and 23.7% in terms of value. “Hence these new measures, which aim to discourage foreign and investment demand, will affect the luxury unit sales in the primary market most.”

hey were the “market cooling measures” everyone had been expecting, but will the foreigner property tax make any difference to home prices in 2013? Probably not, seems to be the consensus of property analysts, who reckon that sales volume will slow with the absence of foreign buyers deterred by the 15% extra tax, but that locals will still keep the price firm. Only one in five buyers of Hong Kong property is a foreigner, so that still leaves 80% of the market fighting over a still unlimited supply.

Singapore, which imposed a 10% extra duty on foreign buyers in early 2012 has seen no correlating drop in sales prices--an instructive if unwelcome message for Hong Kong.

10 HONG KONG BUSINESS | JANUARY 2013

Over the 27 months from March 2009 to June 2011 mortgage debt expanded by 34%.

Looking for loopholes In the three months since the new administrative measures were introduced, there has been little sign of a slowdown in sales or a drop in prices. Indeed, Barclays reckons the mood is one of looking for loopholes. “Reaction to recent government measures has not been concern about price falls, but about loopholes in the measures that would allow more money to flow into the property market. And with interest rates still low, few owners of property seem to be rushing for the sales door.”

Indeed, any change to the direction and momentum of Hong Kong’s property market will likely come from market forces rather than government diktat. Just what these will be is unknown, but in the past in Hong Kong price falls have varied ranging from a political crisis in 1989, to interest rate increases in 1994, and to a currency crisis in 1997. The one that will probably do it is a rise in US interest rates, which will make Hong Kong interest rates also rise. But would-be buyers of property shouldn’t hold their breath for that to happen.

Residential supply completions 35000 30000 25000 20000 15000 10000 5000 0 1998

2000

2002

2004

Completions

2006

2008

2010

2012E

2-year moving avg. (Completions)

Source: HKMA, HK government data, Barclays Research

2014E

FIRST however, were typically smaller; especially in Central.”

Exit bankers, enter lawyers

B

ankers are slowly giving way to lawyers in the prime office markets of Central in Hong Kong. Gone are the days when a mega bank with plans of doubling its staff would take up six floors of an office with an option on another three. Instead it is smaller law firms, headhunters, and some hedge funds who are the new lessees of Central office space. That does make for more work for agents with the average size of a new law firm rental being 11,000 square feet. Colliers notes that newcomers were mainly finance-related companies who looked for office premises with areas of about 3,000 sq ft.

Offices in Central Colliers notes that legal firms were still expanding in Central but the

pace has slowed down in 3Q 2012 compared to the previous two quarters.

Over the last 6-9 months, Jones Lang LaSalle has seen Squire Sanders commit to The Landmark (approx. 12,500 sq ft), an approx.

40% increase in space. Reynolds Porter Chamberlain set up an office in Hong Kong of approximately 11,000 sq ft in Three Exchange Square. Aside from this, King & Wood Mallesons has agreed a deal to consolidate their offices in to the Landmark from Hutchison House, without expansion.

Jones Lang LaSalle adds that the growth of the broader financial services sector helped offset some of the impact arising from the downsizing in the banking sector.

“Requirements from these tenants,

Rents rebounding Still, average rents are starting to rebound. The average grade A office rent in Central / Admiralty showed its first quarterly gain since 3Q 2011, rising 0.8% QoQ in 3Q 2012 to HK$98.8 per sq ft per month.

The rent rise as well as the stalled overall vacancy were driven by the sustained demand from new set-ups and expansionary demand from the legal sector, albeit at a slower pace compared to the previous quarter.

It will be harder to get central space moving forward, with no new office space due for 2013. Looking into 2013, there will be no new supply on Hong Kong Island, and the scarce supply of grade A office premises will continue in 2014 when only three new office developments of 570,000 sq ft of net floor area are expected to be completed.

Colliers notes that newcomers were mainly finance-related companies who looked for office premises with areas of about 3,000 sq ft.

Hong Kong Island Supply Pipeline 4%

To end 2014

To end 2016

2%

0% Core

Fringe Core

Midtown

Decentralised

Source: CBRE

2013 OUTLOOK Readers of Hong Kong Business looking for some good cheer will be happy with the forecasts for 2013, which by all accounts look good. Duncan Wooldridge from UBS forecasts real GDP to rebound to 4% y/y next year from an estimated 1.4% in 2011. China is back into recovery mode and Europe doesn’t seem to be getting any worse, so these should provide a more benign environment for Hong Kong.

“Viewed in perspective, our projected 4% next year is below the trend growth rate of around 4.5% for Hong Kong and the 6-7% real GDP expansion typically seen during past recoveries. For the

domestic economy, fixed investment will likely remain a clear bright spot, as the driver of which has transited from cyclical to structural forces. Specifically, the strong pipeline of infrastructure projects, plus the government’s commitment to rebalance the property market by boosting housing supply, should underpin construction investment regardless of the business cycle. The latest data spells this out, with real fixed investment growing almost 8% y/y in the first three quarters of 2012 despite a poor 1% headline GDP print,” notes Wooldridge.

He expects private consumption to steadily trend up next year, growing at

A subpar recovery next year %YoY 10.0 5.0 0.0 Forecast

-5.0

Real GDP grow th Av erage grow th, 2003-12

-10.0 2006

2007

2008

2009

2010

2011

2012

2013

Source: CEIC, UBS estimates

HONG KONG BUSINESS | JANUARY 2013 11

OPINION

WANDER MEIJER

Will they still need me when I’m 64?

A

friendly headhunter stated clearly in his blunt language: “We don’t recruit guys like you for executive positions at international companies; you are too old. If you want to do something different, start your own business.”

I did not take it personally – at my own global employer I hadn’t seen a senior appointment of anyone my age since I turned 50 a few years ago. It does however bother me in the bigger scheme of things – the world is ageing quickly and side-lining a growing part of the workforce does not benefit anyone.

Age determines happiness. People are at their happiest at young and at an old age and least happy during the infamous mid-life. Age defines sexuality, as any woman knows and what many men should know when they think they’ve still got it on the dance floor, while everyone else can see that they don’t. Fortunately that moment seems to occur later in Asian dance venues than it does in Europe.

The West and the East put different values on age, prevalent in the way the East reveres parents, wisdom or chooses it leaders.

Barack Obama has just been re-elected President at the age of 51, David Cameron became Prime Minister of the UK at 43, and my home country, the Netherlands also elected his equivalent at the same age, a man who still looks and behaves like a student. It isn’t necessarily better or worse, but it is certainly different in Asia.

India’s leader, Manmohan Singh is 80 years old, and the new Chinese Politburo Standing Committee counts an average age of 63.4 years.

Jiang Zemin, who allegedly had a hand in the appointment of 6 out of 7, is 86.

(39) be doing when they are 84?

Having said that, in the USA people are working at a much higher age than in Europe, notably in aviation, where most flight attendants continue working far beyond European retirement age.

While not particularly good for the passengers, it is better for the US economy. Overall, the labor force participation rate in Europe is much lower than in the US or in Hong Kong or China. Age has a tremendous effect on the economy. Countries with the biggest fiscal and economic problems are the ones with the lowest labor participation / oldest populations.

Nevertheless, convincing a population, who live on average 15 years longer and healthier than 60 years ago, to extend their working life by 1-2 years is one of the most difficult political battles in “Age has a tremendous effect on the Europe, arguably because companies don’t elderly employees anyway. economy. Countries with the biggest fiscal want Dealing with an ageing population is and economic problems are the ones with one of the biggest challenges of our times, effecting healthcare, labor participation, family the lowest labor participation / oldest structures, pensions. The golden age of wellpaid early retirement is over forever. populations.

And companies who are innovative and can successfully accommodate elderly employees Age also drives the business world. Senior by being more flexible in work offering, timings executives at Western companies are happy to and tasks will get a competitive edge over narrowretire when they are 60 or 65, worn out by heavy minded enterprises. travel schedules and endless financial quarterly Meanwhile, I’ve decided to defy the ageing reviews. In contrast, Hong Kong’s most famous process. I went hiking in the Himalayas with my tycoon Li Ka Shing is now 84 and shows no sign of sons last month and am about to prove the friendly slowing down. What will Mark Zuckerberg, CEO headhunter wrong – a good story for my next blog. of Facebook (28 years) or Larry Page, Google’s CEO 12 HONG KONG BUSINESS | JANUARY 2013

BY WANDER MEIJER Global Head International Research for TNS

Does age matter?

HONG KONG BUSINESS | JANUARY 2013 13

ECONOMICS

IAN PERKIN

IAN PERKIN Independent Economic Consultant perkin888@hotmail.com

The future of the HKD-USD link

T

he Hong Kong Monetary Authority’s modest series of interventions in the foreign currency market in late October to moderate the rise in the local dollar against the US dollar brought the usual speculation about the future of the socalled dollar “peg”. They also brought the usual Government denials that there were any plans to change the linked exchange rate between the local and US currencies. The relatively muted response to the HKMA’s actions was understandable.

According to media reports the HKMA sold $3.5 billion worth of Hong Kong dollars to keep the local dollar within the allowed trading range of $7.75 to $7.85 to the US dollar - that is either side of its original set rate of $7.80 to the greenback. That’s miniscule compared to the daily trade on the local dollar – one of the most traded currencies on world forex markets – the fact that the SAR’s monetary base is backed by US dollars and the huge reserves the local Administration has to defend the linked exchange rate if needed. The HKMA intervention was aimed as much at sending a message about its commitment to the linked rate as it was about keeping the dollar within the set trading range which it’s obliged to sustain.

In any case, the relatively small matter of Hong Kong’s bilateral currency link to the US was overshadowed by the elephants in the room in global politics and economics in recent weeks – the US Presidential election (November 6), the National People’s Congress in Beijing (from November 8) and the Eurozone crisis (which seems like forever).

HK economic dilemmas But closer to home, right here in Hong Kong, it has been two hardy perennials that have been at the close to the centre of economic debate – the future of

HKSAR Financial Results (Budget Situation) HKD billions Item

14 HONG KONG BUSINESS | JANUARY 2013

September 2011

Half year to September 2012

Half year to September 2011

14.85

22.85

132.6

150.9

Expenditure

36.83

26.54

190.6

156.3

Deficit

21.98

3.68

58.0

5.4

Fiscal Reserves

611.07

590.02

611.07

590.02

Revenue

Mainland cash leaking across the border in search of better yields and capital gains, especially in the property market, and buoying the local dollar.

But while these global and regional flows make things more difficult for the Hong Kong dollar, they hardly seem to be a threat to the linked rate even with US interest rates set to remain low through to 2015 and QE continuing.

In fact, critics of Hong Kong’s linked exchange rate to the US dollar – the so-called dollar “peg” – and forecasters of its demise have been on the wrong side of history for almost three decades now (including on occasions this writer). When it was established in October 1983, the linked rate to the US currency was meant to be a short-term fix to stabilise the Hong Kong dollar after a period of turmoil as a free-floating currency. It worked. Indeed, it worked so well that it has stayed in place ever since, through recessions, currency and financial crises and even the return of sovereignty over British colonial Hong Kong to the People’s Republic of China.

“HKMA sold $3.5 billion worth of Hong Kong dollars to keep the local dollar within the allowed trading range.” the Hong Kong dollar’s link to the US currency and a rampant residential property market.

The two are related, of course, in that Hong Kong’s linked HKD-USD rate means that the SAR follows US monetary policy and interest rate settings and local monetary policy and rates help determine property market activity (and prices).

Hong Kong’s situation has been compounded by

September 2012

Budget deficit spike In the meantime, the weaker growth in the Hong Kong economy has seen the HKSAR Government’s budget deficit blow out to $58.02 billion in the six months to September (see table above) from only $5.4 billion in the same period last year. While expenditures have increased significantly, revenues are down at least for the opening six months of the year. The usual caveat applies that the bulk of the government’s revenue, including salaries and profits taxes, flow towards the end of the financial year (March 2013).

The unending peg issue

OPINION

RICHARD BRANSON Age is an advantage

W

“Older employees who have learned how to inspire and lead people, and how to remain persistent and optimistic despite changes in circumstances, will have an edge.”

hen I was young, my hero was Peter Pan, and he is still one of my favorite fictional characters.

After all, who wouldn’t want to be him? He spent his days with a great gang of friends, he went on lots of adventures, and he could fly. While I have no intention of slowing down anytime soon, it would be great to be like Peter, who never got any older.

Use the years to your advantage In my experience, older entrepreneurs can use their age to their advantage, both in business and in life. There is no reason at all to slow down.

If you are concerned about preserving your creativity, look to some new sources of inspiration – innovative ideas or fresh strategies from other fields, for example, or surprising new technological developments, or art and music you find interesting.

I often find that when I take a break to learn about something new, my newfound knowledge can be applied to some of our Virgin businesses, helping us to tackle long-standing problems from different angles. A group that recently inspired me was the band we partnered with to launch our new global music venture, Virgin Live: The Rolling Stones. After spending 50 years together as one of the world’s most popular rock bands, Mick Jagger, Keith Richards, Ronnie Wood and Charlie Watts are still as keen as ever to get onstage and to work on new songs.

Make new friends and keep the old Senior business leaders can sometimes fall into a rut by

16 HONG KONG BUSINESS | JANUARY 2013

working only with the same team of colleagues and advisers they have always trusted, wary of newcomers’ youth and inexperience.

If you surround yourself with energetic, like-minded people, no matter what their ages, you will find that great ideas are more likely to flow.

One way of expanding your contacts among younger generations is by volunteering as a mentor. A lot of young people are not getting a fair shake when it comes to getting a start in business, so we started up initiatives such as the Branson Centres of Entrepreneurship in South Africa and the Caribbean, and Virgin Media Pioneers in the U.K. I’ve benefitted immensely from our exchanges – these young entrepreneurs’ ideas have been fascinating and transformative.

And do not forget to draw upon the knowledge of your wider circle of peers. When a problem comes up, you may find that they have been in similar situations in the past.

Feed your motivation Staying motivated is another worry that entrepreneurs contemplating the later stages of their careers have mentioned to me: If you’ve done it all before, what is the point of starting over?

I have never found this to be a problem, since there is always another challenge to tackle. If you are having trouble finding an interesting new project, step back and look at your situation in a different light: How can you use this opportunity to make a difference and do good in the world? Are you doing something you care passionately about? If so, you will want to keep on doing it.

Stay active Another thing to bear in mind is the importance of physical fitness – keeping fit will help you to remain a creative, agile thinker.

In the past few months my children Sam and Holly and I have completed challenges including climbing Mont Blanc, which is the highest mountain in Western Europe, and taking part in the London Triathlon.

And over this past summer, we broke some records for kite-surfing across the English Channel: My son Sam broke a world record, becoming the fastest person to kite-surf across the channel, while I am now the person with the most years to have done so! A bit of action and adventure away from the office can be highly refreshing, reinvigorating your creativity in other areas, including business.

Pursue new dreams Finally, many people do not find their true calling until later in life. Some business leaders who have done well at a steady job for many years feel the urge later in their careers to start up on their own businesses.

Those who lose their jobs in cutbacks turn misfortune into opportunity and follow up on a brilliant idea that they never had time for before.

If you find yourself in this situation, my advice is to go for it!

You’ll find that a lot of the skills entrepreneurs need are acquired through experience: real-life, on-the-job expertise.

Older employees who have learned how to inspire and lead people, and how to remain persistent and optimistic despite changes in circumstances, will have an edge.

HONG KONG BUSINESS | JANUARY 2013 17

DEALMAKERS

Morrison & Foerster acts on Hong Kong’s 3rd largest IPO Check out the latest and biggest deals by other firms - Appleby, Herbert Smith, and Baker & McKenzie including IPOs, share buy-back arrangements, and acquisitions.

PARTNER

Gregory Wang Morrison & Foerster partner Gregory Wang acted for Shanghai Fosun Pharmaceutical Group for its US$512 million Hong Kong IPO in October, which was the third largest this year. It has been a quiet year for new stock offerings this year, and the Fosun listing was the first listing since July.

Morrison & Foerster now has acted for two of the three largest China-related pharmaceutical IPOs, the first being Sinopharm’s US$1.2 billion IPO on the Hong Kong Stock Exchange in 2009. Wang worked with Ven Tan and John Moore on this deal. UBS AG, China International Capital Corp., J.P. Morgan and Deutsche Bank AG acted as the joint global coordinators in the deal.

According to Ven Tan, managing partner of Morrison & Foerster’s Hong Kong office, the MoFo team led by our partner Greg Wang was exemplary in every aspect and worked around the clock during the last few weeks to get this deal done. “I am proud to have such capable attorneys as my colleagues.” he added.

18 HONG KONG BUSINESS | JANUARY 2013

MANAGING PARTNER

Frances Woo Frances Woo, managing partner at Appleby, has been busy acting for China Development Bank in relation to a US$1 billion facility to Alibaba Group Holdings, China’s biggest e-commerce company, for its share buy-back arrangement with Yahoo! Inc. This is the largest ever financing for a private sector Chinese company and the largest nonLBO private financing for a technology company globally to date.

China Development Bank Hong Kong branch was the only Chinese bank which provided the senior financing, alongside eight international banks which together provided a parallel senior debt facility of US$1 billion to Alibaba Group in the support of the transaction.The initial repurchase of shares was valued at approximately US$7.1 billion.

Alibaba used the proceeds of the CBD facility to finance the share buy back. Yahoo! Inc.’s stake in Alibaba is now down from 40% to 23%.

Woo was assisted by counsel Tan Li-Lee and associate Rupen Shah.

PARTNER

PARTNER

Hilary Lau

Elsa Chan

Herbert Smith partner Hilary Lau recently advised China National Offshore Oil Corporation on its entry into a Heads of Agreement with BG Group for the acquisition of the Queensland Curtis LNG project in Australia for US$1.93 billion.

In the last three years, Lau has built a reputation for multi-billion dollar energy transactions. These include PTT’s acquisition of a 40% stake a Canadian oil sands project for US$2.28 billion and CNOOC’s US$1.467 billion investment in a Ugandan oil project.

Lau was supported by Phoebe Yuen and Jie Li who worked with him to close the deal.

According to Lau, in terms of the size and complexity of the deal, this deal will be CNOOC Gas & Power’s largest overseas investment, in aggregate with the first transaction.

“It is also BG’s largest transaction for the supply of long term LNG from its Queensland Curtis project in aggregate with the first transaction,” he added.

Baker & McKenzie’s head of the securities practice group Elsa Chan recently acted for Zhengzhou Coal Mining Machinery Group’s HK$2.3 billion global offering. Zhengzhou Coal is the largest hydraulic roof support manufacturer in China in terms of market share based on production volume.

Chan has worked on multimillion dollar Hong Kong IPOs including Dynam Japan Holdings’ USD200 million global offering in August. She also acted for China Corn Oil Company, SinoPharm Group, and China South City Holdings in their IPOs. Chan was assisted by special counsels Edwin Li and Ding Chengfei.

According to Chan, the company already had its A Shares listed in Shanghai.

“The application for listing in Hong Kong of its H Shares had to be planned carefully in order to comply with disclosure requirements applicable to the company under the PRC regulations. Pricing the H Shares, given the A Shares were already trading, also required a lot of expertise.”

JANUARY 2013 HONG KONG BUSINESS | OCTOBER 2012 19 13

OPINION

STEPHEN BARNES

A must-read for foreigners wanting to do business in Hong Kong

BY STEPHEN BARNES Co-Founder at Hong Kong Visa Centre

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Promotes a business plan that sees him opening an office and employing 1-2 local workers at some stage in the first 12 months after gaining his business investment visa; and • Can show HKD1-1.5 million in investment-ready cash funds to satisfy 6-12 months of pre-revenues cash flow in the wake of his visa approval; and has a really good story.

The business investment visa is a first rate alternative to the HKCIES for those persons who have the resolve to actually get down to business once they move to Hong Kong and takes, typically, between 8 to 12 weeks to approval.

Investing in HK

T

here is a lot of commentary on the HKD10 million investment-for-residence Hong Kong Capital Investment Entrant Scheme (“HKCIES”) but surprisingly little is heard about gaining a visa for ‘business investment’ under Hong Kong’s General Employment Policy.

Essentially, in order for a foreign national to secure the permissions of the Immigration Department to join in an existing, or establish a new, business in the HKSAR, he has to show that he is in a position to make a substantial contribution to the economy of Hong Kong.

This is a very different proposition from parking HKD10 million in certain types of Hong Kong investments, thereby gaining residence permissions as is the premise under the HKCIES. The irony is that, for approximately 10% of the funds needed to qualify for a HKCIES visa, any foreign entrepreneur worth his salt stands a pretty good chance of gaining permissions to live and do business in Hong Kong on the basis that he: • Has a modicum of prior business experience overseas that can be said to amount to a ‘track record’; and

20 HONG KONG BUSINESS | JANUARY 2013

This compares with the 6-8 months under the HKCIES. Moreover, extensions to the initial 12 month business investment visa are granted almost automatically assuming you can demonstrate that you are actually implementing your business plan by the time your visa first comes up for renewal.

Once you’re past the hurdle of the first extension, in the years that follow you will receive a 2-2-3 year extension pattern assuming your business is still actively trading all throughout that time.

After 7 years of holding this visa, you can apply for permanent residency.

This compares to the 7 year ‘lock in’ of HKD10 million to maintain your HKCIES status until you are eligible to make an application to become a permanent resident (and when your funds can be freed up once again).

Each year, there are between 250 and 400 business in estment visas issued to foreign national entrepreneurs in Hong Kong. This is just 15-25% of the average of 1,600 HKCIES visas issued annually since the Scheme was first introduced in October 2003.

Ostensibly, Chinese nationals resident on the Mainland are effectively precluded from applying for Hong Kong visas under both the HKCIES and also the business investment visa, except where they can show they have lived outside of the Mainland for 12 months immediately prior to making their application (business investment visa) or they have secured permanent residency in a third country first (business investment visa and HKCIES).

However, with countries such as Guinea-Bissau and The Gambia making permanent residency available to high net worth individual Chinese nationals quickly and fuss-free, these preclusions are easily worked around.

So, the General Employment Policy actually provides a cheap and easy alternative to the HKCIES for those foreign nationals and Mainlanders alike who intend to run a business once they take up residence in Hong Kong.

HONG KONG BUSINESS | JANUARY 2013 21

GAME CHANGERS and Dante Tsang, pitched the business idea in a local event organised for Hong Kong start-ups and won an award for innovation. This in turn attracted investors. Founders note that the service they offer is an appealing option when not buying from an established brand.

Hong Kong Business spoke with the founders of AfterShip, initially named as Awesome Ship, to learn more about this innovative start-up.

Teddy Chan, Andrew Chan, Dante Tsang

How to track your packages online AfterShip offers a comprehensive service to track all your packages in one place, regardless of shipping provider.

A

fterShip, a firm which started operation last March, helps online merchant stores to auto-track packages in one place from dispatch until delivery and notify customers delivery updates through email, SMS and social media like Twitter. Simply put, there’s no need to remember tracking numbers anymore. All that customers have to do is link their email accounts or shopping cart accounts to auto-import all tracking numbers.

AfterShip offers an open beta tracking system which is used by online merchants selling items through shop-front store platforms, such as eBay, Amazon, Shopify, Magento and Spree. The service supports USPS, UPS, Fedex, DHL and 40 other major couriers.

AfterShip also provides online stores a reporting tool detailing any problems incurred during shipping like delayed delivery for merchants to solve them immediately.

Founders boast that the e-commerce shipment service they offer improves customer service after shipping and reduces enquiries about order status. They promise 50% increase in return customers and 40% reduction in operating cost. Co-founder Andrew Chan says that the market currently lacks a single platform for merchants to track all their shipments in one place that supports multiple couriers, postal services and channels. Teddy Chan, also a co-Founder, runs an online store himself and felt the pain of his customers when not being notified about the delivery status. Teddy, together with Andrew 22 HONG KONG BUSINESS | JANUARY 2013

HKB: What do you think makes your company promising?

Currently in the market, there is no single platform for merchants to track all their shipments in one place that supports multiple couriers or postal services and sales channels like eBay, Amazon, Shopify, Magento and the like.

According to a survey from Limelight in 2010, 79% of online shoppers rank “the ability to track shipments” as the most important customer service feature.

AfterShip focuses on the e-commerce B2B markets, targeting over 11million online merchants who ship out nearly 17 billion packages for 575 million customers each year.

With the global e-commerce market growing at 19% annually, there will be a stronger need for online merchants and customers to use our service. Hong Kong has a unique position for starting e-commerce business where stores can enjoy lower product costs, lower taxes and lower shipping rates.

HKB: What are your significant milestones so far?

AfterShip was founded after winning the 2011 Hong Kong Startup Weekend and 2011 Global Startup Battle in Dec 2011. In Jan 2012, the startup also won a HKD$100,000 micro funding from Cyberport Micro Fund Program, a leading incubator in Hong Kong.

The team launched AfterShip.com in Mar 2012 and signed the first paid e-commerce client in Apr 2012.

AfterShip helped online retailers send out over 200K shipping notifications in Jun 2012. We secured our first overseas funding from an Australian company “Business Switch” in return for a 5% share.

HKB: What’s the market response to your latest offerings?

We received positive feedback so far and many merchants wanted such service for a long time as it increased return customers. Some of our customers comment that AfterShip improves customer experience while at the same time cutting down on customer service inquiries on the status of their order.

HKB: Are you facing difficulties so far?

We were struggling whether to open our service free for individual customers to use at the beginning but at the end, we decided to serve mainly the online retailers (B2B) so that we can allocate more resources to customers who are willing to pay.

Nonetheless, AfterShip is free to use for merchants shipping less than 100 shipments each month.

HKB: What are your future plans and offerings?

We plan to launch an application programming interface for tracking and integrate tracking of 100 shipping couriers worldwide.

HONG KONG BUSINESS | JANUARY 2013 23

WINE INDUSTRY

Hong Kong wine industry climbs to the top after cutting duty rates With US$230 million auction sales, Hong Kong is now the world’s largest wine auction centre.

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he Hong Kong wine industry has experienced steady growth over the past five years since the government abolished the hefty 80% duty rate.

Within a short span of time, Hong Kong managed to surpass New York and London to become the world’s largest wine auction centre for the past two years. The Wine Spectator Auction Index, which tracks sales at fine wine auctions, shows that the total auction sales in Hong Kong amounted to as much as US$230 million.

The title was briefly surrendered to the United States in the second quarter of 2012 but Hong Kong retook it the following quarter despite sales dropping by almost 60% to US$20 million from the same period last year. In terms of percent-sold rates—a barometer 24 HONG KONG BUSINESS | JANUARY 2013

“According to HKDTC Research, Hong Kong wine auctions usually outperform those in London and New York.

of wine market strength -- Hong Kong reported a strong 97% in 3Q. Soaring wine imports Speaking at the opening ceremony of the fifth Hong Kong International Wine & Spirits Fair 2012 held early November and organized by the Hong Kong Trade and Development Council (HKDTC), Financial Secretary John Tsang said that since eliminating duties on wine in 2008, Hong Kong’s wine imports soared from about $200 million in value in 2007 to $1.2 billion in 2011.

Data from HKDTC Research show that wine imports surged some 80% in the first year of deregulation. This was followed by four more years of strong growth.

Recently, however, the value of wine imports dropped by 18.3% yearon-year in the first nine months

of 2012 as most of the imported wines originated from debt-stricken European countries such as France and the United Kingdom.

New wine players The past five years also saw the brisk entry of new players looking to profit from the increasingly lucrative wine market. Secretary for Commerce and Economic Development Gregory So said that nearly 700 new companies relating to wine have been established in 2011.

Some have taken up the conventional roles of traders and logistics operators while others are pioneering new ventures such as urban wineries, bottling, wine investment and consultancy.

Citing an ad hoc survey carried out by the Commerce and Economic Development Bureau

WINE INDUSTRY to evaluate the economic benefits of wine duty exemption, HKDTC Research notes that about 850 new wine-related companies were set up in Hong Kong in 2008 and 2009, which raised the total to 3,550. Further, the wine sector as a whole gained HK$5.5 billion worth of wine-related business receipts in 2009, representing an increase of over 30% as compared with 2007.

Manpower headcount The number of employees engaged in wine-related business, meanwhile, increased by more than 5,000 as compared with 2007 to reach 40,000 by the end of 2009.

According to HKDTC Research, this employment gain translated to about 1,000 full-time jobs, 60% of which were for front-line staff. The number of wine-related manpower and professional courses including sommelier training as well as wine business or management courses also grew from 21 in 2007 to 86 in 2009. The number of participants in these courses reached over 8,500 in 2009, representing an increase of

more than two times as compared with about 2,400 participants in 2007.

Asian brewing centre According to HKDTC Research, Hong Kong wine auctions usually outperform those in London and New York, thanks to the surge in demand from Asian investors.

High-value, investment grade wines are usually sold through auctions mainly organized by Christie’s, Sotheby’s and Bonhams.

Simon Tam, Christie’s Head of Wine, China, says that buyers around the world are now making bids in Hong Kong wine auctions either on-site or via video technologies.

“It is precisely because of the absence of geographical restrictions that Hong Kong wine auctions have become truly international events, so much so that many premium suppliers are willing to put up their goods for auctioning in Hong Kong,” says Tam. California State Trade and Export Promotion (STEP) program

“The wine sector as a whole gained HK$5.5 billion worth of wine-related business receipts in 2009, representing an increase of over 30% as compared with 2007.”

Performance of Hong Kong’s Wine Trade^ Wine (HS 2204-5) Trade 2010 2011 Jan-Sept in value terms HK$Mn. Growth % HK$Mn. Growth % HK$Mn. Growth % Total Exports 1,336 +75.7 1,913 +43.2 1,384 -6.9 Domestic Exports 1 = * +73.6 - -100.0 Re-exports 1,336 +75.6 1,913 +43.2 1,384 -6.9 Imports 6,982 +73.2 9,790 +40.2 5,989 +18.3 Wine Exports for Markets 2010 2011 Jan-Sept (by value) Share% Growth% Share% Growth% Share% Growth% Asia: 96.9 +81.5 97.2 +43.6 92.1 -12.3 Chinese Mainland 37.7 +82.9 42.1 +59.6 55.2 +27.3 Macau 52.3 +76.0 48.8 +33.7 29.8 -45.6 Vietnam 41 +539.1 2.9 +2.1 3.5 +3.3 Singapore 0.9 +27.5 1.6 +145.6 1.2 -17.8 Taiwan 0.6 -10.2 1.2 +173.5 1.1 -15.9 U.S.A 1.6 +45.5 0.9 -21.9 3.2 +374.5 Wine Imports by Origin 2010 2011 Jan-Sept (by value) Share% Growth% Share% Growth% Share% Growth% Europe: 81.8 +82.5 83.8 +43.7 76.9 -24.9 France 59.0 +80.6 62.8 +49.1 57.0 -25.0 U.K. 13.9 +74.6 12.9 +30.0 11.3 -31.3 Italy 2.2 +44.9 2.5 +39.2 3.1 +28.7 Australia 6.0 +26.7 5.6 +32.2 7.3 +7.8 U.S.A. 5.4 +15.6 6.0 +57.1 7.0 -8.6 Chile 1.9 +34.6 1.4 +1.5 2.3 +35.5 Wine Trade 2010 2011 Jan-Sept in volume terms Mn. litres Growth % Mn. litres Growth % Mn. litres Growth % Total Exports 12.339 +45.0 18.494 +49.9 14.424 +1.4 Domestic Exports 0.002 = * -98.0 - -100 Re-exports 12.336 +44.9 18.494 +49.9 14.424 +1.4 Imports 40.007 +14.8 48.203 +20.5 38.415 +9.2 ^ Since offshore trade has not been captured by ordinary trade figures, these numbers do not necessary reflect the export business managed by Hong Kong companies. * Insignificant Source: HKTDC Research

director Jeff Williamson told Hong Kong Business that significant opportunities for growth from China will balance out the challenge of a competitive environment. “It is estimated that the market for imported wine in China could be as much as 200 million consumers, yet the current user base is about 20 to 30 million, providing significant opportunities for growth,” he said.

Citing a data from Wine Institute, Williamson notes that California wine exports to Hong Kong in 2011 amounted to $163 million dollars, a 39% increase over the previous year.

Local consumers Domestically, wines are sold through off-trade channels such as supermarkets, specialty stores and convenience stores, and on-trade channels such as bars, restaurants and club houses. According to Euromonitor International, wine sales in Hong Kong amounted to HK$2.9 billion or 12.3 million litres in 2011, up 31% and 34% respectively compared to five years ago. For 2012-2016, wine sales are forecast to grow 6% per annum in value terms and 3.9% per annum in volume terms. Currently, off-trade channels account for approximately 46% of total wine sales in value terms and 64% in volume terms in 2011.

Christie’s Tam remarks that wine prices are escalating steadily and consumers are now paying attention to the years and regions of wine production. In particular, wines less than two years old, he says, are becoming favourites of the market.

Christian Pillsbury, managing director of Applied Wine, used the “Long Tail” theory to explain the Hong Kong wine market. In pointing out the significant growth potential in wine consumption frequencies, he says, “Currently, of all wine consumers in Hong Kong, only 22% are frequent drinkers (drinking three to four times a month to more than four times a week) and more than half are nonfrequent drinkers (drinking once every one or two months).”

Research firm Sopexa notes that HONG KONG BUSINESS | JANUARY 2013 25

WINE INDUSTRY consumption in the Hong Kong market is only reaching around 5 liters per capita, compared to over 50L per capita consumption in France and hence is certainly a market to grow. Sopexa adds that the Vinexpo study forecast around 7L by 2015.

Regional growth According to a recent report from International Wine and Spirit Research, Asia is projected to account for over half of the growth in wine consumption in the world in the five-year period ending 2015.

Hong Kong, India, Japan, Mainland China, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand are seen to take the lead, thanks to the relentless growth of the middle class with a huge appetite for modern living following the Western lifestyle.

A separate Euromonitor International report supported this bullish regional forecast, showing that wine sales in Asia amounted to US$62.2 billion or 5.5 billion litres in 2011, up 63% and 56% respectively compared to five years ago.

For 2012-2016, wine sales are forecast to grow 9.5% per annum in value terms and 8.9% per annum in volume terms. Wine sales in China have been particularly spectacular, reaching US$33.1 billion or 3.9 billion litres in 2011, up 143% and 79% respectively compared to five years ago.

“The leader of the league is no surprise to anyone. Wine consumption in Mainland China grew by 140% between 2006 and 2010.

That has placed China, including Hong Kong, as the fifth largest consumption country in the world.

There would be a further increase of some 54% in Mainland China from 2011 to 2015,” says So. The mainland market Mainland China’s National 12-5 Plan, which aimed at improving the quality of China-made products, is seen to impact largely on the Hong Kong wine industry.

According to So, between 2006 and 2010, the per capita consumption of wine of Hong Kong has grown by some 90% to 4.6 litres, 26 HONG KONG BUSINESS | JANUARY 2013

and to 5 litres in 2011. The figure, he says, is expected to balloon further as the city benefits from mainland China’s rising demand for quality wines. “New opportunities therefore abound. Very initially we see potential for Hong Kong to take some part in the Plan as appropriate. An immediate role we can possibly play is to ride on our international wine trading network to help export the Mainland’s produce to other places,” he said.

ASC Fine Wines, which bills itself as the largest importer of premium wines in the Chinese mainland, said that five years ago 95% of the wines consumed in the Mainland are produced domestically. But over the past half-decade, the quantity of wine imports jumped 14.4 times and accounted for 25% of the market. ASC general manager for Hong Kong and Macau David Andrews says that it has been forecasted that 28 million cases of wine will be imported into the mainland market by the end of 2012. He also points out that, previously imported wines were sold only in first-tier cities such as

Beijing, Shanghai and Guangzhou, and that sales channels were limited to foreign-invested hotels and retail shops.

But now imported wines are entering second-tier cities and are being sold in department stores as well as mainland retail shops, restaurants and hotels, or are being directly sold to governments and state-owned enterprises.

For 2012-2016, wine sales are forecast to grow 9.5% per annum in value terms and 8.9% per annum in volume terms.”

Wine storage Also speaking at the Fair, deputy secretary for Commerce and Industry Christopher Wong boasts that the world’s first “Wine Storage Management Systems” certification scheme was first launched and implemented by the Hong Kong Quality Assurance Agency in 2009. To date, 32 wine facilities have already been certified and the scope of certification has extended to the retailing, consumption and shipping of wines. Since the launching of the scheme, there has been a 60% increase in the number of wine storage facilities and a 75% growth in wine storage quantities in Hong Kong.

HONG KONG BUSINESS | JANUARY 2013 27

OPINION

TIM HAMLETT

TIM HAMLETT Former Editor of Sunday Standard and Associate Professor of Journalism

A case for expecting dads

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he idea of paternity leave seems a bit avant garde for Hong Kong. I know we think of ourselves as an advanced, trailblazing city, but not when it comes to social welfare, surely?

It is a pleasant thought -- details are still awaited -- even for those of us who come too late for it.

Men’s role in childbirth Traditionally, men were considered to have very little to do with childbirth. They had made their one irreplacable contribution to the proceedings nine months before. The rest was women’s stuff. In many cultures, including both 19th century China and 19th century Britain, male doctors were not allowed to look at or touch the parts of a female patient involved in the procedure. There were no female doctors, so the real work was done by a midwife.

This seemed to be pretty much still the situation when my son was born 24 years ago in a local hospital. I was told quite firmly that a father’s place was in the corridor. In more trendy hospitals it was the custom for the father to watch the performance, though I understand he was hustled outside fairly quickly if any emergency arose.

Personally, I bristled a bit at not being given a choice, but if given a choice I would have chosen the corridor. There are some things you do not need to watch.

What about C-section daddies?

In recent years the husband-as-spectator role has been rather displaced by the widespread enthusiasm among mothers for having their offspring be like Shakespeare’s Macduff who was, “From his mother’s womb. Untimely ripped.” This can be done under anaesthetic and at a prearranged time.

This may be just as well, because the proposed paternity leave is going to run for three days. I imagine most employers will wish the happy father-to-be to book these in advance. That is alright for the Caesarian enthusiasts; they can choose their day. Couples who let nature take its course will face a serious problem. Predicting birthdays is not an exact science. One does not wish to spend three days feeding one’s wife lumps of coal and vainly urging the bun in the oven to get on with it. Equally unattractive is the idea of leaving the paternity leave so late that by the time it comes along, the new arrival is already installed in the family flat with his complimentary Bible and free starter pot of baby formula.

Bankruptcy in-the-making?

In fact the only thing which marred this piece of good news was a complaint from a spokesman for business -- self-appointed as such spokesmen usually are -- that the institution of paternity leave would lead to bankruptcies.

His firm could handle the extra expense, he said, but some small firms would be sunk by it. Apart from awakening echoes of the character in the Bible who went to the temple to thank God that he was not like other men, this statement had the additional 28 HONG KONG BUSINESS | JANUARY 2013

disadvantage of not being very credible.

I understand that the operators of small businesses always eye innovations with suspicion. I myself was not always a scribbler. My family ran a small business in which I participated at weekends.

During my secondary education, it progressed from small to medium. I was not really conscious of this, although it was marked by a gradual improvement in the family transport. I was delivered to Form 1 in a van, and collected from Form 7 in a Jaguar. For the owner of a small business, constant wariness is a way of life. Small waves which will make no impression on bigger boats may swamp his small craft. My father briefly achieved public figure status as the leader of a campaign to reduce the amount credit card companies charged retailers when the cards first appeared. Minor changes to employment law were greeted with delight or dismay. Usually dismay.

Still, one tries to keep a sense of proportion. No doubt losing a trusted employee for three days will be an inconvenience to enterprises with a small staff, although people occasionally take three days off at short notice for other reasons, like illness. Still, fatherhood is not something which is going to happen every week.

Few people these days want more than two kids and many settle for one. A woman who breastfeeds -- as we hope she will -- is going to have two years between babies. So what this amounts to is that your male employees who are of breeding age are going to have one or two extra three-day holidays, and probably if it were two, they will be at least a couple of years apart. This assumes, rather unkindly, that at present, the employer makes no arrangement at all for employees whose wives are incubating. I can quite see how someone who runs a big business might find this an easy assumption to make. Big businesses have personnel departments who study the relevant regulations carefully. If you are not entitled to a day off for a particular purpose, then you don’t get it. Rules are rules.

Human beings vs human resources Small bosses who want to stay in business and keep staff have to treat them like human beings, not like human resources. Whether it is an entitlement or not, I expect a good many of them will tell any staff member whose wife has disappeared into a local hatchery to get lost for a couple of days. No doubt the more parsimonious ones will make an appropriate deduction from the employee’s pay, but the absence can be handled.

Of course employers who are really worried about paternity leave -- or maternity leave for that matter -- have a simple solution, which is to employ people who are past the age at which such things are likely to come up. If this solution were widely adopted it would rectify a serious injustice, which is the prejudice among many employers against mature job seekers. Or for a more exciting suggestion which, again, would counter discrimination elsewhere, why not recruit gay men?

Who’s your Daddy?

CO-PUBLISHED CORPORATE PROFILE

Stalled Western economies and Eurozone crisis continue to affect HK sales and payments

The Hong Kong economy suffered a technical recession again as it shrank 0.1% in the second quarter - find out how this will impact payments.

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ith the latest economic figures showing that vital export markets, particularly in Europe and the USA are still struggling to make any real progress, it’s of little surprise that our own economy in Hong Kong has suffered as a direct result, shrinking by 0.1% in the second quarter and sparking talk of a ‘technical recession’ once more.

A good indicator of the poor state of our traditional export markets is the significant interest in the HK$, as investors look for better performing assets in HK. However, while it is comforting to know that we are a ‘preferred risk’, it has also meant that our central bank has needed to intervene to weaken the currency and keep it within the trading limits of its HK$7.80 peg rate to the US$. With all economic information, such as this, it’s always important to look behind the headlines and statistics to get a clearer true picture of what’s really happening and explore how they’re affecting Hong Kong businesses.

The latest Atradius Payment Practices Barometer focuses on the key economies in the Asia Pacific region and provides one method of exploring the current business environment, looking at current payment practices, how companies trade and what issues are present.

Hong Kong payment default rate fails to improve Of all Asia Pacific markets, Hong Kong recorded the fourth highest export payment default rate of 5.7%. This is a slight worsening over 2011’s figure of 5%, but even though we had the highest default rate a year ago, in reality we haven’t progressed, it’s just that India, Singapore and Australia have deteriorated more rapidly, with their defaults averaging around 7%.

If nothing else, this provides further evidence that export trade has become more challenging and is having a wider impact on major APAC countries. Even China’s export defaults stand at 4.5%,

with the overall figure for the region being 5.4%. For Hong Kong businesses, the picture on late payments provides little comfort with 34.3% of domestic and 36.3% of foreign business-tobusiness invoices remaining unpaid after the due date. Of these, almost 52% are more than 16 days overdue. This is almost identical to the average for the APAC region, although Europe and North America perform slightly better on average, with figures of 47.9% and 50.8% respectively.

Slightly better news comes from the Hong Kong’s DSO (days sales outstanding), which at an average of 33 days, is well below the 44-day average for the region and well ahead of North American and Europe, which produced respective figures of 42.7 and 48.9.

However, when companies were asked whether their DSO levels had changed over the past 12 months, more than 21% said that they had experienced an increase, which is twice the number of those that reported a reduction. This suggests that payment delays are not only a common feature across APAC, but are also on the increase.

The effect of delayed payments It would be simple to view these figures as purely statistical information, yet the impact on businesses as a direct result of payment delays and defaults can be significant, particularly on cash flow, where the revenue stream is reduced.

To encourage payment, almost 60% of Hong Kong companies use payment discounting even though it has the effect of reducing profitability, which could be avoided or reduced, if credit insurance was used to help improve cash flow and protect businesses from the risk of

“The latest Atradius Payment Practices Barometer focuses on the key economies in the Asia Pacific region.”

Matthew Cockerill Atradius Country Manager - Hong Kong

payment delays and default as part of the credit management process.

To explore how credit insurance can help support your business, please e-mail me at matthew.cockerill@atradius.com.

Also, if you’re keen to find out more about payment practices in Hong Kong and around the globe, visit www.atradius.com.hk.

About Atradius The Atradius Group provides trade credit insurance, surety and collections services worldwide. With a presence through 160 offices in 45 countries, it has a market share of approximately 31% of the global trade credit insurance market.

Atradius has access to credit information on 100 million companies worldwide and makes more than 20,000 trade credit limit decisions daily.

Its products help protect companies throughout the world from payment risks associated with selling products and services on credit.

OPINION

HEMLOCK

HK unveils next official controversy

BY HEMLOCK www.biglychee.com

D

uring 2009-2011, Hong Kong endured a debate on a proposed minimum wage. In an attempt to deflect pressure for a legal pay floor, officials had encouraged an embarrassing voluntary ‘wage protection movement’, which to no-one’s surprise low-margin employers of menial labour ignored. As unions and activists demanded action, lawmakers representing corporate interests predicted mass-firings of unskilled workers, then demanded that the minimum be set at substarvation levels that would retain the status quo in practice.

Pious free-market types decried the sacrilege of state intervention in the libertarian paradise that was the Big Lychee. The government sought to contrive obscure categories of local workers who would be exempt from the new law, to make it look as if foreign domestic helpers – who were never going to be included – weren’t being singled out.

Third world workers After much bickering, a minimum wage took effect at a level arrived at through lots of consultation, consensus and harmony. At HK$28 an hour, it is a fraction of its counterparts in many countries with comparable per-capita GDPs and an admission that a chunk of Hong Kong’s work force are living in a Third World economy, albeit often with near-free housing and medical care. Rather than reduce demand for labour, as basic economics would expect, the compulsory higher wages actually attracted underemployed and voluntarily idle people back into work, increasing employment levels. Employers seem to have adapted, almost certainly by passing on at least some extra costs to customers and extracting better deals from

controversy: official standard working hours.

Two rival blocs In theory, Hong Kong’s downtrodden proletariat has little chance of success. Their excuse for a movement is divided into two rival blocs. One is susceptible to persuasion and manipulation by proBeijing United Front forces that value the loyalty of capitalists more than that of the masses. The other is itself split between moderates and radicals who don’t always get on.

However, the workers can always rely on representatives of employers’ interests to inadvertently come to their help. The bosses spokesmen could make measured and valid points about the potential administrative problems with working-hours laws. Instead, predictably, they start the process off by issuing dire warnings that are clearly exaggerated, if not stupid.

“A chunk of Hong Kong’s work force are Stanley Lau Chin-ho of the Federation of Hong Kong Industries forecasts Greeceliving in a Third World economy, albeit style riots and unrest if statutory hours are often with near-free housing and medical introduced. It is a strange argument, because half-failed European economies like Greece are care” trying to change the law to allow employers to make staff work longer hours – the opposite of what suppliers.

Hong Kong is set to do.

Apart from the prospect of regular adjustments It sounds as if he thinks the very mention of the to reflect inflation (or maybe one day deflation), subject will provoke civil disorder. But presumably the excitement is all over. But anyone nostalgic for his logic is the slippery-slope one; go down the the debate, for the struggle for oppressed workers’ regulated-hours road, and one day we will be like rights and for the amusement of seeing some the European countries with so much protection for fairly repellent politicians and lobbies not getting workers that business ceases. their way can now look forward to the next big 30 HONG KONG BUSINESS | JANUARY 2013

Workaholic Hong Kongers

HONG KONG BUSINESS | JANUARY 2013 31

LEGAL BRIEFING

Hong Kong Data Privacy Regime gets more stringent Disclosing personal data without data user’s consent now a criminal offense.

O

ne key change under the amended Personal Data Privacy Ordinance starting October 1 states that it is now an offense for a person to disclose any personal data he obtained from a data user without the latter’s consent and with the intent to either obtain gain for himself or another person, or cause loss to the data subject. Latham & Watkins partner Simon H. Berry notes that it is also an offense if the unauthorised disclosure, irrespective of its intent, causes psychological harm to the data subject.

Mayer Brown partner Duncan A. W. Abate says that an example of where this provision applies is where an employee sells personal data obtained in the course of his employment to a marketing company.

How should a person charged with an offense defend himself?

According to Berry, he may do so by arguing that the disclosure was made with the reasonable belief it was necessary to prevent or detect crime; as required or authorised by law or court order; with the reasonable belief that the data user had given consent; or in the course of news activity or a directly related activity with the reasonable belief that the publishing or broadcasting of the personal data was in the public interest.

“The penalty for these two new offences is a fine of up to $1,000,000 and imprisonment for up to five years.”

How will a Privacy Commissioner judge a case?

Abate notes that the Privacy Commissioner has indicated that under the new law, it is irrelevant whether there is actual gain by the person disclosing the personal data or another person or loss by the data subject. It is the intention to obtain gain or cause loss that matters, he says. “The terms ‘gain’ and ‘loss’ are not restricted to gain or loss in the monetary sense, but can include gain or loss in other property. Further, the ‘gain’ which may be obtained can be for the benefit of the person disclosing the personal data, or for the benefit of another person.

However, the ‘loss’ caused by the disclosure must be caused to the data subject and not to other people.”

Are data processors now regulated?

According to Berry, the Amendment Ordinance now broadly defines a “data processor” to include 32 HONG KONG BUSINESS | JANUARY 2013

Simon H. Berry

Duncan Abate

Matt Glynn

any person who processes personal data on behalf of another and not for his own purpose.

“It expressly provides that, if a data user engages a data processor, either within or outside Hong Kong, to process personal data on the data user’s behalf, the data user must adopt contractual or other means to prevent any personal data transferred to the data processor from being kept longer than is necessary for the processing of the data; and prevent unauthorised or accidental access, processing, erasure, loss or use of the data transferred to the data processor for processing.”

How should data users deal with access requests?

According to Berry, the previous Ordinance only provided that a data user must comply with a data access request not later than 40 days after receiving the request.

The Amendment Ordinance, he says, clarifies that a data user, within 40 days after receiving a data access request, shall, if he has the requested data, inform the requestor in writing that he has such data and supply a copy of it to the requestor, or, if he does not have such data, send a negative confirmation in writing to the requestor.

Berry notes that the Amendment Ordinance also expands the existing grounds on which a data user might refuse to comply with a data access request.

“The additional grounds include non-disclosure or secrecy requirements under the laws of Hong Kong; and where the Hong Kong Police Force receives a data access request regarding criminal conviction records from a requestor who has a clear record, it is only required to provide an oral response that it does not hold any such record within 40 days after receiving the request.”

What are the penalties?

The penalty for these two new offences is a fine of up to $1,000,000 and imprisonment for up to five years.

Repeated contravention is also punishable. DLA Piper partner Matt Glynn notes that fines for second and subsequent convictions were raised up to HK$100,000 and imprisonment for two years, with daily fines of HK$2,000 for continuing offenses.

Furthermore, where a data user complies with an enforcement notice but subsequently commits the same act or omission in breach of the notice, it is a criminal offence subject to a fine of HK$10,000, imprisonment for two years, and a daily fine of HK$1,000 if the offense continues after conviction.

CO-PUBLISHED CORPORATE PROFILE

Sparks fly for CLP’s future in the industry

Being at the helm of CLP Power Hong Kong fills Richard Lancaster with a powerful sense of history and a clear vision of the future.

“We are very proud of our past, but very excited about our future,” says Mr Lancaster, CLP Power’s Managing Director. “Our long history in Hong Kong, supplying electricity to generation after generation of Hong Kong people, means that our customers – and the community at large – have high expectations of us,” he adds. “That can be a challenge, but it’s one that we welcome.”

Blast from the past Mr Lancaster points out that CLP sets itself very high standards in terms of its technical expertise, customer service excellence, community commitment and environmental protection.

These benchmarks, he emphasises, represent the company’s core values, and underline CLP Power’s brand message that espouses “Energy for Life.” The brand statement captures the essence of the CLP story that it has been an integral part of

so many aspects of the lives of successive generations of Hong Kong individuals since the company started operating in 1901.

Points of priority “Our priority focus is to continue to provide an excellent level of service to our customers,” he says. “That means providing a safe and reliable power supply, for safety and reliability are the bedrock of our business. It also means helping our customers to better manage their energy use.”

Another major CLP priority is to minimize the impact of its operation on the environment. “We value environmental protection and we are firmly committed to sustainability from the Board Room downwards. In the past two decades, we have reduced the emissions generated by our power by 82% at a time when demand rose by 80%. In recent years CLP has increased the use of natural gas as a clean energy alternative to improve Hong Kong’s environment,” he says.

Leveraging on expertise CLP is looking to harness new technology so that it can provide an even more reliable power supply. “We are doing extensive research and development on ‘Smart Grid’,” Mr Lancaster says. The objective is to deliver better energy management solutions in the future.

Richard Lancaster Managing Director, CLP Power CLP also has a substantial community engagement effort which includes helping youngsters in career development and also rewiring services for the elderly. It also distributes refurbished electrical appliances to people in need and, more recently, has initiated a “Hotmeal Canteen” providing meals for the needy in Sham Shui Po. Mr Lancaster adds: “We are Hong Kong’s biggest power company, with almost 4000 staff catering to the energy needs of more than 80 percent of the population, or around 5.8 million people. That’s more people than you’ll find in half the countries of the world.”

“We are conscious of our responsibilities to the wider Hong Kong community to strive for a brighter future for all of us,” he says.

“That drives everything we do.”

“That means providing a safe and reliable power supply, for safety and reliability are the bedrock of our business.”

HONG KONG BUSINESS | JANUARY 2013 33

HONG KONG’S TOP 25 LAW FIRMS first Japanese incorporated company to achieve a primary listing in Hong Kong,” he says.

Foreign law firms knock local firms off top spot Baker & McKenzie has topped Hong Kong Business inaugural top 25 law firm rankings for 2012, beating out Deacons and Mayer Brown, who took second and third spots.

F

oreign law firms have topped Hong Kong Business inaugural top 25 law firm rankings for 2012 with only five local firms making it to the list.

US law firm Baker & Mckenzie lands the top spot in Hong Kong Business’ list of biggest law firms in Hong Kong with 273 law professionals, beating out other foreign firms Deacons and Mayer Brown, who took second and third spots.

The biggest local law firm was Woo Kwan Lee & lo but only came in 10th in the list with 76 law professionals.

Together the top 25 law firms employed 2,575 people in Hong Kong, according to figures compiled

by Hong Kong Business. The average number of employees in the top 25 firms was 63.

Baker & McKenzie bags biggest deals Key deals for the top ranking Baker & McKenzie over the last year included advising Yuexiu Group on the investment by Yuexiu REIT in Guangzhou International Finance Center, one of the ten tallest skyscrapers in the 34 HONG KONG BUSINESS | JANUARY 2013

The top 25 law firms employed 2,575 people in Hong Kong.

world; China Eastern Airlines on its US$198 million 50/50 joint venture with Australian carrier Qantas Airways to establish Jetstar Hong Kong; and State Grid Corporation of China on the acquisition of seven high voltage electricity transmission assets in Brazil.

Other deals of note included the US$200 million global offering by DYNAM Japan Holdings, one of the biggest pachinko hall operators in Japan as well as for Cheung Kong Bond Securities on the issue and offering of HK$1 billion 5.25% guaranteed senior perpetual securities.

Deacons defies downtrend Coming in second was Deacons with 252 law professionals. Deacons executive partner Jeremy Lam said 2012 has been a busy year for the firm, especially for its Corporate Finance practice which has defied the general market trend of a slowdown in capital markets work. “One of the highlights of the year was advising Dynamo Japan Holdings on its global offering and Main Board listing on The Stock Exchange of Hong Kong, the

Mayer Brown shines in acquisitions Rounding out the top 3 was Mayer Brown JSM employing 200 law professionals. Some notable deals that Mayer Brown has in the past year include advising Nestlé on its acquisition of Pfizer’s infant nutrition business for US$11.85 billion, which was one of the largest acquisitions announced to date in 2012.

Other deals included the Trade and Development Bank of Mongolia’s US$300 million issuance of senior notes; MIE Holdings Corp US$100 million acquisition of Sino Gas & Energy, and Hanergy Holding Group, the largest privately-owned cleanenergy developer in China on its acquisition of Solibro, a manufacturer of copper indium gallium diselenide co-evaporation technology and thinfilm unit of insolvent German solar group Q-Cells SE. Finally, Mayer Brown advised Hong Kong-listed China State Construction International Holdings on its top-up placement of 300 million shares to independent third parties raising approximately US$280 million or HK$2.2 billion.

Coming in fourth was Linklaters employing 183 law professionals.

Linklaters has advised the China Minmetals Corp, one of the world’s leaders in the production of zinc.

The group acted through its subsidiary Minmetals Resources, a Hong Kong listed Chinese company, concerning its $1.3b public tender offer of the total capital pertaining to the copper manufacturer, Anvil Mining. It is also one of the law firms which acted on Astro Malaysia Holdings’ $1.5 billion initial public offering, Malaysia’s third largest IPO this year.

Coming fifth in the rankings was King & Wood Mallesons, the newly minted firm named after merging Australian law firm Mallesons Stephen Jaques and Chinese law firm King & Wood.

The firm employs a total of 163 law professionals in Hong Kong, but boasts of a much larger Chinese presence and partner David Bateson notes that it’s the first firm to receive a license to practice Australian law, Chinese law and English law.

HONG KONG’S TOP 25 LAW FIRMS

Largest Law Firms in Hong Kong COMPANY NAME

LEGAL PROFESSIONALS

MANAGING DIRECTOR

WEBSITE

1

BAKER & MCKENZIE

273

PAUL TAN

www.bakermckenzie.com

2

DEACONS

252

JEREMY LAM

www.deacons.com.hk

3

MAYER BROWN JSM

200

ELAINE LO

www.mayerbrownjsm.com

4

LINKLATERS

183

STUART SALT

www.linklaters.com

5

KING & WOOD MALLESONS

163

STUART FULLER

www.kwm.com

6

SPRUSON & FERGUSON

153

PETER CHARLTON

www.cliffordchance.com

7

ALLEN & OVERY

139

VICKI LIU

www.allenovery.com

8

HERBERT SMITH

90

ANDREW TORTOISHELL

www.herbertsmith.com

9

HOGAN LOVELLS

88

ALLAN LEUNG

www.hoganlovells.com

10

WOO KWAN LEE & LO

76

WILLIAM C.Y. KWAN

www.wkll.com

11

HOWSE WILLIAMS BOWERS

67

KEVIN BOWERS

www.hwbhk.com

ORRICK, HERRINGTON & SUTCLIFFE

67

SOOK YOUNG YEU

www.orrick.com

13

CLEARY GOTTLIEB STEEN & HAMILTON

54

MARK LEDDY

www.cgsh.com

14

CLYDE & CO

53

MICHAEL PARKER

www.clydeco.com

15

JONES DAY

52

ROBERT L. THOMSON

www.jonesday.com

16

VIVIEN CHAN & CO

50

VIVIEN CHAN

www.vcclawservices.com

17

STEPHENSON HARWOOD

49

VOON KEAT LAI

www.shlegal.com

18

SIMMONS & SIMMONS

48

PAUL LI

www.simmons-simmons.com

19

ROBERTSONS

45

MICHAEL LINTERN-SMITH

www.robertsonshk.com

SKADDEN, ARPS, SLATE, MEAGHER & FLOM

45

ALAN SCHIFFMAN

www.skadden.com

21

WALKERS

42

ANDY RANDALL

www.walkersglobal.com

22

EVERSHEDS

41

NICK SEDDON

www.eversheds.com

23

HARNEY WESTWOOD & RIEGELS

40

JON CULSHAW

www.harneys.com

24

TANNER DE WITT

31

IAN DE WITT

www.tannerdewitt.com

25

FRIED, FRANK, HARRIS, SHRIVER & JACOBSON

27

VICTORIA S T LLOYD

www.friedfrank.com

*The list is based on the information provided by the company or their website.

HONG KONG BUSINESS | JANUARY 2013 35

OPINION

ZARATHUSTRA

On the (absurdly) weak Chinese stock market

BY ZARATHUSTRA alsosprachanalyst.com

and corporate profits fell for the index as a whole, it simply should not be a surprise, especially with the benefit of hindsight, that the market has done pretty badly in the past couple of years.

The question we get, then, is this: While we have been rightly bearish on the Chinese market overall in the past two years, surely there comes a point where stock prices have fallen so much that it is finally a buying opportunity?

Stock market bubbles

H

ong Kong/China investors have certainly learned in a hard way in the past two years that the rate of economic growth may have very little to do with stock market return. However, we, as everyone else, are amazed by the weakness of the Chinese stock market. It was as if even bears were not bearish enough.

While we are very notably pessimistic on both the Chinese economy and its stock market in the longer time frame, we are at the same time constantly surprised at the failure of the Chinese stock market to produce any respectable bounce. This comes as an even bigger surprise for optimists as everyone seems to be convinced (much more convinced than we are, obviously) that the Chinese economy has somehow bottomed out, with incoming data improving.

Shanghai Composite simply does not care, while the Hshare counterparts are doing significantly better in recent months, but still underperforming the developed market for the past two years or so.

Why Chinese equities performed poorly There have been a lot of reasons being suggested as to why Chinese equities have performed so poorly. To us, the main fundamental reason remains profitability, and we are somewhat surprised that people are talking about this.

Companies with falling profit simply do not deserve higher stock prices and multiples. As the economy slowed

36 HONG KONG BUSINESS | JANUARY 2013

Major stock market bubbles To that, we would point to the following chart, which should be familiar to regular readers, showing the major stock market bubbles in the past and how the market performed in the years following the burst of the market bubbles. The red line is the Shanghai Composite.

There are many reasons (which we may discuss later) that we think China is going down the path of Japan in the years to come if there are no major changes in how the economy is run. So let us say that NIKKEI 225 is a template for how the Chinese stock market could perform in the very long run.

This is a very bearish view on China in the long run, and this is certainly a very big assumption. We may change our mind in the future, but let us stick with it for the time being.

While Japan’s stock market has been in a super bear market for more than 20 years, there have been in fact a few strong bull runs along the way. In the chart, we only show NIKKEI 225 alongside with Shanghai and Hang Seng China Enterprise Index. The horizontal axis shows the number of years away from the all-time highs of the three indices.

Japan’s super bear market Note that about five years into the long super bear market of Japan, NIKKEI 225 rebounded very strongly, only to come all the way back down (then broke down later).

Other strong bounces happened nine years and 13 years into this long bear market, again, only to come all the way back down. In particular, the bounce five years into this long super bear market started on July 1995, and peaked on June 1996. In the space of 11 months, NIKKEI 225 rose 56%.

For China and Chinese stocks in the long run, our view has not changed much. Namely, the reliance on investment across sectors for economic growth produces overcapacity, which destroys corporate profit in the long run. We are in no way looking for a sustained bull market.

In a six-12 months timeframe however, you are welcome to draw your own conclusion as to whether the Shanghai Composite is due for a 50% bounce, before crashing all the way back down.

C

M

Y

CM

MY

CY

CMY

K

HONG KONG BUSINESS | JANUARY 2013 37

ANALYSIS: ASIAN AIRLINES

Asian airlines heading for a profit margin crash Cost advantage over rivals deteriorate as currencies continue to appreciate.

A

sian carriers in terms of cost efficiency remain cheaper to operate than European and US rivals but it may only take a few years from now before we see a reversal as the former’s cost advantage continues to shrink over the last seven years. That’s according to HSBC Global Research which have benchmarked the Asian airlines by estimating passenger airline unit costs and comparing these to average flight lengths.

Cost inflation According to HSBC, the relative cost advantages that the Asian airlines have so far enjoyed are now being eroded by currency appreciation.

It reckons that for non-dollar currency regimes, local currency costs make up 20-50% of operating costs, with most airlines falling towards the 38 HONG KONG BUSINESS | JANUARY 2013

Local currency costs make up 20-50% of operating costs, with most airlines falling towards the upper end of this range.

upper end of this range.

Low cost base a decade ago created by weak Asian currencies, it argued, masked process inefficiencies and poor product decisions that are now being exposed by cost inflation.

The impact of cost inflation on the airlines is not uniform as it depends on whether competitors have also suffered similar levels of unit cost increases.

The case of Singapore Airlines HSBC noted that Singapore Airlines (SIA) was probably the world’s lowest cost premium airline in 2004 and had unit costs lower than rivals such as Cathay Pacific and Emirates, but by 2011, SIA had slipped behind the two.

All airlines have benefited from the change in exchange rates over the last seven years. However, Thai and Cathay Pacific have benefited more than

other airlines due primarily to the strength of revenue currencies relative to the cost currencies, said HSBC. Stated differently, as an internationally focused airline, SIA has witnessed the highest cost increase over these seven years, owing solely to currency movements, and this has offset much of the benefits of revenue currency appreciation, it added.

Staffing inefficiency HSBC also pointed out that SIA’s product has been relatively spaceintensive, which has increased its unit costs. Finally, SIA’s staffing efficiency has not improved at the same pace as Cathay Pacific’s, which is probably due to the former’s lower capacity growth rates.

Cathay Pacific, on the other hand, is a clear winner in terms of relative cost performance in Asia. It has

ANALYSIS: ASIAN AIRLINES enjoyed the benefits of a weak homebase currency, achieved efficiency improvement and constrained wage inflation.

Capacity cuts Going forward, HSBC expects some of the ASEAN carriers to face substantial challenges to restore returns over the medium term if Asian currencies continue to appreciate. It seems likely though that Asian airlines will continue to offer discounted fares to lure passengers despite already eroding margins.

A December 2007 report by InterVISTAS Consulting titled “Estimating Air Travel Demand Elasticities”, notes that the fare elasticity at the carrier level is -1.5 to -2.5, which means that if a carrier raises fares unilaterally then it is likely to lose pas-

sengers to other airlines on the route.

In essence, on many international routes to and from Asia and within the region, the environment is highly competitive, and there is plenty of capacity – therefore airlines have little control over ticket prices.

CIMB noted that despite macro concerns, passenger demand has remained resilient, although it has grown at a moderating pace. Latest data from the International Air Transport Association showed AsiaPacific carriers saw demand growth of just 0.9%. This is a major slowdown from the 5.8% recorded in June the year before.

European airlines benefitting over Asia-Pacific airlines Moreover, compared to the previous month, demand contracted by 1.3%.

Cost per ASK versus Stage length - 2011

Source: Companies, HSBC

Sustained disparity between cargo and passenger growth is unusual

Source: CIMB, AAPA

“Asia-Pacific Airlines (AAPA) suggest that capacity growth rates in 2H12 are likely to decline around 3-4% against ASK growth of 6.4% observed in 5M12.”

IATA notes that European airlines appear to be benefiting more than Asia-Pacific airlines from the recently stronger trade flows from West to East. Passenger load factors of SIA climbed 1% pt in October, the third consecutive month of improvement.

Traffic surged 7% yoy last month against a 6% growth in capacity, with loads to the Americas, Europe and West Asia and Africa rising notably.

MayBank analyst Bernard Chin however notes that SIA’s long-haul segment load factor of 79.8% was exactly at break-even.

More disconcerting, he said, was the fact that long-haul passenger yields at SG11.4cts/pkm were the lowest in more than two years, last seen only during the GFC-hit year of FY3/10. Promotional fares to stimulate demand will continue to depress yields going forward. On the other hand, cargo traffic has deteriorated significantly over the last 18 months.

According to IATA, the freight market saw a 7.6% decline in demand in July compared to the previous year, the steepest decline for any region, while capacity dipped just 4.3%.

Asia-Pacific carriers have experienced virtually no growth in freight traffic since the fourth quarter of 2011. SIA’s cargo volumes declined for the eighth consecutive month in October.

Discounted fares CIMB believes that the disparity between the cargo and passenger trends implies that airlines may have been offering discounted fares in an attempt to stimulate demand and suggests potential weakness in passenger yields in 1H12.

Additionally, CIMB said that although load factors have stabilised in recent months, forward demand indicators do not suggest a sharp turnaround either. That said, it seems that the Asian airlines are beginning to factor in an increasingly benign demand outlook. However, instead of increasing fares, Asian airlines are more likely to resort to cutting capacity especially on international routes.

While planned schedules can be altered, CIMB said that current schedules obtained from the Centre for Asia Pacific Aviation and Innovata for the airlines studied by the Association of Asia-Pacific Airlines (AAPA) suggest that capacity growth rates HONG KONG BUSINESS | JANUARY 2013 39

ANALYSIS: ASIAN AIRLINES in 2H12 are likely to decline around 3-4% against ASK growth of 6.4% observed in 5M12.

Fleet efficiency Aside from cutting capacity, another area where airlines can manage rising costs without passing it to consumers is through buying modern and appropriate jets. This strategy, however, raises a number of issues.

First, HSBC noted that many Asian airlines simply don’t have the balance sheet strength to modernize their fleet: “This problem is compounded by two factors. Carriers where the book value of aircraft is now at a significant premium to the market value are reluctant to sell the assets as they will recognize significant disposal losses.”

In addition, In addition, some of the aircraft types are now so unpopular that selling the jets is increasingly difficult.” The second issue is aircraft choice. HSBC argued that a number of the Asian airlines have purchased trophy aircraft such as the Airbus A380 but their long-haul routes are simply too thin to support these jets.

“There are two prerequisites for operating an Airbus A380 aircraft profitably in our view,” it said.

First is to have high density long haul routes with either of the origin or destination airport capacity constrained.

If the airport is not capacity constrained, there is the likelihood that a competitor with lower capacity aircraft can operate better frequen-

cies between these markets and may become a preferred choice of flyers.

“The second condition is scale i.e. having around at least 20 jets of each type in the fleet to yield scale advantages in maintenance and staffing,” said HSBC.

subsidiaries. HSBC argued that this may not be the solution while noting the poor track record of low-cost carrier subsidiaries in Europe and the US highlights the risks of this strategy. “Ultimately, a full-service airline needs to lower the costs of its main line product rather than try and bypass its cost base via a lower cost subsidiary,” it said.

Low-cost subsidiary With their main airlines at risk from rising unit costs, some Asian carriers have established low-cost carrier

Innovata data suggest that ASK growth will decline in 2H12

Source: CIMB, AAPA, CAPA, INNOVATA

40 HONG KONG BUSINESS | JANUARY 2013

A full-service airline needs to lower the costs of its main line product rather than try and bypass its cost base ”

Cost-effective product in SIA In the case of SIA, HSBC believes that establishing a more cost-effective product in Singapore Airlines may ultimately be a better strategy than by-passing this cost base via Scoot.

“Long-haul LCCs are not a new concept in Asia, but the track record so far has been poor. In the past, the failure of Oasis and Viva Macau had raised doubts over the sustainability of the LCC model in the long-haul market,” it said while noting exceptions for the survival stories of AirAsia X and Jetstar.

Still, HSBC insists on its view that long-haul low-cost model is problematic, offering as evidence the recent suspension of most long-haul flights and the recent heavy losses of AirAsia X in Eurozone areas.

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HONG KONG BUSINESS | JANUARY 2013 41

FEATURE: RENMINBI ON THE RISE in which foreigners (and until 2001, only foreigners) were allowed to invest. In effect, the inability to freely buy and sell Renminbi was used as a firewall to insulate China’s financial markets from the outside world.

The rise of the Renminbi as an international currency What price is China willing to pay to manage a global currency?

By Patrick Chovanec

T

he rise of the Renminbi as an international currency is looked up with an almost breathless anticipation from London to Tokyo to Sydney. All this excitement has tended to eclipse a more sober assessment of the opportunities and obstacles the Chinese yuan realistically faces, as well as the benefits and burdens a larger international role for the Renminbi would pose for China. Rarely are the questions asked: Does China really want or need to manage a global currency? And if so, what price is it willing to pay?

The growing role of the Renminbi in China The Renminbi has already come a long way. Not that long ago, the Renminbi wasn’t a fully functional currency even within China’s own borders. All imported goods, as well as services provided to foreign visitors, had to be paid for with Foreign Exchange Certificates (FEC), in 42 HONG KONG BUSINESS | JANUARY 2013

“Not that long ago, the Renminbi wasn’t a fully functional currency even within China’s own borders.”

exchange for hard currencies. While FECs were ostensibly denominated in the same yuan as the Renminbi used for domestic purposes, their buying power was obviously quite different, giving rise to a vibrant black market on the doorstep of every international hotel across the country.

Gradually, the yuan’s exchange rate was allowed to depreciate nearly sixfold, from 1.5 CNY/USD to 8.2, closing the trading gap and allowing China to phase out the FECs in 1995.

This opened the door for China to make the Renminbi convertible for current account (i.e., trade) transactions the following year. The flow of investment funds both into and out of China via the capital account, however, continued to be strictly regulated. When China set up its two domestic stock exchanges in the early 1990s, it went so far as to create an entirely separate market in so-called “B shares,” denominated in US dollars and HK dollars respectively,

The role of the USD in international settlement It’s worth pausing for a moment and asking, why US dollars? After the US de-linked the dollar from gold in 1971, demolishing the post-war Bretton Woods system, there has been no institutional framework enshrining the US dollar as the world’s preeminent currency. The dollar retains its role because market participants prefer to use it, for three main reasons: • The dollar represents a claim on goods and services in the world’s largest economy, presuming it retains its value; • The dollar can be freely used or exchanged for any (legal) purpose, without restriction; • The dollar can be held in a wide range of readily traded investment instruments, and in large amounts.

The same is true of other international currencies, such as the Euro, the British pound, and the Japanese Yen, but to a lesser degree. In contrast, someone who accepts a Chinese yuan as payment – or a Nigerian naira, a Honduran lempira, or a Laotian kip – may find it a lot harder to invest or find another trader who will accept it in turn. Many of these countries find it easier – or even essential – to conduct trade in a currency that is far more widely accepted.

The drawbacks of relying on the US dollar were driven home by the immediate aftermath of the Lehman Brothers collapse in September 2008.

The Federal Reserve stepped in to provide dollars via “swaps” with other central banks, but not every country found itself first in line to obtain relief. It was this crisis that provided the impetus for China to negotiate bilateral currency swap agreements with several of its largest trading partners, including Indonesia, Argentina, Australia, and Brazil.

The RMB’s increasing role in trade Because few people understand what central bank currency swaps actually are, or how they function,

FEATURE: RENMINBI ON THE RISE the signing of these agreements has given rise to the misapprehension that the Renminbi has already taken on a more prominent international role that includes being held as a reserve currency. In fact, no currency reserves have been exchanged. The “swaps” are simply an emergency back-up in the event of another crisis. It is unclear how such swaps, if implemented, could be unwound except through careful stage management, since there is no global market for banks to replenish their Renminbi balances, once deployed. For now, that is a bridge nobody is too worried about having to cross.

In any event, the much-touted currency swaps that China has entered into are a tailored response to a specific set of concerns, and in no way herald the Renminbi’s arrival as a fully functional global currency.

Of course, China is not Honduras, Laos, or even Argentina. China now has the second largest economy in the world, and is the world’s largest exporter. There are plenty of people around the world who want to buy Chinese goods, or make investments in China, and would be willing to acquire Renminbi to do so. Thus, the Renminbi fulfills at least the first criteria that made the US dollar a globally accepted currency: it represents a claim that many people wish to possess.

In response, China has begun to allow companies to invoice and pay for import and export transactions in Renminbi, rather than a foreign currency. Starting with a pilot program in 2009, settlement in Renminbi grew four-fold in 2011 to 2 trillion yuan ($330 billion), or 9% of China’s foreign trade, and in March 2012 was made available to all firms nationwide.

deficit – in other words, it has to export currency either by running a trade deficit or by channeling a very large amount of investment abroad.

For the dollar to be a global currency, there has to be some way for people around the world to get their hands on dollars.

Up until very recently, China has been running surpluses on both the current and capital accounts. The result is that, far from Renminbi accumulating abroad, China has accumulated a massive stockpile of $3 trillion in foreign currency reserves.

Foreign buyers can’t pay for Chinese exports in Renminbi because, in net terms at least, they’ve had little chance to earn Renminbi. And unless China starts running a trade deficit, or opens its capital account and allows a lot more investment to flow overseas, any yuan the Chinese use to pay for imports only adds to the sum of foreign currency left in China’s official reserves – heightening, rather than reducing, China’s dependence on dollars. For the Renminbi to take on a more prominent international role, much less emerge as the world’s chief reserve currency, would require a dramatic change in China’s relationship to the global economy.

Another key revealed Opening China’s capital account is the key to another obstacle facing the Renminbi. According to McKinsey, 40% of global capital markets are denominated in US dollars, giving investors, including central banks, deep and liquid markets in which to maintain large dollar balances. China, including Hong Kong, accounts

“Opening China’s capital account is the key to another obstacle facing the Renminbi.”

for just 4% — mostly in equities, and a large part of it barred to foreign investors. China has tried to fill the void by issuing so-called “dim sum” bonds, yuan-denominated securities sold in Hong Kong: 35.7 billion yuan’s worth in 2010, and 131 billion in 2011. But as long as the offshore market in “dim sum” bonds remains set apart in quarantined isolation from Mainland capital markets, it risks sharing the same fate as the stunted and illiquid B share market.

Allowing free flows of capital is really the only way China can – in time – develop into the kind of global financing hub that could support a truly international currency. The problem, for China’s leaders, is that achieving that goal requires giving up a substantial amount of control over the economy. Economists call it the “trilemma,” or the “impossible trinity”: no country can allow free flows of capital, support a fixed exchange rate, and manage an independent monetary policy at the same time.

One of them has to go. And as the Japanese discovered with their “big bang” in the mid-1990s, opening China’s financial system to outside market forces would make it a lot harder to hide and quietly manage any bad debt problems lurking in Chinese banks.

So the question is not just whether the Renminbi has the potential to become a truly international currency, but whether China wants to go down the path that could make it one. That path involves risks and rewards, obstacles and opportunities, but wherever it leads, it will not leave the Chinese economy unchanged.

Two undesirable scenarios in RMB’s internationalization In the 1960s, the economist Robert Triffin observed an interesting dilemma involving the dollar’s role as the dominant global currency. In order for the dollar to be a desirable currency to possess, it has to buy things that everyone all over the world wants. But in order to meet that need, the dollar has to be readily obtainable, which means the U.S. must run a balance of payments HONG KONG BUSINESS | JANUARY 2013 43

REGIONAL ECONOMY BRIEFING: MALAYSIA Asia CPI (% y-o-y)

Source: Thomsom Reuters Datastream, CEIC, HSBC

M

this trend has been evident since late 2011. In the coming months, however, we can see some modest pickup in inflation owing to various factors. First, there is the reduction in the sugar subsidy, which the PM announced in his recent budget speech, and which kicked in from October. At the margin, this is likely to cause a slight lift in prices of food and related activities, such as restaurant prices. Sugar directly accounts for only 0.25% of the overall CPI basket, but is widely used in the production of an array of other food and drink. Second, we note that global food prices are starting to move higher again.

This could lift prices of imported food,” says HSBC economist Su Sian Lim. Su adds that even if inflation even if inflation picks up modestly in the months ahead, price gains should remain well within BNM’s forecast of 2-3%. This gives the central bank room to continue to support economic growth at its currently accommodative policy rate of 3%. Come 2013, however, Su notes that risks of a rate-hike cycle starting from 2Q will rise.

Policy rates BNM left its policy rate unchanged at 3% in its last policy meet for the year thus giving the full year of no change. HSBC notes that the accompanying statement suggested that the central bank was neutral on its policy outlook for 2013, citing modest inflation and excess economic capacity.

“Overall, both headline and core inflation continue to slow;

Government spending Moody’s Analytics also shares the same view adding that strong government spending is also supporting the economy, reducing the need for even lower policy rates. That said, Moody’s analyst Fred Gibson notes that a severe downturn in Europe’s ongoing sovereign debt crisis or an unexpected deterioration in the U.S.’s looming fiscal cliff will prompt the central bank to add another monetary stimulus.

Nomura analyst Euben Paracuelles believes that while inflation will continue to remain benign in the coming months, a rise could be expected towards year-end, in part reflecting the impact of the minimum wage regulation that took effect in October. “For the full year 2012, we forecast CPI inflation to average 1.7% versus BNM’s forecast range of 2.5-3%,” he says.

Despite headline inflation averaging well below the official forecast this year, Nomura’s Paracuelles also does not expect BNM to start considering the possibility of a rate cut. “We forecast the policy rate to remain unchanged at 3% for the rest of the year and throughout H1 2013.

In our view, the monetary stance is viewed as appropriately supportive of growth amid still elevated external risks, and that the benign inflation outlook gives it scope to keep policy settings unchanged,” says Paracuelles.

Malaysia’s inflation rate going steady?

Malaysia’s low inflation persists Risks of a rate-hike cycle only starts 2Q13. alaysia’s inflation rate was steady at its more than two-year low, giving the central bank room to maintain policy rates. Consumer prices rose by a measly 1.3% from a year earlier, after climbing at the same pace in September, the lowest reading since March 2010. On a monthly basis, the inflation rate barely increased by 0.2% with food & non-alcoholic beverages a major contributor.

As for January to October this year, consumer prices were up 1.7% YoY, far below Malaysia’s historical average. According to data monitoring firm, Trading Economics, Malaysia’s Inflation rate averaged 2.67% from 2005 until 2012, reaching an all time high of 8.5% in July of 2008.

October consumer price gains in Malaysia were also the lowest among Southeast Asian economies. While there are risks of food inflation accelerating given that subsidies are broad and likely to remain intact at least until the general election is over, HSBC expects overall inflation to stay low with Bank Negara Malaysia (BNM) likely to continue standing pat on policy in the coming months. Tightening, it said, is likely only to occur from 2Q13.

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DINING

A Trio of Tantalizing Tastes

Western cuisines from London and Paris made extra indulgent for Asians.

22 Ships Jason Atherton first hit headlines when he garnered a Michelin star for Maze when he opened the London restaurant for Gordon Ramsay – he has since spread his own wings with a series of hugely successful ventures both in the UK and Asia. Having wowed Shanghai and Singapore with his culinary stylings, it was high time that he treated our neck of the woods to an opening. Tiny 22 Ships (it has only a 35 person capacity) has been his most successful venture yet, the no reservations policy garnering long queues along Wanchai’s previously little frequented Ship Street for the modern yet unpretentious tapas. The baked bone marrow, onion jam, served with sourdough and gentlemen’s relish butter is a solid favourite, as are the Iberico pork and foie gras burgers.

Wild Grass

Bistro du Vin

Fergus Henderson started a food revolution with his “nose-to-tail” recipes at St John’s, London, bringing offal back into gourmet fashion. Amongst the Cantonese of course, organs have never been off the menu, yet the western fad had never really hit Hong Kong, so the opening of Wild Grass has been met with high anticipation.

The restaurant embraces the more conscientious approach that comes with eating the whole animal, with organic ingredients and grass-fed free range Aussie cattle on the plate. The setting is unexpectedly pretty for a meatfocused eatery, with a feminine take of rustic, country chic.

With its vintage posters, tiled floors and unrefined wooden and iron furnishings, Bistro du Vin oozes casual Parisian appeal, and is busy adding to the mid-range dining charms of the up-and-coming Kennedy Town district. While the laid back Gallic ambience may be a draw in itself, it’s the food that will get people going west: owned by the Operations Director for Singapore’s Les Amis group and with a chef poached from L’Atelier de Joel Robuchon, it’s fair the set expectations for your palate high. The kitchen specializes in perfectly executed bistro classics, like homemade patés and rillettes, bouillabaisse and airy soufflés served humbly in cast iron dishes or atop wooden boards.

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

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LIFE & STYLE

A toast for the best wine glasses With the party season in full swing, there’s sure to be plenty of tippling to be done. Make your toasts with one of Quintessentially Lifestyle’s recommended wine glasses.

Riedel

Townhouse, Shop 210-211, Prince’s Building, 10 Chater Road, Central, Hong Kong , +852 2845 0633 Riedel really needs little introduction – this Austrian glass manufacturer has been as big a name in modern oenology as any vineyard, redefining the way people drink wine.

Riedel pioneered the concept of different glass shapes and sizes to bring out the unique characteristics of each grape varietal: from the balloon bottomed Burgundy, to the slender stemmed Loire, to the tulip shaped Sauternes, each of their signature glasses are developed to funnel the wine in just the right manner to enhance its character.

Fusion Stemware

http://www.wineenthusiast.com/templates/ fusionwineglasses.asp Touted as the world’s most break-resistant stemware, the eponymous Fusion of European crystal with ultra-strong magnesium makes for a glass that is both handsome to behold, lightweight and durable. The shatterproof glasses are a worry free option for occasions where acrylic is not an option, but neither is breaking out the family heirlooms. The collection is available from online store, Wine Enthusiast, who offers a ten- year guarantee on any glasses that might break (shipping costs not included).

Lucaris

Lalique & James Suckling 100 Points Wine Glass

Lalique Maison, Shop 104, Ruttonjee Centre, 11 Duddell Street, Central, Hong Kong, +852 3488 6028 Internationally renowned wine critic James Suckling knows wines.

And few know crystal better than Lalique. This exemplary partnership of expertise have created a “beautiful yet functional” wine glass that marries the exquisite craftsmanship and eye for beauty that have defined Lalique’s work, with the exacting specifications of a wine tasting veteran: a classic form with a frosted rib stem, and a sensual, substantial feel in the hand. The 100 Points glass is an elegant one-size-fits-all solution, perfect for red or white, young or old, first growth or “petit chateau”.

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Kung Kai Hong, G/F., On Wing Building, 59 Bonham Strand East, Sheung Wan, Hong Kong, +852 2544 1503 Lucaris is an expression of the emerging Asian wine market, a world-standard range that incorporates Asian traditions with cutting-edge Western techniques.

Leveraging experience in the Thai (Ocean Glass) and Japanese (Toyo-Sasaki Glass) glass-making industries, Lucaris brought in the detail-orientated German designer Martin Ballendat to produce a stemware for sophisticated palates that is aesthetically appealing and durable: the lead-free crystal manages to be both paper thin and exceptionally strong, is resistant to sudden temperature changes and is dishwasher safe.

Seletti Glass from Sonny

Homeless, G/F, 29 Gough Street, Central, Hong Kong, +852 2581 1880 These eccentric Italian-made glasses are sure to stand out from the crowd with their weirdly warped bubbling surfaces. Blown by mouth, Seletti sees the imperfections of form as beauty in their own right, a natural artifact of the manufacturing process. The borosilicate glass is also tremendously resistant to thermal changes.

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

Contact hongkongbusiness@quintessentially.com.

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NUMBERS

Android is the most preferred smartphone OS Smartphone operating system

Usage of mobile phone to access social networking websites (Asia Pacific countries)

Source: Copyright Š 2012 The Nielsen Company

Mobile phone ownership

Source: Ipsos

% of mobile phone owners per age range

Source: Ipsos

Smartphone VS. Traditional mobile phone

Source: Ipsos

Source: Ipsos

For more information contact: Ipsos, nicolas.bijuk@ipsos.com, website: www.ipsoshk.com; Nielsen, Ellen Cuijpers (ellen.cuijpers@nielsen.com) 50 HONG KONG BUSINESS | JANUARY 2013

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