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What our exclusive interview with C Y Leung reveals about the future of property and living in Hong Kong







HONG KONG BUSINESS | APRIL 2012 1

2 HONG KONG BUSINESS | APRIL 2012

FROM THE EDITOR

HONG KONG

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Our cover story this issue is, naturally enough, the newly elected Chief Executive of Hong Kong, Mr. CY Leung. Hong Kong thrives on business as usual, but the strains and pressures it imposes on the majority of the population will no doubt meet some major policy changes, especially in the property market.

Tim Charlton

louis@hongkongbusiness.hk

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The approachable Mr. CY Leung

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Can we help?

This will be the defining issue within the Chief Executive’s tenure, and one in which he must succeed at if he is to ensure more fairness for all in Hong Kong. When this magazine reached out to Mr. Leung in April of 2011, he was fast to give us an outline of his views on Hong Kong property. Since his election, he has been noticeably busy meeting with people and talking to the media. A friend even managed to get herself ‘tagged’ in a photograph with the Chief Executive on the first Saturday night following his election around Central. Of course, this may be superficial glad-handing, but one gets the sense that Mr Leung is trying to reach out to people from all walks of life. It also suggests that he will remain approachable and public during his tenure, not locked up at the governor’s mansion or some of his cronies’ corporate jets. The election may be over and Mr. Leung may have been handpicked by a chosen few, but in the era of social media, politicians of all stripes succeed when they are open and approachable to their constituents. These are the early days, but the Chief Executive is clearly still in campaign mode with the rest of Hong Kong, the ones who didn’t get a vote but on whose public support he will very much rely on in the coming years. Many challenges remain, but the rebuilding of Hong Kong’s social fabric through a housing policy that directly benefits the majority is the Chief Executive’s goal, and it is a necessary one.

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

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HONG KONG BUSINESS | APRIL 2012 3

CONTENTS

10

12

30 feature hongkong art scene on the

COVER STORY HONG KONG BUSINESS WELCOMES THE CHIEF

COVER STORY 12 Chief Executive CY Leung on the hot seat

What will CY Leung’s election as Chief Executive really mean to Hong Kong property and society?

FIRST the budget airline war

rise

OPINION 17 Bringing romance back to the office

22 Reputation vs reality 29 A case for a census

ANALYSIS 24 Floods bereave Thai economy The 2011 deluge drains hope on the economy’s ability to rebound.

26 Asian luxury sales soar despite the global economic crisis

FIRST 10 Dogfight over Chek Lap Kok 10 Goodbye, exports? 11 Hong Kong retail staggers

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 | APRIL 2012

FEATURE 18 Should investors fear or face the dragon?

30 Vibrant, exhausting Hong Kong art scene

Statistics show that a crunch does not mean a plunge in splurging.

REGULAR 48 Life & Style 50 Numbers

For the latest business news from Hong Kong visit the website

www.hongkongbusiness.hk

HONG KONG BUSINESS | APRIL 2012 5

News from hongkongbusiness.hk Daily news from Hong Kong Hong Kong’s welcome for newly elected Chief Executive Leung most read ECONOMY

Hong Kong employees work too hard 70% of Hong Kong’s employees don’t stop working — even at home. That attitude might be good for business but it certainly is unhealthy. The result of this over zealousness: Hong Kong employees struggle to achieve a healthy work-life balance, according to the Randstad Workmonitor Report for Q1 2012. TRANSPORT & LOGISTICS

Mazda Hong Kong selects Vang Iek Motors as the local distributor Vang Iek Motors (Hong Kong) Limited is pleased to announce that it becomes the distributor of Mazda Hong Kong in January. Vang Iek held a press conference at JW Marriott, and Vang lek CEO Gary Cheung, ITOCHU Corporation’s Daigen Nakajima, Vang lek Group Macau representatives, and Vang lek Directors Cheng Kin Shing and Cheng Kin Ming were present. “Vang lek’s extensive experience and enthusiasm in autosales industry, as well as the outstanding sales performance and professionalism of Mazda Macau, are few of the reasons why Mazda believes in us,” says Cheung.

Will the Hong Kong economy give this chief more reasons to smile? financial services

Hong Kong banks are tough enough, says Fitch Fitch Ratings believes Hong Kong banks will withstand potential losses resulting from a new global economic slowdown. A Fitch stress test showed that growing links between Hong Kong and China coupled by the expansion of Hong Kong banks in the mainland could have a marked effect that will be far different from the downturns in 1997 and

the “Great Recession of 2008-09.” MARKETS & INVESTING

Hong Kong M&A activity reaches US$13b YTD This is a 19% decline compared to the same period last year, when deal values totaled to about US$16 billion. According to Thomson Reuters, of the total M&A deal flow for Hong Kong involved transactions, 51% are domestic deals while Outbound M&A and Inbound M&A account for 39% and

Hong Kong M&A: Deal or no deal?

6 HONG KONG BUSINESS | APRIL 2012

Banks bulk up for the potential losses

10%, respectively. ECONOMY

Leung elected Chief Executive Long-shot outsider Leung Chun-ying was elected last March 25 by Hong Kong’s elite as the next Chief Executive. “CY”, as he is also known, will assume office July 1 and will serve for seven years. He replaced Donald Tsang. Leung won 689 votes from the Beijing-appointed 1,200-strong election committee consisting of business and social leaders who choose Hong Kong’s leader. His major rival, Henry Tang, received 285 votes while prodemocracy candidate Albert Ho got 76 votes. China immediately congratulated Leung on his election. Xinhua news agency quoted a Chinese government

official in Hong Kong saying that Leung’s election was in accordance with the Basic Law and the election law of the Special Administrative Region of Hong Kong. COMMERCIAL PROPERTY

Loan approvals rise sharply in February The Monetary Authority has announced upbeat news for the property sector. It says that new loans approved during February rose 44.1% to $14.4 billion while new mortgage loans drawn down that month increased 25.8% to $7.6 billion compared to January. The outstanding value of mortgage loans hovered at around $799.8 billion. The mortgage delinquency ratio and the rescheduled loan ratio was unchanged at 0.01% and 0.02%.

HONG KONG BUSINESS | APRIL 2012 7

Company Snapshot: Hutchison Telecom revenue growth’s upward trend will continue due to the higher dependence on smartphones,” he adds.

More data means turtle speed?

Unlimited data, redefined

Hutchison still offers unlimited data packages but it slows down mobile internet speed, thanks to OTA’s “Fair Usage Policy.”

A

ccording to Kim Eng analyst Andy Poon, the company is likely to announce a new mobile data service plan in early 2012. “Based on the offerings of their peers, we believe that they are likely to retain their pricing structure, but replace their unlimited data offer with 2GB-5GB data usage, plus a HK$90-100 charge for additional data usage,” he adds. When Fair Usage Policy becomes unfair The “Fair Usage Policy” implemented by the Office of the Telecommunications Authority seems to make the mobile market in Hong Kong a bit complicated, and the subscribers are distressed. Because of the policy, the telcos now have an excuse for providing slower network service to subscribers. Poon notes that Hutchison Telecom announced some revisions to its mobile data packages and that its unlimited data packages now operate on a different definition. Though they retained the pricing structure and unlimited data usage offer, Hutchison would slow down the mobile internet speed of the subscribers whose usages exceed the fair usage data. “While this new definition of ‘unlimited data packages’ eliminates our earlier expectations of price cap removal and higher ARPU growth to HTHK and SMT, our assumption of network cost relief under the new data package remains unchanged,” adds Poon. Heavy data users to drive revenues People who are willing to pay HK$200/month more for additional data usage are heavy data users and they account for

8 HONG KONG BUSINESS | APRIL 2012

approximately 20% of HTHK’s 3G postpaid subscribers. Together with new data users who can pay HK$100/month more for data usage, they are expected to drive Hutchison’s revenues for FY12F. According to Poon, based on their 1H11 subscriber figures, the additional revenues from the heavy data users and new data users would be HK$120m for FY12F. “Even though the immediate incremental revenues seem to be uninspiring as it only accounts for 2% of our FY12F revenue estimate, we believe the data

The smartphone domination HSBC analyst Neale Anderson also reckons that the market is rapidly shifting to the smartphone generation, but the exacerbated pace of migration creates greater opportunities, as well as threats. He notes that the primary innovation in wireless telco services over the last several years is the migration from featurephones to smartphones, and the ‘capacity crunch’ is the result of this shift. “We do not see the move from 3G which offers speeds of up to 42Mbps with HSPA+ to LTE which offers speeds of up to 40-70Mbps, depending on the size of the carrier, as a similar step-change,” he adds. Poon notes that HK telcos expect better network traffic and cost controls with the termination of the unlimited data package. They also expect gradual margin improvements with the new data pricing structure. “We estimate 0.8% EBITDA margin improvement for FY12F. In the view of higher ARPU growth and better margin improvement for FY12F, we expect more upward earnings revisions by the market after the 1H12F result,” he concludes.

Additional revenue for new data subscribers who subscribe the new data plan for FY12F

Source: Company data Kim Eng Securities

HTHK’s HK subscribers (million)

Source: Company data Kim Eng Securities

HTHK’s HK subscribers (million) Source: Company data Kim Eng Securities

HONG KONG BUSINESS | APRIL 2012 9

FIRST imminent rebound. Additionally, the company also highlighted the large fuel hedging gain of HK$1.8 billion that it booked in FY11. “We believe that this is unlikely to recur and will lower profitability in the coming year,” adds RBS. HSBC analyst Mark Webb thinks the joint venture will have difficulties. “They don’t plan to fly to Shanghai or Beijing, so they are confining themselves to a small amount of the market where the profitability is probably a lot less.” Perhaps one reason Jetstar refuses to fly these routes is that China Eastern rejects the competition. Another reason may be that landing rights are quite limited. Nevertheless, Jetstar plans to open up much of North Asia to flights to Hong Kong which can be routed to Singapore and even Australia. Singapore Airlines, which was in a similar position to Singapore, has proactively started one short haul budget carrier, Tiger Airlines. It will launch a long haul airline later this year called Scoot. Cathay Pacific has chosen to drop out of the budget fray, but for how long?

The new startup will boast 18 planes by 2015

Dogfight over Chek Lap Kok

C

athay Pacific’s tight grip as Hong Kong’s preferred airline may be in for a bit of shake up. Qantas’ budget subsidiary, Jetstar, recently announced that they would start a new airline with China Eastern out of Hong Kong. In a way, it was probably long overdue, with the rest of Asia having multiple budget carriers and Hong Kong standing alone as a transport hub without one. That is about to change. The new startup will boast 18 planes by 2015 and is backed by two carriers with the size and financial holding power to take on Cathay Pacific in the lucrative short haul Asia sector. Pundits will point to previous attempts to launch a budget carrier in Hong Kong like

Oasis, which ended in bankruptcy. But Jetstar is a very different company with a well established traffic network in Australia and Singapore. Not a good time For Cathay, the entry of a new competitor has not come at a particularly good time. Its 2011 earnings fell 60%, and management is forecasting ongoing weak traffic with little sign of a turnaround, notes RBS. “The company highlighted that much of this growth was from yield growth, with tailwinds provided mostly by fuel surcharges. However, commentary on demand remains guarded and does not seem to suggest an

Goodbye, exports? Hong Kong’s role as an export-led economy has given way to its centre to become a shopping-led economy since the end of 2010. Since then, private consumption overtook exports as the biggest contributor to the economy’s growth. A closer look at the number shows just where that growth came from, with wholesale and retail trade growing a whopping 16% over the year. As HSBC economists Qu Hongbin and Frederic Neumann note, the West just ain’t what it used to be for Hong Kong. “The West matters to HK via two

10 HONG KONG BUSINESS | APRIL 2012

Passenger carried (000) Figure 14: Passengers carried (000) Yoy (%)

40%

16,000

Cathay passengers carried (000)

35%

14,000

30% 12,000 25% 10,000

20%

8,000

15% 10%

6,000

5% 4,000 0% 2,000

-5%

0

-10% 1H 05

2H

1H 06

2H

1H 07

2H

1H 08

2H

1H 09

Sources: CIMB Company Reports

key channels, trade and finance. The EU and US buy about one tenth each of HK’s exports, but China snaps up over half and the rest of Asia, one fifth. This means that they all matter, but none as critically as China.” Provided China’s slowdown bottoms out as the effects of Beijing’s stimulus measures fully unfold in the coming months, Hong Kong’s trade-reliant sectors should find a firmer footing in 2H12, they add. The other bit of good news for Hong Kong is that headline and underlying are finally starting to show greater signs of moderation. “With fundamental aggregate demand strong, inflation will likely start to rebound in the third

2H

1H 10

2H

1H 11

2H

SOURCES: CIMB, COMPANY REPORTS

quarter, leaving the full-year average inflation print at 5.3% again.” Oh well, it was a nice thought while it lasted.

Ppt contribution to real GDP growth (%yoy) Ppt contribution to real GDP growth (% yoy ) 5

3 1 -1 -3 -5 1 1Q 2011 2Q 22011 Priv ate spending GFCF Net ex ports of serv ices Sour ce: HHK K CenCenstatd, statd, HSBC Source: HSBC

3 2011 4Q 42011 3Q Gov t spending Net ex ports of goods

FIRST

Hong Kong retail staggers

S

omething funny happened with Hong Kong retail in January, and it has analysts worried. For years the flood of mainland tourists to Hong Kong has seen retail sales jump by double digit rates, but January saw a dramatic drop in sales which put a cloud over the industry for 2012. Total Hong Kong retail sales in terms of value were up by 14.9% in January 2012, showing a pronounced slowdown from growth of 23.4% in November 2011 and 23.5% in December 2011. Retail sales volume was down further to only single-digit growth in January at 9.1%, from growth of 16.9% in November 2011 and 17.1% in December 2011. More significantly, sales were down in the sectors that are most reliant on tourists – department stores and luxury goods sales. Department stores According to Macquarie Securities, Hong Kong department store sales value growth was at 13.8% YoY, down from 24.9% in November 2011 and 23.2% in December 2011. Sales volume was down to single-digit growth, at only 9.5% from 19.1% in November 2011 and 18.7% December 2011. Sales value growth for luxury goods was at 18.4% in January 2012, falling from 35% in November 2011 and 29.2% in December

2011; the volume growth number declined to only 7.7% from 21.1% in November 2011 and 15.9% in December 2011. Macquarie expects this trend of slowing growth will continue throughout 2Q/3Q due to a high base, noting that jewelry, watches and valuable products sales growth peaked in May last year with 61% growth. Clearly, Mainlanders, who make up 60% of retail sales in Hong Kong, are slowing down their spending on luxury goods. Luxury sales slow Raymond Yeung, senior economist with ANZ Bank, notes that the slowdown of China’s economy has dampened Mainlanders’ appetite for luxury shopping. “What’s more, yuan has appreciated much slower and the Chinese inflation has tapered off, reducing their incentive for cross border shopping.” Not only that, but the growth in tourist numbers is also showing signs of slowing. The Hong Kong Tourism Board expects mainland arrivals to Hong Kong to show only a 7.6% YoY growth this year, compared to 23.9% YoY growth last year. None of this will be good news to retailers who are now being slugged with rent increases as high as 100% based on the performance over 2011 and 2012. Solid global figures Mariana Kau, an analyst with

CLSA, also notes the growth slowing in luxury goods sales even off a high base from 2011, Total Hong but remains bullish on the sector. Kong retail Mainland Chinese consumers sales at 14.9% currently account for around onein January third of global sales for top brands, 2012 and emerging markets account for half, notes Kau. “The key cost for luxury retailers are rents, which are largely fixed. We believe that sector growth of 10-12% this year can translate into 20-25% earnings growth. Customers come to luxury stores when they are travelling and luxury companies do not need to aggressively expand store count to capture sales growth,” notes Kau. She adds that Chinese consumers’ shopping habits are becoming more sophisticated and true luxury brands with heritage will take market share from local high-end brands. That should be good news for local luxury brands like Prada and Chow Tai Fook, adds Kau. For more on luxury retail, see GREATER our CHINA GREATER CHINA analysis on page 26.

HK retail retail sales sales value value growth growth YoY HK HK retail sales value growth YoY YoY 35% 35% 30% 30% 25% 25% 20% 20% 15% 15% 10% 10%

Jul- Aug- Sep- Oct- Nov- Dec- JanJul- Aug- Sep- Oct- Nov- Dec- Jan11 11 11 11 11 11 12 11 11 11 11 11 11 12

Source: HK Census and Statistics Department, Macquarie Research, Source: HK Census and Statistics Department, Macquarie March 2012HK Census and Statistics Department, Macquarie Source:

Research, March 2012 Research, March 2012

HK dept store sales value growth YoY

HKdept dept store sales YoY HK store sales valuevalue growthgrowth YoY 28% 28% 26% 26% 24% 24% 22% 22% 20% 20% 18% 18% 16% 16% 14% 14% 12% 12% 10% 10%

Jul- Aug- Sep- Oct- Nov- Dec- JanJul- Aug- Sep- Oct- Nov- Dec- Jan11 11 11 11 11 11 12 11 11 11 11 11 11 12

Source: HK Census and Statistics Department, Macquarie Research, March 2012 HK Census and Statistics Department, Macquarie Source:

Source: HK Census and Statistics Department, Macquarie Research, March 2012 Research, March 2012 HONG KONG BUSINESS | APRIL 2012 11

Jewellery, watches watches and and clocks, clocks, and and Jewellery,

Chief Executive CY Leung ready for change What will CY Leung’s election as Chief Executive really mean to Hong Kong property and society?

I

n April of 2011 Hong Kong Business Magazine was following a story on housing affordability in Hong Kong, which ran in our May 31, 2011 issue. We asked the then Convenor, non-official members of the Executive Council, CY Leung, for his opinion on the article and were gratified with a fast and clear response. Less than 12 months later, CY Leung became the freshly elected Chief Executive of Hong Kong and his views have transgressed beyond pure academics. Much has been written about the Chief Executive, but we feel that relooking at his responses to Hong Kong Business Magazine and its implications will have a resonant impact not just on Hong

12 HONG KONG BUSINESS | APRIL 2012

“Home ownership is socially more preferable to renting. This applies to both the private and public sectors”

Kong businesses, but on Hong Kong people as a whole. That’s definitely worth your while. Getting a response, let alone a timely one, from any senior executive is always a challenge for journalists. The fact that the now Chief Executive made time to let us know his thoughts shows that he, whether you share his viewpoints or not, acts quickly and efficiently. It shows that he is ready to take a stand and communicate his views. This ability to tackle fundamental issues facing Hong Kong is paramount in a leader. And, at least according to our experience, we know that Chief Executive CY Leung is a good communicator.

Citizens first The second thing that stood out during our encounter with the Chief Executive was his concern with the basic well being of Hong Kong citizens, especially on the issue of housing. He told Hong Kong Business that, “Home ownership is socially more preferable to renting. This applies to both the private and public sectors.” It won’t be easy, and he may not have a lot of support from certain property developers, but the Chief Executive’s intent is to clearly usher more Hong Kong citizens into their own homes, and that is good. If he can successfully execute a program of home ownership, that would be great. Another point that the Chief Executive addressed to Hong Kong Business Magazine was that: “The affordability gap has been growing as housing prices have increased at a rate much faster than salaries and wages. Government policies should not aim at bringing down prices to suit affordability but

COVER STORY should provide homes for sale at subsidized prices.” This is a very important and nuanced point, and one that is tough to deliver. The property developers and existing house owners are naturally concerned that their investments will lose value should prices drop. Nevertheless, the social cost of not having affordable housing for Hong Kong citizens, in the view of this magazine, is too high. If the Chief Executive can introduce policies that will sell homes at subsidized prices (which would be for the middle and lower income earners) without greatly destabilising general property prices, he will have achieved what could arguably be the most important goal of his tenure. More supply In his third point to Hong Kong Business Magazine, the Chief Executive noted that: “The key factor behind continual increases in prices is that net supply of private residential properties has been falling progressively in the past eight years. The long-term policy response to this must lie in the increase in supply.” Clearly, this means there will be an increase in government land sales, but are there other policy options available that the government could consider? Even if property supply was greatly increased, without extra measures to ensure that at least part of this supply is reserved or subsidized for Hong Kong citizens, there is nothing to keep foreign investors from snapping at all up. The Asian Wall Street Journal reported that then Chief Executive Tung Chee Hwa tasked Leung with devising a housing policy to help the middle class. The response was a plan which involved building 85,000 units a year of public housing. It was more than unfortunate that the timing coincided with the Asian Financial Crisis when housing prices in Hong Kong dropped almost by half. The Singapore option? However, it doesn’t mean that the idea of affordable housing for Hong Kong citizens is misguided. Perhaps the biggest break in the past is the plan to build some apartments, which can only be

bought by Hong Kong people. There are three ways by which “The key Plenty of countries have a twoHong Kong’s housing affordability factor behind tiered property market, with issue would be best addressed in continual segments that are not for sale to a market oriented manner, says increases in foreigners. Australia, for example, Monkkonen. “The first is the most prices is that makes it illegal for a foreigner to commonly argued, but nonethenet supply purchase any pre-existing housing less fundamental. The government of private unless he can secure an exempmust release more land for develresidential tion from the Foreign Investment opment; the argument that the terproperties has Review Board. The only sector of ritory does not have enough land been falling Australian housing that is open to to house its population is false. It progressively foreigners is newly built apartis a decision of the government to in the past ments. Similarly, Singapore has leave almost 80% of the territory eight years” a very successful public housing as country park. And the relaxing scheme. Singaporeans pay around of development restrictions on the HK$2 million for a 2-bedroom land in indigenous villages could government flat whilst foreigncreate space for many new develers pay four or more times that opments. As a monopoly owner of amount for a similarly sized land, the Hong Kong government private dwelling. This is a sensible has benefitted at the expense of its policy for a country which, like citizens by greatly restricting housHong Kong, has limited space ing supply.” and is highly desirable for foreign investors. In the case of Singapore, their citizens must actually, physically live in the government HDB flats themselves and not just rent it out to another within a certain Macquarie Research Hong Kong Property time frame. So what options are open to the government? Paavo Monkkonen, Assistant Professor at the UniverUpcoming supply sity of Hong Kong, considers the The resumption of the Home public rental housing system inOwnership Scheme (HOS) will begin with 2,500 units in 2016 (pre-sales as early as 2014), a total of 17,000 units between 2016 and 2020, and then a maximum average of the country5,000 to be unitsan perimpressive year afterward. Household income is restricted to below HK$30k/month, and the HOS unitsHowever, will be HK$1.5–2m per unit and 400–500 sqft each in size. Resales are allowed, within the first achievement. he says five years of purchase, back to the Housing Authority or to public rental tenants, or, after five years, that the subsidized ownership to the public after payback of the premium. The premium, or the government subsidy, is the program isdifference very problematic for price HOS buyers paid and the market value of the unit at the time between the subsidized of purchase (not at the time of re-sale). several reasons. “It is effectively The My Home Purchase a large one-time subsidy for Plan a will continue, with the first 1,000 units in Tsing Yi to be completed in (pre-letting as early as 2012). The Plan still targets the HK$30-40k/month per household select group2014 of the population. income group, but the administration is now flexible, allowing purchase of the rented unit at the That is unfair to those whoupare left beginning of tenancy to two years after tenancy termination. The price will be locked in regardless market and halfThe of the paid rent will be provided as down payment. out, and is ofnot costswings, effective. The government committed planned resumption ofisthe HOSto making available land sufficient to develop 40k residential units per year regardless of market ups and downs. This requires the mega Kai Tak development to progress is for less than 10,000 units, but Road Quarry, Cha Kwo Ling Kaolin Mine, development of Northern as planned, levelling Anderson Territories, sea problem reclamation in Tung Chung and relocation of sewage plants in Sha Tin and the housingNew affordability reservoirs in Kennedy Town and Mount Davis. affects a much larger segment of WeMonkkonen. believe if the promised supply (20k private residential units, 15k public rental, 5k HOS and 5k My society,” says Home units) does come through every year five years from now, supply and demand should be more balanced and price growth may fall back to GDP growth in the medium term.

Fig 1 Annual residential completions completions (000s) Annual residential (000s) 100

in 000s

Private

Public rental

HOS

My Home Plan

90

2016 Private residential: 20k Public rental: 15k HOS: 5k My Home Plan:5k

80 70 60 50

End 2010 Private residential :13k Public: 6k

40 30 20 10 0 2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Source: CEIC, Housing Authority, Macquarie Research, March 2012 Source: CEIC,Hong HongKong Kong Housing Authority, Macquarie Research, March 2012

HONG KONG BUSINESS | APRIL 2012 13

COVER STORY

Oligarchs at the gates The second and related issue is the real estate development oligopoly, adds Monkkonen. “Roughly two thirds of private housing in Hong Kong is produced by the four largest developers making it an extremely uncompetitive market. Developers focus on the luxury market because they face limited competition and there are so few. This is partly a result of the challenges in land acquisition, but there are likely other ways to encourage competition in real estate development, like reducing barriers to entry.” Finally, adds Monkkonen, the fundamental importance of income is almost always overlooked in discussions of housing affordability in Hong Kong. “Income inequality is very high in Hong Kong and this should be a concern for the new government. Rather than implementing inefficient supply-side programs that give a small number of people a large subsidy and maintain high prices in the private housing sector, if subsidies are still to be employed, a down-payment assistance scheme could actually benefit all eligible people rather than the lucky few who receive a HOS unit,” he says. 14 HONG KONG BUSINESS | APRIL 2012

“The argument that the territory does not have enough land to house its population is false”

No difference Goldman Sachs, in a report issued just after the election, said it would be difficult for new policies to significantly impact the property market in the short term. “In the current environment of limited Macquarie Research housing supply, low interest rates, and sustained mainland buying intensity, we believe any new Fig 2 Annual private residential completions (000s) policies would likely take time to make a meaningful difference in the physical market (especially on housing supply), and hence the overall economic impact would likely be limited in the near term,” they noted. Nevertheless, Leung 40 35 30 25 20 15 10

has made explicit comments during his election campaign that addressing high property prices and unbalanced housing supply/ demand will be his policy focus, noted the bank. Some of the campaign policies proposed by The Chief Executive include selecting sites suitable for middle-income families for the construction of units to be sold to HK residents only. The policies also include speeding up the construction of the 75,000 public rental housing units originally planned by the current government for the next five years. The big winners under these proposed new schemes could be the areas of Lok Ma Chau Loop and its vicinity (Kwu Tong North, Ping Che and Fan Ling North), notes Macquarie Research. Lok Ma Chau Loop is 99 hectares of delta on the Shenzhen River bordering Shenzhen, which owns the land, and HK, which has the operating rights. It is to be developed into a university town for 24,000 students and R&D center creating 29,000 jobs. Macquarie also notes that Barry Cheung, Chairman of the CY Campaign Office, is also the Chairman of Hong Kong Property the Urban Renewal Authority (URA), which has been criticized for building too many expensive but small urban units. “We expect this to change if he becomes one of the key officers. There will be more supply of cheaper units from old district redevelopment, and purchase restrictions may be first experimented on projects by March 2012: Property price index: 99.2

110 100 90

Supply of >20k units annually in next 10 years

80 70 60 50

5

40

0

30 1999

2000

2001

2002

2003

2004

Completions (LHS)

2005

2006

2007

Forecasted Completions (LHS)

2008

2009

2010

2011

2012F

Centaline index (RHS)

Rating of Chief Executives under months of service

Source: Centaline, Rating and Valuation Department, Macquarie Research, March 2012

Fig 3 Rating of Chief Executives under months of service 70 65 60 55 50 45 Month of service

40 1

5

9

13

17

21

Chris Patten's Ratings

25

29

33

CH Tung's Ratings

Source: The University of Hong Kong; Macquarie Research, March 2012 Service period of Chris Pattern: July 1992 – June 1997 Service period of CH Tung : July 1997 – June 2002 Service period of Donald Tsang: July 2007 – March 2012

37

41

45

49

53

Donald Tsang's rating

Source: The University of Hong Kong; Macquarie Research, March 2012 Service period of Chris Pattern: July 1992-June 1997 Service period of CH Tung: July 1997-June 2001 Service period of Donald Tsang: July 2007-March 2012

57

COVER STORY URA and the Hong Kong Housing Society. But it is the idea of having a new class of property exclusive to Hong Kong residents that is the biggest break with the past and possibly a move towards a more Singaporean style market. Political control Some commentators, such as the Asian Wall Street Journal, warn that, “Using public funds to house the middle class could make Hong Kong more like Singapore, where the government uses housing as a tool of political control.� But this is both wrong and disingenuous. Singapore does not use public housing as a means of political control. It uses it to ensure that its citizens have access to quality housing at an affordable price in a global city with few entry barriers to foreigners. It may be fine for the United States to have an open housing market, but anyone who finds New York too expensive can always go and live in Arizona. Hong Kong citizens have little choice and cannot readily move out. If the Chief Executive can implement a two-tiered property market where Hong Kong citizens can finally gain access to affordable housing, whilst foreigners still pay what they want for housing that is available to them, then he will have done more to improve the livelihood and living standard of Hong Kongers than anyone else in his generation. Since Governor MacLeHose introduced the 10- year housing program in 1972

to alleviate housing shortages, no such ambitious program has been mooted, or perhaps required. If it is successful this time around, almost 40 years after the first program, Hong Kongers will finally receive the benefit and our society will be better off for it. For this, Hong Kong Business Magazine wishes the new Chief Executive CY Leung and his team all the very best.

Annual private residential completions (000s)

Macquarie Research

Fig 2

Hong Kong Property

Annual private residential completions (000s) March 2012: Property price index: 99.2

40

110

35

100

30

90 Supply of >20k units annually in next 10 years

25

80

20

70

15

60

10

50

5

40

0

30 1999

2000

2001

2002

2003

Completions (LHS)

2004

2005

2006

2007

Forecasted Completions (LHS)

2008

2009

2010

2011

2012F

Centaline index (RHS)

Source: Centaline, Rating and Valuation Department, Macquarie Research, March 2012

Source: Centaline, Rating and Valuation Department, Macquarie Research, March 2012 70

Fig 3 Rating of Chief Executives under months of service

65 60 55 50

HONG KONG BUSINESS | APRIL 2012 15

16 HONG KONG BUSINESS | APRIL 2012

opinion

richard branson

Bringing romance back to the office

T “Any forwardthinking company should think twice about prohibiting office romances. ”

here are many types of family businesses, as I was reminded when Virgin Money recently acquired the British bank Northern Rock; we are in the process of rebranding it Virgin Money. As I traveled around the country, welcoming the Northern Rockers as the newest members of the Virgin Group, the bank’s strong family spirit was evident. Not only did I constantly meet husbands and wives working in the same offices but, in several cases, sons and daughters too. I cannot think of a stronger endorsement than an employee recommending the company to his relatives as a good place to work in. A couple of days after those meetings, I had dinner with an old friend from New York who asked me about Virgin’s policy on office romances. It seems that his 28-year-old son works at a company that prohibits all romantic relationships between employees. The young man was having a miserable time trying to conceal his three-month relationship with a female co-worker. Though they were very prudent while at work, outside the office they had to worry about being spotted together by an office whistleblower. I hadn’t thought about this issue before. Everyone spends more time than ever before in the workplace and, with most first marriages taking place in people’s mid to late 20s, falling in love at the office would seem inevitable, rather than a corporate misdemeanor. To the best of my knowledge, we at Virgin have

never had any problems with office relationships – and we do not prohibit them. My interest was piqued, so I talked to some people at progressive companies and used their advice and our experience at Virgin to develop a more sensible approach to office romance. Employers and employees can use these guidelines to avoid problems without shooting Cupid down. 1. Bring romance back to the office KISS (“Keep it simple, stupid”) would seem to be applicable here. If single employees are told that they are free to have a relationship with any consenting single colleague, then it should be easier to gain their compliance and respect for your company’s policy. Any guideline you put in place should be designed to avoid forcing people to conceal their relationships. That openness will prove to be a win-win for your company and your employees. 2. Who reports to whom? While it is not at all surprising that two people who work closely might fall in love, they should not report one to the other. If a couple finds themselves in this situation, their managers should make other arrangements, adjusting the reporting structure so that this would not be an issue. 3. Try to make it a longdistance relationship While every company and situation is different, managers should keep in mind

that it is likely a bad idea for the couple to work together, especially in a small department. No matter how discreet and sensible the pair might be, too close a working relationship will invite problems. Some physical distance may be good for everyone. 4. Discretion is key One person I consulted said: “They should act like a married couple around the office – no outward displays of affection.” Perhaps a lame joke, but also wise. 5. Keep it offline Couples should not use corporate email systems to send very private messages. One mistake might broadcast the note to the whole company – perhaps things that are much better kept private! Any forward-thinking company should think twice about prohibiting office romances. Rather than implementing rules that (as in my friend’s son’s case) make for distracted and unhappy employees, it would be far better to prepare some “common sense” guidelines for your company. This will help couples cope with the relationships that will inevitably arise in a manner that is helpful to everyone, from the couple’s managers to their colleagues. A great company behaves something like an extended family – cheering successes, finding the upside of mistakes, and getting together periodically to reconnect. Employees who are falling in love are all part of the adventure, and should be celebrated. HONG KONG BUSINESS | APRIL 2012 17

Should investors fear or face the dragon?

The birth of 2012’s dragon ushered weak growth in America, political unrest in the Middle East, and a debt crisis in Europe. Should investors risk getting burned? Roxanne Uy investigates.

W

ill the dragon burn your cash to the ground, or will it soar with your investments towards profitability? Last year, we brought you investment ideas with the goal of leading you to more informed investment decisions. Now, as the dragon year crawls in, we explore more ideas that could open up lucrative opportunities. Even though 2012 is expected to be unpredictably volatile, Philip Poole, HSBC Global Asset Management’s global head for macro and investment strategy, says there are still attractive opportunities for investors. “Diversification will be critical to successful investing given the volatility and uncertainty that surrounds the outlook for 2012,” he adds. May

18 HONG KONG BUSINESS | APRIL 2012

“Diversification will be critical to successful investing given the volatility and uncertainty that surrounds the outlook for 2012”

the celestial beast bring you good luck in your investments. Idea #1: RMB bonds Offshore renminbi bond is an asset class that is undeniably developing at a rapid pace. The RMB bond market in China is opening up new investment opportunities in one of the world’s most rapidly growing and dynamic economies, Poole believes. “Investing in the offshore RMB bond market provides investors with exposure to potential RMB appreciation and portfolio diversification --- something that is hard to find in such a highly correlated world. Chinese policymakers are keen to internationalise the RMB, and the process is already well underway. These

bonds look attractively priced in our view at the current time,” he adds. Idea #2: State-owned dollar bonds Indeed, Investors in Hong Kong have a good reason to look to domestic opportunities after the city accounted for a big chunk of the global GDP growth in 2011. Though bond yields have been as low as they are in the West, defensive assets still prove worthy of investment. Hartmut Issel, head of APAC’s Cross Assets Research and head of Singapore UBS Wealth Management Research, advises investors to seek dollar bonds of state-owned Asian issuers as these pay higher coupons than their Western counterparts. These also offer higher yield than the sovereigns without adding more risks. “Investors may also take positions in the Singapore dollar, Chinese yuan, and Indonesian rupiah as these currencies have appreciation potential and, in the case of the rupiah, high yields as well. Outside Asia, we like the British pound

TEN INVESTMENT IDEAS because it is currently undervalued yet backed by improving fundamentals, thanks to the government’s credible debt-reduction plan,” he adds. Poole concurs that developed market government bonds look expensive on fundamentals which then points to higher yields in the future. “They have been supported by safe haven flows. Also, we see little fundamental value in this asset class beyond support from risk aversion, believing that developed government bonds will need to sell off once market sentiment improves,” says Poole. Issel warns investors not to think in terms of good or bad currencies or companies. He notes that quality investments, such as currencies with strong fundamentals or bonds and stocks of well-run companies, may be less volatile and therefore won’t keep investors awake at night. However, they don’t always outperform the broader market. Investors should then think in terms of overpriced and underpriced assets. But this is only the first ingredient; assets can stay underpriced for an extended period, so it is important to identify what might trigger an improvement in fundamentals and when it might occur. “Our call on the British pound is one such example. Investments like this often turn out to yield the highest returns once other investors follow, at which point the investor has to gauge when the asset starts to look overpriced, and thus prepare

to exit. This is a key ingredient to effective investing. Unfortunately, it is often forgotten,” Issel says. Idea #3: Commodities Poole believes that there is long-term value in commodity-related plays in both emerging and developed markets. He sees the commodity weakness in 2011 as a short-term correction than the end of a longerterm bull trend. The key drivers of demand for both hard commodities such as industrial metals and soft commodities such as agricultural crops are now-emerging markets, not developed markets. Poole notes that this is because the emerging markets’ growth is commodity- intensive. Russia is the preferred equity market to play the ‘hard’ commodity theme, and so far, valuations still look cheap despite the bounce this year. “In addition, equity markets in Latin America provide interesting exposure to hard and soft commodities and again, valuations still look decent. In terms of gold and other precious metals, negative real interest rates in much of the developed world should be supportive despite the continued uncertainty in the fundamental economic outlook,” he adds. Idea #4: Gold Yes, gold. As the global economy faces various financial stresses, investors need to balance their asset portfolio. And what better way to balance that portfolio than by having safe assets such as gold. According to Albert Cheng, far east managing director for the

Issel Hartmut

Philip Poole

Albert Cheng

World Gold Council, gold acts as a form of insurance to your portfolio as gold prices tend to go up when the value of other asset classes are going south. He cites a research by Oxford Economics commissioned by the World Gold Council where scenario analysis using the Oxford Global Model shows that gold performs well in extreme economic scenarios. These include low inflation, a weak dollar, and elevated levels of financial stress where events may trigger a flight to safe assets. So, gold can indeed sparkle despite gloomy economic situations. In fact, in their latest Gold Demand Trends report for 2011, Cheng notes that global demand for gold in 2011 exceeded US$200 billion for the first time and had the highest tonnage level since 1997. These results were driven by two main factors: Asian growth and optimism on the one hand, and Western desire to protect assets against uncertainty on the other. “At the World Gold Council, we are certain that long-term fundamentals for gold remain strong. It has a diverse and growing demand base, coupled with constrained supply side activity. Looking at Asia, there was a major boost in gold demand from China in 2011. This is a trend that we see continuing over the next year, and it is likely that China will emerge as the largest gold market in the world for the first time in 2012,” Cheng reveals..

Emerging markets currencies look under valued

NB: 1 PPP is purchasing power parity International Monetary Fund (IMF) estimates, Expressed in national currency per current international dollar.Interest rate differential vs US Fed funds rate. 2Foreign exchange rate vs USD.Source: IMF, Bloomberg, as at December 2011 HONG KONG BUSINESS | APRIL 2012 19

TEN INVESTMENT IDEAS Central banks seem to be mesmerised by the opportunities that gold offers as they became the net purchasers of gold in 2011, adding a driving force to the global gold demand dynamic. Cheng points out: “In 2011, on the supply side, mine production increased slightly to a record annual level. But this was countered by a small decline in recycling and considerable net purchases by central banks, further illustrating the importance central banks attach to gold. We are still optimistic about the central banks’ positive attitude towards increasing their gold reserves given the current macroeconomic environment.”

“Global demand for gold in 2011 exceeded US$200 billion for the first time and had the highest tonnage level since 1997”

ing the US dollar, the Japanese yen, and the Swiss franc. As a result, these currencies look expensive on fundamentals, particularly in real purchasing power terms. In contrast to the developed currencies, many emerging market currency valuations look cheap on real purchasing power measures and have attractive interest rate differentials relative to the developed world where yields are likely to remain very low, notes Poole. “The currencies that potentially stand out to us include those of China, Indonesia, Korea, Malay-

‘Dim Sum’ bond issuance has surged

Idea #5: Emerging currencies According to Poole, last year’s selloff was a classic risk-off move with investors dumping ‘risky’ assets including equities, corporate bonds, and high yielding currencies, and buying safe and liquidity haven assets like US treasuries, UK gilts, and Japanese government bonds. This safe haven buying supported the associated currencies includ-

Source: HSBC Global Research, as at December 2011

Corporate debt looks attractive

Source: Corporate debt looks attractive

20 HONG KONG BUSINESS | APRIL 2012

sia, Singapore, Mexico, and Chile. Many of these currencies depreciated markedly in nominal terms in 2011. In addition to getting currency exposure to play this directly, we believe that over the longer-term, emerging market currency appreciation should be a key component of investment returns for equity and local currency bonds, and undervaluation of emerging market currencies provides an important reason to consider emerging market exposure more generally,” he concludes.

HONG KONG BUSINESS | APRIL 2012 21

opinion

Tim hamlett

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

Reputation vs reality

T

he evil that men do lives after them; the good is oft interred with their bones, as Shakespeare put it. This depressing observation seems to be particularly applicable to political

leaders. While the great man is in office as Governor, Chief Executive, Prime Minister, or whatever he is described and regarded in admiring terms, his mistakes, if they cannot be overlooked, are at least serious and heavyweight mistakes. His triumphs are exaggerated. This tradition has been carried to extraordinary lengths in Hong Kong. Extreme contrast Governors and Chief Executives, while in office, are subjected to something close to adulation. Many observers appear to be ready to nominate them for all six Nobel Prizes. This produces an extreme contrast when they leave office. Suddenly the idol’s feet of clay become visible. At this point comments move to the part of the scale between “We knew he wasn’t that good” and “Rubbish!” For those of us who are happy to criticise local leaders while they are still in office, it comes as a surprise: suddenly when they retire we have lots of company. People who were previously nodders (a nodder, a species first identified by P.G.Wodehouse, is a yes-man who is too frightened to speak) become outspoken critics. Still, one expects that after a few years some balance will be established: most of us will recognise that the lost leader was a mere mortal man who did his best and was subjected to a great deal of luck, good or bad. Tun Chee-hwa’s luck This has not happened, though, with Tung Chee-hwa. Of course, he enjoyed the usual adulation while Chief Executive. I recall one particularly grovelling comment: the argument that abortion should not be allowed because the interrupted fetus might otherwise grow up to be “another Tung Chee-hwa”. Also, as usual, he received a good deal of abuse once he was safely out of the way. “Didn’t understand the Civil Service, didn’t understand Hong Kong people (Tung was from Shanghai), didn’t understand what Beijing wanted...” Some of these were unavoidable, but Tung was still unseated in mid-term, so he must have annoyed someone. Anyway, years go by, and Tung now enjoys a respectable retirement. His replacement, Donald Tsang, turns out after the usual honeymoon to have problems of his own. Balanced views would, one might hope, prevail. Tung looked unavoidably dowdy after the flash and fireworks of Chris Patten. He was unlucky with the Asian financial crisis. It was daring, perhaps too daring, to simultaneously alienate the property developers and the large slab of the general population who wanted nothing to do with National Security legislation. But there we are. Everyone makes mistakes. As of late, we had regarded the Tung period as a new Dark Age. This first surfaced in 22 HONG KONG BUSINESS | APRIL 2012

one of Henry Tang’s attacks on C.Y. Leung. Hong Kong people should beware of Mr Leung, they were warned, because he had been behind the 85,000 units-a-year housing target. This had led to negative equity houses worth $1, and “people burning charcoal”. Shortly thereafter there was a letter to the Post, in defense of Donald (Hello sailor!) Tsang and his taste in yacht trips. The writer contrasted Tsang favourably with his (unnamed) predecessor, under whose regime large numbers of people had fled Hong Kong. There seems to be quite a lot of this sort of thing about, particularly from people who would like the next Chief Executive to be the man with Hong Kong’s biggest basement. History abuse This is history abuse. The 85,000 housing target was a sensible choice at the time it was made, when Hong Kong property prices were at record levels and many people were complaining -- as they are now -- that young couples had been priced out of the market. As it happened, the policy was unnecessary. The property bubble was punctured by the Asian financial crisis. But I do not remember any of the opponents of the target saying it was unnecessary because the crisis was just round the corner. Negative equity is a revealing complaint, because this is really a con. Negative equity just means that your flat is worth less than the amount you borrowed to buy it. This is a completely fictional figure as long as you do not wish to move. Your flat is still the same flat and your repayments are still the same amounts. Negative equity is an important life-and-death matter for people who bought flats which they did not intend to live in, like property developers sitting on a few hundred units, or Legco members with a few hobby flats on the side. The heartrending stories (including the dubious suggestion that some people committed suicide) are a smokescreen behind which lurks the familiar plea that government should manipulate the economy so that the value of investments always goes up. As for people fleeing Hong Kong, I remember a good deal of that. It was not caused by despair at Tung’s stewardship of the economy, or revulsion at his rather lustreless leadership style. It was caused by SARS. No doubt there were aspects of the dreaded epidemic which could have been handled differently, but it hardly seems fair to blame the whole thing on Tung. Behind the scenes, I infer, people in the immediate circle of the real estate tycoons are saying things which would hardly stand up to scrutiny if uttered in public. Tung was a disaster because he did not serve their interests, which is the only standard to be applied to Chief Executives. Unfortunately the real estate crowd are in such bad odour that their support for a candidate reduces his attractiveness to everyone else. The best thing the Real Estate Developers’ Association could have done for Henry Tang was to warmly embrace his rival. Politics is a funny game. “The force is strong in Tun Chee-hwa...”

HONG KONG BUSINESS | APRIL 2012 23

Regional EConOmy Briefing: THAILAND Contributions to GDP growth, by expenditure

Should investors wade in the waters?

Floods ravage Thailand’s economy The 2011 deluge drains hope on the economy’s ability to rebound. Krisana Gallezo reports.

The 2011 Thailand floods’ damages were expected to affect the GDP, but not to the point of staggering growth at 0.1%. This is much lower than the government’s forecast at 1.5%. Not surprisingly, the biggest decline on GDP by expenditure came from net exports after the floods severely damaged a significant number of factories in key manufacturing areas. According to RBS estimates, the trade balance subtracted a hefty 5.9% from overall GDP growth, as exports plunged by over 15% sequentially. OSK-DMG Economics Research comments that the floods had a greater negative impact on the economy than previously expected. “We had expected private consumption to hold up and the government to accelerate its spending to mitigate the factory closures and weak exports,” says OSK-DMG economist Leslie Tang. Consumption unfortunately fell by 4% QoQ. RBS also admits that there was a significant ‘shock’ element behind the decline in Q4 GDP. Nevertheless, it points that cyclical weakness was also already evident prior to the flood when export momentum had been slowing since 2Q11, as had investments. “In fact the contraction in investment in Q4 marks the second straight quarter of decline. Then there is consumption, which for the better part of 2011 was already drifting sideways (in level terms) prior to the floods,” says RBS economist Su Sian Li. Government’s ambitious forecast Despite sharp economic deterioration in 2011, the government remains optimistic that a growth of 5.5-6.5% could be achieved this year. In fact, it believes that 7.0% is even reachable. Economists, however, say otherwise. “We are not as optimistic as the Thai government. We think that for growth to hit the top end of the growth forecast and beyond, there has to be discernible strength in exports. This is unlikely given the uncertain external environment currently,” says OSK-DMG’s Tang. Tang however notes that government spending for the rebuilding efforts which started in Q1, as well as favorable base effects, could support the economy this year. “We also think the 24 HONG KONG BUSINESS | APRIL 2012

SOURCE: CEIC, RBS

Bank of Thailand can further cut its policy rate to support the economy, though this would have to be weighed against greater inflationary pressures that could arise from the rebuilding efforts,” she adds. More worries The OSK-DMG forecast of 5.2% growth in 2012 is below the government’s projection range. RBS, meanwhile, thinks that while a ‘technical recovery’ is possible in the first half -- as plant and equipment will be replaced and workers will be re-employed to operate them – there are more worries as the broader economic cycle tends to dominate, especially in the absence of strong fiscal efforts to boost the economy. “Parliament has approved a widening of the THB50 billion budget for FY12 to THB400 billion. But in absolute terms, as well as a percentage of GDP, this is still a smaller net outlay compared with FY11 (-3.6%of GDP, vs -3.9% for FY11),” says Su. Also, other off-budget measures, including a proposal to allow BOT to issue THB300 billion in soft loans to commercial banks, THB350 billion of flood recovery/water management programs, and the establishment of a THB50 billion disaster insurance fund to help firms secure flood insurance, are in RBS’ view. The goal is to still too ‘politically tangled’ and/or too longterm to make an immediate difference to the current economic environment. Fitch Ratings also shares the same view, adding that pre and post-flood fiscal loosening could narrow the fiscal buffers that the Thai sovereign can deploy against future shocks. “More broadly, the orderly handover of power following the July 2011 elections was reassuring. But, like fiscal policy, the political risk which was behind the ratings downgrade in 2009 (that took Thailand’s Long-Term Foreign Currency IDR to ‘BBB’), remains an important ratings driver and will be monitored closely,” Fitch Ratings notes, adding that that the economy will only grow by 4%. RBS tagged the government’s forecast as ‘highly ambitious’ as it maintained its projection at 2.9% growth. “The data so far is not great – there is a rebound underway, but we remain well off pre-flood levels in terms of activity and confidence,” says Su. She adds that in December, the central bank’s private consumption index bounced 1.7%mom after sliding a cumulative 5.6% from August 2011. Meanwhile, consumer confidence increased for a second month in January, albeit at a slower pace and still at a two-year low. Also, as of December, no recovery was seen in BOT’s private investment index.

co-published Corporate profile

Hong Kong vis-a-vis the world – a mixed picture

Whilst the global economy recoils, Hong Kong remains unaffected; the question is how long for?

T

he very nature of the global economy ensures that all emerging and more mature economies are intrinsically linked. As a result, the relative strengths and weaknesses of individual countries can inevitably have an effect on near neighbours as well as complete regions on the other side of the globe. No further proof of this principle is needed than the dramatic global crisis of a few years ago, which for many economies is still having an ongoing impact and for some countries, such as Greece and Portugal, these effects continue to be severe. Hong Kong’s Position As Hong Kong is a very open economy, with excellent trading relationships with for example North America, Europe and the Asia Pacific countries, it could be argued that we are particularly vulnerable to any changes in the global financial and trade climate, this was borne out by the drop in export figures at the end of 2012. However, current forecasts still suggest that Hong Kong will grow by 3.4% during 2012, while many other economies are facing significant downturns in their fortunes. It’s true that our dependency on both international trade and financial transactions, does create some sensitivity to external shocks and the 2012 forecast is around 1.5% down on 2011 as a result of slower export growth. However, our economy is well supported by private consumption resulting from international and Chinese tourists, robust wage growth and a strong labour market. Consumption and demand, however, also present some issues. As we have extremely close links with China, which is the source of most of Hong Kong’s food products, the global increase in food prices has been the main driver of inflation, which in 2011 stood at 5.3%. Some of the inflationary pressure has also been created by the increase in real estate prices, which has leapt by 60% since 2009. While government measures to cool the property market are likely to reduce inflation to around 4%, food inflation imported from China is likely to remain a problem, as is the impact of increasing rent levels and property prices, which combined are expected to keep inflation high. The link between the HK and US dollar enables us to track the US Federal Reserve’s monetary policy. Interestingly, the US is also expected to be the best performing Western economy in 2012 with a forecast growth of 2.2%, but this could improve further if unemployment can be meaningfully reduced. Future Influences So, for the moment, at least Hong Kong

appears to be in a fairly stable position, but what external influences can we expect to be subjected to in the future due to global market changes? Overall, the global economy appears to be slowing, with a growth rate of 2.6% expected during 2012. While this is only a reduction of 0.3% on 2011, it’s almost 1.5% down on 2010. It’s also clear that there is a two-speed growth pattern, where emerging markets are growing at a much higher rate than more advanced and mature economies. Currently, emerging markets are on average expected to reach growth of between 4 - 5%, while the more advanced economies are closer to 1 - 2% growth (with Europe expected to contract by 0 – 0.5%). China continues to be a star performer in terms of GDP growth and is likely to grow by around 8% during the next 12 months, which is significant by any standards and spectacular compared to most Western economies, where the best performing country is likely to be the US. India is also expected to increase by around 7%, although this is 2% down from 2011, while the other key developing markets of Russia and Brazil are forecast to grow by 3 - 4 %. However, the Eurozone is expected to fall into a recession and although it will be fairly muted there will be some fairly large contractions of economies in countries such as Portugal & Greece with conservative estimates predicting contractions of 3 - 4%. The Eurozone is one of two major sources of uncertainty for 2012 and 2013, due to its ongoing debt crisis. The other is the rising oil price exacerbated by continued political tensions in the Middle East. As the Eurozone countries are struggling with high debt levels, governments are under pressure to reduce debt. This has lead to higher unemployment rates and austerity measures which in turn have affected consumer confidence and consumption and lead to households also trying to reduce their own debts, further worsening the fiscal position. Signs of Stability Even so, there are definite signs of stability in the financial markets, since the European

“Overall, the global economy appears to be slowing, with a growth rate of 2.6% expected during 2012”

Matthew Cockerill Atradius Country Manager - Hong Kong Central Bank (ECB) intervened by providing the banks with a large amount of liquidity at very low rates of interest. In December 2011, this figure was EUR489 billion and this process was repeated at the end of February 2012 with a further injection of EUR530 billion. Political tensions in the Middle East present a particular concern to the global economy as it could stimulate further increases in the already inflated oil prices being experienced. Any oil price rises will further depress consumption levels in the advanced economies, which are already under pressure due to the austerity measures already implemented by the various governments. Further increases would clearly present more issues, although the International Energy Agency has already demonstrated that it has the capability to can help mitigate the effects of oil price rises, when in June 2011 they intervened in the market quite successfully. Saudi Arabia has also announced it will increase production to try to moderate the price. However, the real concern is if military action is required in the Middle East, which would have a significant detrimental effect on the world economy. Hong Kong clearly has a range of unique strengths and characteristics that have helped us maintain our robust position in the global market. One of those key strengths has been the ability to adapt to change and while there continues to be significant unrest and instability in key parts of the global economy, it’s clear that this ability will continue to be tested during 2012.

ATRADIUS CREDIT INSURANCE N.V Tel: +852 3657 0700 E-mail: hongkong.enquiries@atradius.com www.atradius.com.hk HONG KONG BUSINESS | APRIL 2012 25

analysis: Asian Luxury

Lorem Impusum

Asian luxury sales soar despite the global economic crisis Statistics shows that a crunch does not mean a plunge in splurging

2

011 may have been a terrible year for the European economy, but it was a great one for the continent’s purveyors of posh. Sales growth was at the highest in over a decade with major brands posting an average of 20% increase, according to an HSBC survey. Perhaps all that Prada and Gucci needed was to settle frayed nerves. Misery loves luxury Of course Asia continued the charge with a sales growth of 35%. But the Americans and Europeans were not far behind, posting luxury sales growth of 24% and 12% respectively in 2011. Even the Japanese, hit by the dual ravages of a tsunami and radiation scare, managed to find time to stock up on emergency rations of Louis Vuitton and Chanel, with sales in the land of the rising sun up 4% over the year. Misery may love company, but miserable people seem 26 HONG KONG BUSINESS | APRIL 2012

“First-time buyers still account for 65% of sales of luxury brands in China.”

to love luxury. Even 2012 is expected to be a good year for the branded luxury goods industry, with HSBC analysts expecting sales to grow by 10% this year, tapering off to 9% in 2013. Even this would be a good performance given that the long-term industry growth rate is around 7-8%. Some brands are more exposed to Hong Kong and China than others, and buying practices are also quite different in European markets. Coach, a US fashion retail, actually has more men buyers of leather and accessories in China, where the ‘man bag’ and ‘man pouch’ are still in vogue. This differs vastly from Japan where the majority of Coach outlets are in the women’s handbag section, and where men are presumably not so keen on man bags. Luxury retail sales in Asia Overall 2012 should see luxury retail

sales in Asia slow from 35% in 2011 to 20%, reckons HSBC’s Erwan Rambourg, adding that China should continue to be a strong spot. But there are nuances. In the mainland, the number of people who can afford luxury goods will grow at a slower pace, but the number of people who actually buy will continue to increase, thanks to the expansion in distribution. Of particular interest is the fact that for many Chinese, this year may be the first time they step up and buy a luxury good. First-time buyers still account for 65% of sales of luxury brands in China. But if sentiment in China does take a hit, it could be the watch retailers who suffer the most, mainly because men are the main buyers and they can go without a new watch but they always need to buy their wives a new Louis Vuitton, plus a Prada for the mistress. Aaron Fischer and Mariana Kou,

analysis: Asian Luxury analysts with CLSA, note that luxury goods look set to be the fastestgrowing consumer category in China over the next five years, with a 25% Cagr against general consumption at 11%. “Luxury sales in Greater China represent 10% of the global market sales. If we include sales to Chinese tourists abroad, we estimate Greater Chinese consumers to account for 15% of global sales. But we are only at the start of this golden opportunity. Given rising incomes and supportive social factors, we expect Greater Chinese customers to account for 44% of global luxury sales by 2020.” This implies a market size of €74bn by 2020, they reckon, making China the largest domestic market in the world. Including travel spend, Greater Chinese demand is expected to account for 44% of the global luxury goods market. Fischer cites a Hurun Research which shows that mainland Chinese millionaires are 15 years younger than their overseas peers. As expected, the vast majority live in the coastal regions and top-tier cities. Beijing, Guangdong, and Shanghai are home to 48% of China’s millionaires. The number of individuals with more than RMB1,000 million has increased at a 50% annual rate from 24 in 2000 to 1,363 in 2010. Mainland Chinese make time for luxury During the global financial crisis of 2008, high-end watch sales took a dive, and Swatch recently mentioned it had witnessed lower growth rates for the higher-end of its portfolio in mainland China. According to Swatch CEO Nicolas Hayek, midrange brands did better than high-

end brands. Hayek notes that the group’s January/February sales to the end-consumer in Mainland China were 50% for Longines, 57% for Tissot, and 14% for Omega. In Mainland China, Hayek thinks that the group’s high-end brands could grow at 9-10% in 2012 and the rest of the portfolio at “high double digit rates”. So far, watch sales in Hong Kong and China are holding up. Swiss watch exports for January 2012 showed no signs of a slowdown for Hong Kong and China while the rest of the world is slowing. One example is Hengdeli, the largest retailer of watches in China with a 50% market share. The company reported strong post-Chinese new year sales, with exports up a third in Hong Kong and China in January compared to 16% globally. Of course, many watches are bought by mainland Chinese in Hong Kong. According to CLSA’s survey, Oriental Watch, a large dealer of Rolex and Tudor in Hong Kong, believes that Chinese customers accounted for about 50% of its FY10 HK$3 billion group turnover. At Emperor Watch & Jewellery’s flagship store in Tsim Sha Tsui, more than 85% of customers are from mainland China. Even in the Central business district, the company estimates that 70% of their customers are mainlanders. Luk Fook believes 50-60% of its business in Hong Kong comes from Chinese tourists, and the jeweller opened new shops in Hong Kong in early 2011. Trinity, which operates luxury menswear brands including Cerruti 1881 and Gieves & Hawkes, also finds 60% of its customers in Hong Kong coming from China. Mainland Chinese still spend more

“Luxury goods look set to be the fastestgrowing consumer category in China over the next five years.”

on luxury products outside of China than domestically. Research firm Bain estimates the Chinese overseas luxury market at RMB87 billion, which is 27% larger than the RMB68 billion spend domestically. Many large department stores in Japan, Europe, and the US have hired Mandarin speakers to ride on this trend. First time buyers dominate One reason for the strong growth in luxury watch sales in China is that many are buying for the first time. Rambourg notes that up to two-thirds of consumers purchasing luxury products in China are new to the brands they buy. He takes the view that the proportion of clients who are “new to a brand” is greater with brands that have lower price points like Rado, Mido, Longines, and Tissot, compared with Omega and other brands with higher price points. “We believe that consumers who are able to afford higher price points are more ‘travelled’ and exposed to negative headline news. These weigh on sentiment and influence their decision to postpone a purchase and wait for a better psychological environment. The access segment is also less vulnerable to the ‘guilt factor’, wherein buying a USD1,500 watch is less of a statement than buying a USD50,000 watch,” Rambourg notes. According to CLSA, some 24% of people that they surveyed, who earn around RMB41,976 per year, said that they would be willing to spend more than RMB50,000 on a watch. The survey also revealed that Chinese consumers are willing to pay extra for luxury. As one businessman said, “A price tag of more than one

Luxury customers by age

Source: China Reality Research

Depressed? Depressed?Luxury Luxurybrands brandssuggest suggestshopping shopping as therapy. HONG KONG BUSINESS | APRIL 2012 27

analysis: asian luxury million yuan a bottle -- that does more than show off your wealth, it shows you have good taste.” Not everyone may agree with this, Fischer notes. “The businessman often pays more than RMB30,000 for a bottle of wine to entertain guests. In October 2010, three bottles of Chateau Lafite’s 1869 vintage sold for a record US$230,000 each in Hong Kong, at 28x Sotheby’s top estimate. Fine wine prices increased 40% during 2010.” Niche buyers Fischer adds that there are some luxury products that are not as popular in other countries but are highly interesting to Chinese customers. “For example, a pack of premium puerh tea from the 1980s was sold at RMB13,440 in a 2009 auction, which is almost RMB40 per gram. Another pack that was ultra premium and believed to be more than 80 years old was sold at RMB504,000, or RMB1,800 per gram. Antique furniture is also popular among the Chinese rich. Hainan rosewood, in particular, is very prestigious and a set of four chairs was recently sold at RMB17.7 million and a six-column bed frame fetched a record of RMB43.1 million.” The gift segment of the watch market may be in for a hit if the economy slows, notes Rambourg. But corporate gift giving, or Guanxi, drives high-end purchases more than sales of the likes of Rado, Longines, and Tissot. “If real estate deals are scarce and government officials change at year-end, we see that gift-giving will slow down, at least temporarily. Our estimate for Greater China is that sales growth for Omega and aboveprice points will be in the high single

Come on, Vogue. Let your money move to the music. “Luxury makers have the advantage of earning higher margins on sales in Asia, up to four times markups, compared to an average of 2.5 times in continental Europe.”

China consumer expenditure Cagr growth (2010-15CL)

Source: Euromonitor, CLSA Asia-Pacific Markets

28 HONG KONG BUSINESS | APRIL 2012

digits/low double digits only, while lower-priced brands could still grow comfortably in the high 20s, if not more on the back of middle-class expansion and higher wages,” he adds. CLSA’s survey estimates that 16-17% of Chinese consumers bought luxury goods as gifts. Where is the money coming from? So, where is China’s luxury growth coming from? According to CLSA’s survey, of the 340 consumers in 65 Tier 1-3 cities and 31 luxury store managers, 53% of consumers surveyed in Tier 1-2 cities spent RMB10,000 or more on luxury goods in the past 12 months, compared with 39% in Tier-3 cities. “On average, among all the consumers we surveyed who have made luxury purchases in the past 12 months, each spent RMB16,674. On average, they spent 10-12% of their total household income on these items. This underlines the high propensity to spend on

luxury goods in China.” Given the growth in all Chinese cities, it is not surprising that other luxury brands are continuing in their China rollout strategy. They argue that if you can sell a pair of shoes to just 0.1% of one billion Chinese buyers, you will still make a lot of money. One such shoemaker is Tod’s, which has ramped up its Asian footprint from 9% sales in 2008 to 18% in 2011. Even so, it sits well behind other fashion brands who average 30% of their sales in Asia. Tod’s today is one of the fastest growing brands in China, and grew by more than 50% in 2011. The group will open 20 more stores in 2012, mainly in China, and wants to have 100 stores in Asia over the longer term, up from 50 by the end of the year. Luxury makers have the advantage of earning higher margins on sales in Asia, up to four times markups, compared to an average of 2.5 times in continental Europe, notes Rambourg.

For those who shopped oveseas: where did you make the luxury purchases?

Source: China Reality Research

ECONOMICs

Ian Perkin

A case for a census

F

ifty years ago, the then Hong Kong Financial Secretary John Cowperthwaite guided the local economy to a prosperity not seen before with a light (and deft) touch. He is said to have famously opposed gathering additional economic statistics to prevent demands for greater government intervention. Yet, even he had the census to fall back on. The summary results of Hong Kong’s 2011 population census, published in February 21 this year, give an insight into the demographic and potential economic and fiscal challenges the HKSAR will face in the medium-to-longer term. The principle among these, that is well-recognised by the HKSAR administration and highlighted in the summary results, is the challenge presented by an ageing population. Ageing population The average (median) age of the Hong Kong population is now over 40 years, according to the census outcome. Also, the proportion of the population in the most productive working age years is declining. As a result, the output and productivity of the overall economy in the years ahead will fall on fewer shoulders. The working population will have to be more productive if living standards are to be maintained and enhanced. The ageing of the population also means that the demands on society (and on the administration and its resources) will increase over time. Hong Kong will get a new Chief Executive this year. It is an appropriate time to consider just how the demands on him and his administration will increase in the years ahead. Given that the fastest periods of Hong Kong’s past economic growth have coincided with more rapid population growth (and inward migration), average growth in the years ahead is likely to be more

IAN PERKIN Independent Economic Consultant perkin888@hotmail.com

Hong Kong Population Year 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Population 5.26 5.431 5.566 5.672 5.752 5.888 6.119 6.467 6.583 6.712 6.726 6.798 6.91 7.009 7.122

Percent Change 1.54 % 1.51 % 1.20 % 1.34 % 0.44 % 1.26 % 2.02 % 3.14 % 1.01 % 1.11 % -0.06 % 0.50 % 1.05 % 0.81 % 0.81 %

Source: IMF Statistics

• The ageing trend continued over the decade to 2011 with the median age estimated at 41.7 years in 2011, up from 39.6 years in 2006 and 36.7 years in 2001. Lower fertility and mortality rates contributed to this outcome. •  Hong Kong’s gender imbalance has increased with the male population falling below parity with the female. After excluding the foreign domestic helper population, the number of males dropped to 939 per 1000 females in 2011 compared with 1012 per 1000 females back in 2001. • Fewer Hong Kong citizens, both males and females, married more than a decade ago. • Educational levels have improved. The share of the population aged 15 and over with secondary or higher education increased to 77.3% in 2011 from 71.1% in 2001 and 74.6% in 2006. Those with postsecondary education in degree courses also increased significantly from 12.7% in 2001 to 15.4% in 2006 and 18.0% in 2011. “The average (median) age of the Hong Kong • The labour force increased from 3,437,992 persons in 2001 to 3,727,407 persons in 2011, population is now over 40 years” despite a drop in the overall labour force participation rate from 61.4% to 59.7% over the same period. modest than in the past few decades. As a major • Domestic households increased by 15.4% from global trading entity, Hong Kong’s growth is not 2,053,412 to 2,368,796 over the decade. The average dependent on domestic demand alone. Therefore, household size decreased from 3.1 to 2.9. slower population growth and ageing will have an • Median monthly of the working population was impact on productivity and the shape of domestic $11,000 in 2011, an increase of 10% over the decade. demand. • In 2011, 36.2% of the working population were managers, administrators, professionals and associate The key findings of the 2011 census were: • Hong Kong’s population at the end of June last professionals, up from 31.6% in 2001. Craft and related workers dropped from 9.9% in 2001 to 7.4% year was 7,071,576 with 6,859,341 being “usual in 2011. residents” and 212,235 “mobile residents”.

“The proportion of the population in the most productive working age years is declining.”

HONG KONG BUSINESS | APRIL 2012 29

ART REPORT

Untitled, 1921 by Zao Wou-Ki

Vibrant, Exhausting Hong Kong Art Scene There is something for everyone in Hong Kong’s art market, but local and international collectors must have stamina, a good eye, and big bank accounts. Bonnie Engel reports.

M

ay is becoming known as the “crazy art month” in Hong Kong with Christie’s Spring Sales and several major auction houses -- such as Bonham’s, Seoul Auction, United Asian Auctions, and Tian Cheng Auction from China -- vying for international collectors’ dollars. ARTHK12, Hong Kong’s locally grown art fair (soon to become ART BASEL HONG KONG), opens a bit earlier (May 17-21) where 264 galleries representing 37 territories are competing for buyers’ attention. Visual feast New galleries open and bring exciting new art to town almost every month of the year because the buyers are

30 HONG KONG BUSINESS | APRIL 2012

“Hong Kong is currently the world’s leading art market by auction turnover and there is no tax on the import and export of art”

here. Art collecting is a passion, not a reasoned investment, yet it can yield quite substantial results for savvy buyers. There is some speculation going on, especially in the Chinese contemporary and 20th Century painting fields, which drive up auction prices, but Hong Kong people and visitors are spoilt for choice at art fairs and galleries where they can collect Western and Asian art and antiques, paintings, sculpture, photography, prints, video, and other types of art. Economics always plays a part in the USD$15 billion worldwide art market. With the world’s financial experts focused on what is happening to the economies in Europe and the USA, many investors are turning to

art as an alternative, especially when good quality art is on offer. Kevin Ching, Sotheby’s chief executive officer for Asia, says, “We are offering a better curated though slightly smaller selection this spring. We recognise that worries about the Euro might be hanging over market sentiment at this time, but it doesn’t seem to be affecting Asia as much as other markets. So we respond, as always, by offering the highest quality and rarest pieces because serious collectors are not deterred by external forces.” Owner of the famous Shanghai gallery Contrasts and sponsor of well-established artists and designers, locally born art dealer Pearl Lam says: “Since ARTHK’s first edition four years ago, Hong Kong has been gradually transforming into a contemporary art centre to rival London and New York, attracting both an international and local audience. I am elated by and proud of these changes and want to contribute to this continuing transformation.”

ART REPORT Tryst back home So this global socialite and art expert is returning to the city of her birth to open premises in the Central district’s Pedder Building, which already houses international galleries Gagosian and Ben Brown as well as home to Hong Kong’s own contemporary art scholar and long-time curator Johnson Chang and his Hanartz Gallery, which has been going strong for over 30 years. London’s White Cube just opened a space in March and Frenchmen Edouard Malingue and Pascal DeSarthe debuted last year, displaying British and French artists as well as Chinese contemporary painters and sculptors. This year Hong Kong welcomes Galerie Perrotin and its founder Emmanuel Perrotin in May. Leading into the May madness, Sotheby’s holds its spring auction in April, setting the scene and whetting the appetites of the experts by offering a rare Northern Song Dynasty Ruyou jade-like glazed ceramic washer (for brushes) and consummate paintings by 20th Century Chinese artists Zao Wou-ki, Chen Yifei, Chan Yanning and Wang Yidong in addition to the Contemporary Chinese and Indian and Southeast Asian art. At the end of May, Christie’s will hold its mammoth series of auctions, attracting wine lovers, watch and jewellery collectors and serious connoisseurs of the finest Chinese works of art and ceramics, 20th Century Chinese painting and contemporary

works from around the Asia region. Zero art tax churns more fairs Hong Kong Contemporary is a new art fair opening at the Park Lane Hotel concomitantly with the ARTHK12. Fair Director Roger Lin says, “Hong Kong is currently the world’s leading art market by auction turnover and there is no tax on the import and export of art (in contrast to mainland China, where there is a tax of 34% on the sale of any imported artwork). With its shared history with the West, Hong Kong is a place where people from all parts of the world feel equally at home.” Hong Kong Contemporary is associated with Hong Kong Auctions, which will hold a one-day auction during the fair. This year’s Hong Kong art auction started right after Chinese New Year. February 2012 saw the third Asian Top Gallery Hotel Art Fair in HK, which started in Korea five years ago. It invites galleries to participate at fivestar hotels, using the bedrooms on several floors to exhibit the art. First held in Seoul and then Tokyo, Hotel Art Fair organisers must have had the most success in Hong Kong because the fair keeps coming back. It was hosted this year by the Mandarin Oriental Hotel and featured more galleries than ever before. The fair’s fame spread so far that it even attracted art dealers from St. Petersburg, Russia, Myanmar, and Bangkok, as well as many HK, Taiwanese, Korean,

Bloodline – Big Family: Family No.2 by Zhang Xiaogang

“If the market softens a little, the buyers will pounce. But there is a case of the jitters about the overall picture of the world economy”

and Japanese galleries showing young artists, who were often present, and wonderfully imaginative art.There seem to be more abstract art this year than last year from these artists. A second Top Gallery Hotel Art Fair this year will be in May at the Grand Hyatt and will bring emerging and mid-career artists from all over Asia. As prices are somewhat lower than at the big-name auctions, this fair attracts the curious and the connoisseur alike. Home-boy galleries are not letting any grass grow under their feet either. The exhibitions are becoming livelier and are incorporating more media as they seek larger spaces outside of Central. Just to mention a few: Gallery Exit just opened a large space on the south side of the island, Southsite, along with the Hong Kong New Music Ensemble that will host musical performances, which supplement the fine art shown at the Hollywood Road gallery. Experimental galleries Osage Galleries -- with two locations in Central Soho district, where artist Wilson Shieh lived for a few weeks in March doing his art live and the 15,000 sq. ft. space in Kwun Tong where video, photography, music, and performance art are common -- is one of the more forward-looking,

Sunlight Rock by Wu Guanzhong HONG KONG BUSINESS | APRIL 2012 31

ART REPORT daring and experimental of the local galleries. It introduces new artists from other Asian countries as well as encouraging Hong Kong artists to use the huge space to spread their wings and experiment with many forms of media and new curatorial ideas. Newcomer Gallery 3812 that opened last year offers over 7,000 sq. ft. in Aberdeen and displays a wide variety of artists and art practices. Calvin Hui, one of the owners, is also involved with new contemporary spaces on the mezzanine floor of the Harbour View Renaissance Hotel on the east side of the HK Convention and Exhibition Centre, featuring Fabrik -- a wide-ranging, eclectic gallery -- and spaces for several more. Also near Aberdeen at Ap Lei Chau is FEAST Projects, a new-media oriented gallery owned by Philippe Koutouzis who is presenting in May a very exciting convergence performance piece with Rashaad Newsome, an artist from New York whose work covers a multitude of styles such as collage, video, and performance as well as blending hip-hop and heraldry. Newsome consistently explores non-traditional forms of language and expression such as vogue dancing. Contemporary by Angela Li features large-scale photography and experimental artists from Chongqing, and is offering a show by American Tony Oursler in May. Anna Ning, gallery owner and art agent, lets her own taste dictate the exhibition of 20th Century Chinese artists that she favours such as San Yu, Wu Guangzhong, and Zao Wou-ki, and contemporary Chinese artists such as Jing Kewen. Hesitant sellers and buyers Ning said, “I feel that my clients are holding back a bit. The sellers are waiting for the right price, but so are the buyers. If the market softens a little, the buyers will pounce. But there is a case of the jitters about the overall picture of the world economy, at least right now.” These HK galleries are gaining worldwide recognition. Internationally focussed 2P Gallery is run by Pui Pui To who says, “My gallery has made it into the final cut in Art Basel’s LISTE this year. It’s the first HK gallery that has ever made it into this selection, competing against 300 applicants from emerging galleries 32 HONG KONG BUSINESS | APRIL 2012

Wolf Valley by Ai Xuan

“People still feel safer buying art in HK than in China”

around the world, and there are only 10 new slots available per year. Art in Hong Kong is thriving.” More and more young Hong Kong Chinese students are attending art schools at several local universities; mid-career HK artists are gaining global recognition, and independent curators and art agents are popping up from overseas. The feverish art action also attracts dodgy “art consultants,” who are more like salespeople who have left jobs in finance and are hungry to cash in on the art bonanza in Hong Kong by pretending to know something about Chinese contemporary art. Some have less than sterling credentials and are leaving a few shady stories in their wake. HK vs China’s art scene Yet people still feel safer buying art in HK than in China where, according to one art agent in Shanghai, there have been problems about

payment for goods at auctions, manipulation of the market prices of certain artists and categories of art, buying back of consignments by artists to ramp their published prices, and buying artworks at auction for high prices that end up in the offices of important officials, whether real or not. International corporations are coming to the party with awards and prizes. Although many banks, insurance companies, and other big players have hedged their bets for decades by creating corporate art collections, they now want to be seen supporting the arts. Hong Kong again is the venue of choice for the display of sponsorships or the winners of the awards by the Sovereign Foundation, Societe General, Deutsche Bank, and others. The art is out there and Hong Kong is small and efficient enough to allow collectors and art lovers to experience some of the best from around the world with relative ease.

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

1016 Horizon Plaza, 2 Lee Wing Street, Ap Lei Chau, Aberdeen, Hong Kong Tel + 852 3741 1828 Fax +852 3741 1829 www.dormirest.com HONG KONG BUSINESS | APRIL 2012 33

ANALYSIS: HOUSING POLICIES

Hong Kong housing policy proves futile

Will the government redefine its role in housing, or will they churn a new policy that will save the day? Krisana Gallezo reports.

H

ong Kong is in the midst of its third major housing policy shift since 1997, but current efforts appear inadequate since homeownership rate has remained just above 50% or has shown little change since late 1990s. The data from UBS Investment Research also highlight that Hong Kong is well below 80-90% compared with Singapore and Taiwan. In terms of distribution, only around half of the 2.34 million households benefit from low income housing while more than 30% are living in public rental housing. Colliers International executive director Ricky Poon says that one of the reasons why Hong Kong lags behind peers is the government’s lack of engagement in housing matters. “In Singapore for instance, the government always encourages the people to buy properties and that’s the main reason why their homeownership rate is so high. Also, they encourage the people to use their mandatory retirement plan to buy properties. In Hong Kong, it’s totally different,” he says. Housing affordability challenges Propelled by the housing shortage, the Hong Kong government has pushed

34 HONG KONG BUSINESS | APRIL 2012

“Hong Kong is well below 8090% compared with Singapore and Taiwan”

forth a number of long-term supply side measures which includes a reintroduction of the annual construction target of 40K flats and an enhanced subsidized housing scheme dubbed ‘My Home Purchase Plan’. Despite all these efforts, Hong Kong continues to suffer from the perennial problem of housing shortage, which has dramatically increased land values. According to David Tse, chairman of RICS (HK) Housing Task Force, there has been a continuous shortage of flats, failing to meet the increased number of households over the last decade. Furthermore, there is a serious mismatch between types of flats supplied and demanded. “Over 50% of the total residential property transactions between 2002 and 2009 involve small-sized flats of less than HK$2 million, and only 12.2% of new completions in the same period are small-sized flats of less than 40sqm,” he says. In mid-2011, Hong Kong chief executive Donald Tsang himself admitted that the government’s housing policy has allowed the supply to dwindle. As a consequence, housing affordability deteriorates. According to UBS, the price-to-income ratio

of a 50sqm flat in Hong Kong now stands at around 11 years, down from the peak of 12 years in mid-2011. It still takes a household 11 years of total income to buy a 50sqm flat. This compares with 14 years at the height of the last big housing bubble in 1997, and the 4-5 years that is conventionally deemed reasonable. Meanwhile, based on the estimates by the Centaline, the income gearing ratio now stands at around 40%, up from 28% in late 2008. This means that a typical household with a mortgage will spend 40% of its monthly income to pay the mortgage. Tse meanwhile notes that aside from the rapid increase of large-sized flat or house prices, probably due to investment demands from both local and overseas investors, the price of other types of flats (including smallsized flats which are target flats for first-time homeowners) also soared rapidly or became less affordable to many Hong Kong citizens, especially those Sandwich Class households whose earnings exceed the ceiling for application to live in PRH. Attractive investments On the other hand, owing to the

ANALYSIS: HOUSING POLICIES relatively stable and free market atmosphere in HK, residential properties are regarded as attractive investment vehicles to both local and overseas investors, notes Tse. “Coupled with favourable financial mortgage packages, and no rent control, the price of residential property rises to such an unreasonable high level that they are beyond the affordability of an average household in HK,” he explains. Poon notes that property prices in the last two years since the financial tsunami have actually bounced back and that the country even had a record high in 2011. That’s the key reason why the government came up with various cooling measures in an attempt to curtail them. With housing prices remaining hardly achievable, UBS economist Silvia Liu tags current housing efforts as ‘far from satisfactory’, noting that today’s housing shift is largely reacting to the overheating property market. Thus, the motivation is only to stabilise the conditions and not to build well articulated long-term housing solutions. Going forward, Liu says Hong Kong is unlikely to see a plunge in property prices, as was the case in the late 1990s. “First, the current annual housing target of 40k is quite modest when compared to the 85k tabled in 1997/98. Not to mention that the new supply will not come on line until a couple of years later Second, mortgage rates remain very low. This helps keep mortgage payment to income ratio (the gearing ratio) from being excessive. Third, real interest rates will remain negative, a condition typically supportive of real asset prices,” she says. At best, UBS only expects a 10-15% correction in residential prices in 2012. Colliers shares the same view with Poon, noting that Mainland Chinese and wealthy locals will continue to drive property prices up. A comprehensive and holistic review Tsang will be succeeded by a newly elected Chief Executive in mid-2012, and there will certainly be questions on the continuity of the current administration’s housing policy. However, UBS believes that the direction of the policy to increase both private and public housing supply is unlikely to change in light of the housing shortage. Nevertheless, UBS notes that whether and how the new administra-

tion will redefine its role in housing is critical to watch. Liu argues that as we look through the housing policies in perspectives, most of the shifts we are seeing today are mere rectification of the 2002 measures that aimed to clear the housing backlogs. “A well articulated long term housing strategy is still missing,” says Liu, noting that the government must consider a comprehensive review of future housing demand which takes into account the potential changes in demographic and socioeconomic conditions before formulating a housing supply target and its composition. The last time the government conducted a comprehensive housing strategy review is back in 1997/98. “Certainly, the housing market dynamics has evolved so much over the last decade that it warrants another comprehensive review,” says Liu.

“At best, UBS only expects a 10-15% correction in residential prices in 2012”

Mainland Chinese buyers According to UBS, amongst the demographic and socioeconomic condition changes to consider include a growing realisation that Mainland Chinese are no longer just marginal buyers in some residential segments. In the luxury segment for instance, Centaline estimates show that Mainland Chinese accounted for 15% of the purchases of new luxury homes in 1H2011. To explain this phenomenon, UBS looked at the impact of the Capital Investment Entrant Scheme (CIES) which was introduced in early 2003. It allowed Chinese nationals to apply for residency in Hong Kong by investing no less than HK$6.5 million in the permissible assets. As of September 2011, 19k applications have been received under CIES, of which almost

16k is Chinese. UBS notes that even if we assume all applicants invested in property, the cumulative number of purchases is negligible compared to the cumulative property transactions of 830k during 2003 and 2010. Over the last decade, Hong Kong has become a more integral part of China. According to Liu, this fundamental shift is also contributing to the changing socio-demographic. “The movement of labour and people between Hong Kong and China has become much easier over the last decade. This, plus China’s rapid growth, has resulted in the rising number of well-educated Mainland Chinese working in Hong Kong. For people who have worked in Central — the financial district in Hong Kong — in the past 10 years, the growing presence of Mainland Chinese professionals is palpable. Some of them may end up buying property in Hong Kong,” she says. Long-term strategies RICS’ Tse, meanwhile, recommends that the government must adopt a holistic approach to formulate and implement a long-term housing strategy. By this, he means that the approach should cover both the private and the public housing markets, side-by-side with an effective land use and supply policy. Strategies and policies should be sustainable and feasible irrespective of the ups and downs of the property market. The ultimate goal is to provide adequate and suitable housing units like small-sized flats to meet the housing needs, not of foreign investors but of different sectors of the HK population over the longer term.

Residential flat completions

Source: DBS Vickers EstimatesCEIC and UBS calculations HONG KONG BUSINESS | APRIL 2012 35

legal briefing

Insurers have lawful authority to pay broker commission Except, of course, if the commission is above what is normally paid in the market.

O

ver the past few years, there has been much debate on the longstanding practice of the insurance market to allow a broker acting as the agent of the assured to receive commission from the insurer. Some argue that it breaches section nine of the Hong Kong Prevention of Bribery Ordinance (PBO), which prohibits the offering of a bribe to or its acceptance by an agent and the use of fraud document by an agent to deceive his principal. In January, however, the Court of First Instance in Hong Kong handed down an important ruling which provided much needed clarity in this area that has been fraught with uncertainty. What are the facts? The Hobbins v Royal Skandia Life Assurance Ltd & Anor is the first case in Hong Kong that deals with the legality of insurance brokers receiving commissions. DLA Piper partner Will Harrison notes that in this case, the assured (Hobbins) instituted proceedings against both the insurer (Royal Skandia) and the insurance broker (Clearwater), seeking to set aside the purchase of various Investment Linked Assurance Scheme (ILAS) products. The assured alleged that the broker did not disclose the amount of commission it would be earning on each ILAS product purchased and that the broker therefore breached the fiduciary obligations owed as the assured’s agent. The assured also alleged that the ILAS products were contrary to S.9 of the PBO or tainted by an underlying fraudulent misrepresentation. Further, it was argued that the broker was acting as the insurer’s agent because the insurer paid commission to the broker in respect of the insurer’s ILAS products bought by the broker’s clients. What was the court’s decision? The Court found that commissions paid by an insurer to an insurance broker are not illegal secret profits, unless in excess of what is normally paid in the insurance market. Specifically, the Court ruled that: • The broker was acting solely as the insured’s agent and not as the agent of the insurer. • The payment of commission by the insurer to the broker did not constitute a breach of the PBO. • The broker did not breach its fiduciary, common law, or statutory duty to the assured as it informed the assured that it would earn commission from such of the assured’s business that it placed with insurers and it was not obliged to disclose the precise amount of the commission. • The insurer was not liable as principal for the 36 HONG KONG BUSINESS | APRIL 2012

broker’s breaches as the broker was not the insurer’s agent. • The ILAS contracts are not void or unenforceable as there had been no misrepresentation by the broker and no breach of the PBO. Will Harrison

Richard Keady

What does the ruling demonstrate? According to Clyde & Co partner Richard Keady, the outcome of the case is more an illustration of a disgruntled experienced investor. The case, he says, might be contrasted with that in Field v Barber Asia Ltd4 — a case involving a retail investor dispute which a completed risk disclosure statement by an inexperienced investor was no bar to a successful claim in negligence against a financial adviser. “In cases involving commercial investors and in the absence of egregious conduct on the part of a financial adviser, the courts are usually reluctant to go behind the contractual documents. In the case at hand, the plaintiff was not only an experienced investor and a very successful businessman, but he also had a preference at times for leveraging intricate investments. The plaintiff was known to override advice received when he saw fit,” he says.

“Insurance brokers receiving commission at the normal market rate does not contravene the PBO.” Keady also notes that the outcome of the case also demonstrates the importance of having the proper terms in client agreements, keeping proper records and giving adequate disclosure in accordance with good practice. How should the insurance industry respond? According to Harrison, the case clarifies an important point: that insurance brokers receiving commission at the normal market rate for placing insurance does not contravene the PBO. The key issue now however, he says, is how the self-regulatory organisations respond to the judgment. “The Hong Kong Insurance Authority has prompted a meeting between the SROs with a view to reaching a common position. It seems likely that some form of standard disclosure to clients will be agreed by the industry. However, the challenge is to find a balance that complies with the law and protects the interests of policyholders whilst not unduly restricting the commercial activities of insurers and brokers, which would serve only to increase costs for the public,” he says.

HONG KONG BUSINESS | APRIL 2012 37

SPECIAL FEATURE: 2012 EMINENT INSURERs

Ageas Hong Kong: Providing lifetime financial security

LIFE INSURANCE

38 HONG KONG BUSINESS | APRIL 2012

A

geas Insurance Company (Asia) Limited is one of the largest life insurance companies in Hong Kong. It is a wholly-owned subsidiary of Ageas, an international insurance company with a heritage dating back more than 180 years. Headquartered in Belgium and Netherlands, Ageas is among Europe’s top 20 insurance companies, with 13,000 employees working throughout Europe and Asia.

SPECIAL FEATURE: 2012 EMINENT INSURERs

Ageas harnesses latest IT developments to stay a step ahead of its customers’ insurance needs

“A

geas constantly seeks out ways to make innovative use of technologies to meet the ever-evolving challenges we face in the marketplace and satisfy our customers’ aspirations. They enable us to deliver more comprehensive and high-quality solutions which are more personalised to match individual needs,” says Stuart Fraser, the CEO of Ageas Insurance Company (Asia) Limited (Ageas Hong Kong). Pioneering technology development in the insurance industry Ageas Hong Kong is actively expanding its business and the reach of its marketing and promotional activities by leveraging on fresh opportunities provided by advances in IT. “For instance, we were the first insurance company to begin using Google Apps. Our Model Portfolio Illustrations is a powerful analytical tool that allows our professional consultants to help customers choose the most suitable fund portfolios, based on the past performance of funds and their investments in various asset categories. That makes it easier for them to achieve their financial objectives,” Fraser explains. “We have also been putting enormous effort into raising the quality of our services and products even further,” he points out. Examples of this include free iPhone Apps for specific purposes, such as retirement, education fund and protection. Then there has been the launch

Mr. Stuart Fraser, CEO of Ageas Hong Kong

“...first in Hong Kong to employ QR technology to allow customers to call celebrities and hear their smart financial tips. ”

of online portal which allows clients to check policy details and perform housekeeping tasks. Innovative advertising Ageas believes in integrating new technologies and advertising to enhance customer engagement and increase brand awareness. In mid-February this year, Ageas rolled out the new “Calling

Dayo, Calling DoDo!” advertising campaign featuring stand-up comedian and Ageas Hong Kong spokesperson Dayo Wong and renowned TV artist DoDo Cheng. Ageas is the first in Hong Kong to employ QR technology to allow customers to call celebrities and hear their smart financial tips. The company scored another Hong Kong first last year by using HONG KONG BUSINESS | APRIL 2012 39

SPECIAL FEATURE: 2012 EMINENT INSURERS In 2011, Ageas Hong Kong was among the first companies to be authorised to provide Capital Investment Entrant Scheme (CIES) products – products designed for those wishing to apply for right of abode in Hong Kong as investors. The launch of this product displays its visionary and forward-looking mindset.

Ageas team of professional consultants

“U tie” technology to enable people to scan ads on MTR billboards in order to receive details of its latest promotions. A professional team As Fraser points out “Ageas Hong Kong caters for its customers’ needs by delivering best-in-class financial planning solutions. Our professionalism has been acknowledged by the many accolades we have received recently. These include being named Company of the Year (Insurance) in the prestigious SCMP/IFPHK Financial Planner Awards 2011. Our financial planners were also the Industry Winners for 2009 and 2011 in the same awards.” Combining global strength with local flexibility, Ageas Hong Kong offers customers a diversity of financial protection products and wealth management services. One of Hong Kong’s largest life insurance companies, it has more than 2,500 professionally trained and highly skilled consultants. Innovative and comprehensive financial planning solutions Ageas Hong Kong treasures its long-term relationships with its customers. It promotes these with a holistic approach to financial planning that is based on three pillars: “Protection”, “Savings” and “Investment”. This concept enables Ageas customers to take good financial care of themselves at different life stages. Ageas Hong 40 HONG KONG BUSINESS | APRIL 2012

Kong also upholds its commitment to innovation by offering diversified and competitive products that deliver tailor-made solutions for individual needs. Ageas Hong Kong proactively demonstrates the depth of its concern for its customers’ well being. Referring to health protection, Fraser says: “A survey found that one in every 10 Hong Kong residents suffers from diabetes. We have therefore been quick off the mark in responding to their needs by becoming the first insurer to introduce a Diabetes Mellitus Benefit under our ‘Forever Health’ Critical Illness Insurance Plan.”

“Ageas Hong Kong was among the first companies to be authorised to provide Capital Investment Entrant Scheme (CIES) products ”

Caring for the community Ageas Hong Kong actively gives back to the community. As Fraser puts it, “Our long-term commitment to good corporate citizenship is another reflection of the Ageas mindset. For years, we have enthusiastically supported well-known local charitable events like the Matilda Sedan Chair Race and Oxfam Trailwalker. The company fully supports its employees when they go the extra mile in volunteering. Last Autumn, James DeLong, its Director, Conventional Distribution Asia, scaled the 5,895-metre peak of Mount Kilimanjaro in Tanzania, Africa’s highest mountain and the world’s fourth highest, in order to raise funds and awareness about breast cancer. In recognition of these contributions, the Hong Kong Council of Social Service has awarded Ageas Hong Kong the title of “Caring Company” every year since this programme was launched in 2002.

Ageas staff attempts an 8-day climb of Mount Kilimanjaro for Hong Kong Breast Cancer Foundation

Ageas is an international insurance company with a heritage spanning more than 180 years. With cutting-edge products and financial solutions, we protect what is dearest to you and help you prepare for whatever the future may hold. And, even though life can be unpredictable, our ultimate goal is to make you love the future as much as we do. HONG KONG BUSINESS | APRIL 2012 41

CORPORATE PROFILE

Wealth, Health, Wisdom. Altruist, the Pioneer

EMINENT BROKER

42 HONG KONG BUSINESS | APRIL 2012

A

ltruist Financial Group provides one-stop professional financial planning services to customers with the highest level of integrity and altruistic spirit. “Independence� is their competitive edge. They carry an absolute objective role to provide tailor-made impartial financial solution to meet the unique financial needs of each individual.

CORPORATE PROFILE

Altruist’s competitive edge revealed The motto of ‘in with the new but not out with the old’ provides the continuity of values at the heart of Altruist Financial Group

G

lenn Turner, chief operations officer of Altruist Financial Group Ltd., is very clear about the reason for the company’s continued success as it grows. “We embrace the good parts of the new; that is, we offer new financial services products, new technology and new research tools, but we also retain the old, key values of professionalism, personal service, honesty and independence”. Although Altruist Financial Group was established in 2001, the company has over 25 years experience in providing professional financial planning services to customers with the highest level of integrity and altruistic spirit. Turner believes that life insurance protection is the root of financial planning. Altruist, at the same time, also provides wealth management, liability management and estate planning. By organizing regular career talks, investment seminars and health talks, Altruist strives to provide customer education from time to time. Turner said, “Independence is one competitive edge. As an independent financial advisor, we carry an absolutely objective role to provide tailormade impartial financial solution to meet the unique financial needs of each individual. There maybe Financial Advisors (FA’s) in the market, but are they INDEPENDENT Financial Advisors (IFA’s)?” The company has always sold protection insurance to clients throughout their lives but under the new name has added 300 different, carefully vetted financial services and products. Turner explained, “Because the modern world demands financial services and products over and

Top Ten Financial Consultants

“We have retained 97 percent of our clients over 24 months, while a very good industry standard might be 90 percent over 18 months”

above protection policies, we move with the times to keep up with our competition. Of our 50,000+ clients, 80 percent have bought more than one product from us. We have retained 97 percent of our clients over 24 months, while a very good industry standard might be 90 percent over 18 months. That’s a very good track record.” “We listen very carefully to our clients before recommending any product or service. We have to know what the situation and the life goals are for each customer. We are now serving the third generation of some families. The grandparents, parents and now the children come to us as trusted advisors as they grow up and get married. We look forward to meeting their children (the fourth generation)”. He said, “I believe that we retain

our customers because our brand is the top in terms of quality. We have 40 employees in the back office and 120 planners who help people find the most appropriate financial instruments from the 45 different product providers that we represent”. Clients may have difficulty in choosing financial products from different and numerous service providers available in the market. With Altruist’s “Wise Selection” backed up by its one-stop shop platform, the company can tailor personal financial solutions purely based on their different needs, which are more cost effective, efficient and flexible than the client trying to understand and choose for himself. Turner himself is careful and examines each new product. “We have long-term relationships with the sellers of new products but we do HONG KONG BUSINESS | APRIL 2012 43

CORPORATE PROFILE

Altruist earned Family-Friendly Employer Award 2011

Altruist receives recognition during the 2012 High Flyers Award

our due diligence on all of them. My motto is ‘If in doubt, don’t do it’. It is an integrity issue for me”. Clear Vision Turner showed his humorous side with his analogy of “the bucket”. He said, “People are busy filling the bucket with water (wealth) but often forget that buckets can spring leaks. If the hole is in the side of the bucket, only some of the water will spill out, but if the bottom of the bucket has a hole in it, all the water can be lost.” “So I see our job is to shore up the sides of the bucket and to prevent the bucket from developing a hole in the bottom.” “Protection in the form of various insurance policies not only protects the contents of a portfolio but also its growth. Everyone needs medical insurance, critical illness insurance and life insurance. Our primary strength is protection. The so-called economic “tsunami” did not affect us”. Turner has turned his keen eye on 44 HONG KONG BUSINESS | APRIL 2012

2012 Walk for Million

the Hong Kong market to analyse the future of insurance in the territory. There are about three million people employed in Hong Kong with an average income per month of around HK$15,000. Turner assumes, as a rule of thumb, that 10 times a person’s annual income is the appropriate level of insurance protection. He thinks that Hong Kong overall has only about a 50 percent level of protection coverage at present, assuming the average size of a Hong Kong insurance policy is HK$500,000. Therefore, he is very optimistic about the future of the company as there are around 5,400,000 policies that need to be sold to reach a satisfactory level of insurance coverage for everyone. Awards and Accomplishments Since the transformation into Altruist Financial Group, the awards and recommendations show the company’s core strengths. For example, since 2003 the “Caring Company

“Altruist President Mr. Albert Lam was awarded “Visionary of the Year 2010”

Logo” has been earned, and since 2005, Altruist has been named a winning “High Flyer” and “Most Valuable Company” by business magazines. Altruist President Mr. Albert Lam was awarded “Visionary of the Year 2010” for recognizing his outstanding vision and continuous contribution in the industry by pioneering the transformation from an insurance agency to an independent financial organization. Other outstanding accomplishments include obtaining the first joint-venture insurance agency license in Shenzhen and Ningbo, China; it was granted the exclusivity of distributing investment-linked products from CIGNA and Standard Life, and co-branded the Dah Sing Altruist Credit Card. In addition, Altruist won a “Family-Friendly Employer Award” in 2011 with its caring employee policies, which helps prevent staff turnover.

HONG KONG BUSINESS | APRIL 2012 45

MOTORING REPORT

T

he new Mercedes Benz B-Class was unveiled at the enclosure of Happy Valley’s Hong Kong Jockey Club members this March. The car is scheduled to be one of the first to be produced at Mercedes’ brand new plant at Kecskemét in eastern Hungary with an investment of €800 million. The B-Class has been a huge success in Hong Kong and the world. The B-Class heralded a new market segment, attracting more than 700,000 customers worldwide. In Germany, where the largest BClass market resides, sales rose by 5.6 percent in the first half of 2011 prior to the launch of the new model at last year’s Frankfurt motor show. The second-largest market for this model is, not surprisingly, China, where sales rose a staggering 46.8% in the first eight months. Enhanced features The new B-Class features a newly developed four-cylinder gasoline engine with direct fuel injection and turbocharging, a new dual clutch transmission, and advanced assistance systems. At the model launch in Happy Valley, Chief Operating Officer of Mercedes-Benz Hong Kong Limited Reiner Hoeps pointed out that, “No model change in the history of Mercedes-Benz has ever seen so many new developments introduced in one fell swoop.” Although the exterior appearance has changed little, there are vast improvements under the skin. The new model is slightly lower in its overall height but offers more space inside. The latest B-Class sits a full five centimeters lower on the road than its predecessor; the seat height in relation to the road has been reduced to make it easy to get aboard. However, as a result of numerous customers’ requests, the seating position is a little more upright. Headroom has also been improved. All these modifications give the B-Class far more rear legroom than even an S or E-Class Mercedes-Benz. Overall, the latest B-Class is more agile and efficient but remains ultra-comfortable and particularly spacious for a model in its class. Performance and economy The new four-cylinder engine is a 1.6 liter turbocharged unit that delivers a healthy 156 bhp (115 kW), which offers a benchmark 0-100 km/h time of a respectable 8.6 seconds, while the top speed is a heady 220 km/h. Maximum torque is 250 Nm, produced at the low engine speed of just 1,250 rpm, with fuel consumption rated in Europe at just 5.9 liters per 100 km. Another first in this class is the advanced seven-speed, dual-clutch transmission. The gearbox is extremely compact, particularly variable with regard to adaptation of the engine speed, thanks to its seven gears. It also features an electric oil pump, for start/stop capability and shifts ratios without any interruption in tractive power, combining the benefit of an automatic with the efficiency of a manual transmission. Further convenience is offered with the active park assist and speed-sensitive power steering. Safety features Mercedes-Benz’ advanced brake assist system increases the pedal pressure in an emergency. There is also the latest electronic stability program and a tirepressure-loss warning device. Passive safety includes front airbags for driver and front seat passenger, as well as head and thorax bags, while full-length air curtains protect all occupants. Optional rear side bags can be specified if desired. In addition, there is the unique ‘drowsy’ awareness system which can alert a driver if his car begins to drift lanes; a useful add-on if traveling long distances, particularly at night. Another standard feature is the Collision Prevention Assist, which monitors the road ahead and gives visible and audible warnings if the car approaches another vehicle or object at an unusually high speed. It means, in reality, that rear-end shunts can be avoided or at least the consequences mitigated. 46 HONG KONG BUSINESS | APRIL 2012

On the highway Driving the new B-Class makes you feel that you are very close to the front of the car. It makes for excellent visibility. Power from the engine is immediate with no perceptible turbo lag, while the sevenspeed transmission can be left to its own devices or the driver can operate steering wheel-mounted shift buttons. Although the engine is reasonably powerful, this is no sportscar; it is though a comfortable, yet competent five-seater that is probably the best in its class.

The fast and secure Speed meets safety in the new Mercedes Benz B-class writes Jeff Heselwood

When the A-Class was launched in 1997, questions were raised about its passenger safety, owing to the limited frontal area. Mercedes Benz was quick to point out that in the event of a head-on accident, the engine and transmission were designed to go beneath the car and not into the passenger compartment. Much the same is true of the B-Class: the safety cell of the B-Class is infinitely safer than many other vehicles in this class and probably at par with several larger sedans. Slightly bigger in overall dimensions than the A-Class, the B-Class is without doubt a solid, versatile machine with few direct competitors.

HONG KONG BUSINESS | APRIL 2012 47

LIFE & STYLE

Upgrade your travel style Bring panache back into jetsetting with slick suitcases and holdalls that contain as much style as substance in their design. Rimowa

G3 Holiday Inn Golden Mile Hotel, 50 Nathan Road, Tsim Sha Tsui, Kowloon, Hong Kong - 23668085 This German company offer travellers a range of elegantly contoured luggage in hardy aluminium or hi-tech polycarbonate (a lightweight material originally developed for aviation), with much of the production still done by hand. Other innovations include their patented Multiwheel® systems, which glide with the unsurpassed smoothness of an Olympic figure skater. Their popular Salsa line, which comes in a range of sophisticated colours, is said to be almost unbreakable. It also has water-repellant zippers and TSA combination locks. Available in four sizes from a carry on at HKD 4,180 to a 30” case at HKD 4,880. Halo

GF, 17 Gough Street, Central, Hong Kong - 25593021 The Halo Group make some of the most distinct ranges of holdalls around. Styled in tastefully distressed cigarcoloured leather, these roomy bags lend an old-fashioned sense of intrepidness to the most mundane business trips. Throw your gear into an overnighter (HKD 1,990), a larger weekender (HKD 2,450), or the delightfully vintage-chic and comfortingly oversized ‘Gladstone’ (HKD 3,990), with a structured top and earnest-looking leather straps, reminiscent of a traditional doctor’s bag. Globe-Trotter

Lane Crawford, Podium 3, IFC mall, 8 Finance Street, Central, Hong Kong - 21187619 Globe-Trotter has trotted around the globe with some of the most famous English personalities of the 20th century. It had accompanied Scott of the Antarctic on his ill-fated adventure and honeymooned with the future Elizabeth II in 1947. Today, Globe-Trotter continues to be her majesty’s choice of case, along with many travellers who appreciate the careful construction of the cases; its leather handles and corners are formed over a five-day process. Upgrade to a Globe-Trotter’s Original, with a 30-inch case available at around HKD 11,500 and 33-inch at HKD 13,500 Samsonite Dooney & Bourke

Shop 2616, The Grand Canal Shoppes, The Venetian® Macao-Resort-Hotel 28828058 This New England brand is best known for making swanky, classic handbags since 1975. But additions to the range include some excellent duffle bags in clean unisex lines, just perfect for the aircraft cabin. Like all Dooney & Bourke bags, these pieces are thoughtfully designed and meticulously crafted, with convenient zip pockets inside and out, a compartment for your phone, and a luggage tag in the same fine leather as the main body. Opt for the basic Dillen II bag in black or ivy at HKD 4,640, or splash out on the Florentine Vacchetta, made of course from Italian leather and available in black or ivy at HKD 6,520 – both are 21.5”x8”x12”. 48 HONG KONG BUSINESS | APRIL 2012

Shop 2012, International Finance Centre, Central, Hong Kong - 22953622 Taking its name from the Bible’s muscle man, Samsonite prides itself on its unrivalled strength. On the edge of innovation, Samsonite’s famous hard shell suitcases are pressure formed out of temperature-resistant, highly impact-resistant plastic or polycarbonate for a strong, lightweight, and always handsome finish. Their spinner wheels rotate 360°, making for easy wheeling. Durability extends to their fabric ranges, such as the new Herios collection in heavy duty ballistic nylon with waterproof DuPontTM Teflon® coating. Prices range from HKD 1,300 – HKD 3,090.

Hong Kong Business Singapore Business Review Two business magazines for two countries from one publisher. Think global, read local. Display to 31 March 2012 S$5.90

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numbers

There’s no stopping the ka-ching! Consumer Confidence Index drops for 2011

HK consumers are hesitant about the future economic outlook What have you done to save on household expenses?

Source: Neilsen Global Online Survey 2011

Source: Neilsen Global Online Survey 2011

In Singapore, clothing and utilities have taken the biggest hit in the face of low consumer confidence levels

But the spending goes on no matter what

But the spending goes on no matter what Laptop/Notebook

What have you done to save on household expenses?

How do you spend on your spare cash?

How do you spend on your spare cash?

Mobile phone

Private car

Alcohol

% 100

80

60

40

20

0 '97

'98

'99

'00

'01

Q3 '02 Q2 '03 Q2 '04 Q2 '05 Q2 '06 Q2 '07 Q2 '08 Q2 '09 Q2 '10 Q2 '11

Sources: PAX 1997; 7 markets; PAX Q3 2010 to Q2 2011; 10 markets excluding Tokyo.

Source: Neilsen Global Online Survey 2011

Sources: PAX 1997; 7 markets; PAX Q3 2010 to Q2 2011; 10 markets excluding Tokyo.

Singapore Singapore#1 #1

Hong Kong Hong Kong #1 #1

40% have a privilege/ priority banking account (regional: 21%)

83% own a laptop/ notebook (regional: 56%)

33% took 1+ international business trips in P12M

65% own a HDTV

(regional: 15%)

(regional: 40%)

35% own a luxury watch of USD 1,000+ (regional: 16%)

55%

own a smartphone (regional: 33%)

Source: PAX Q3 2010 to Q2 2011; Hong Kong

Source: PAX Q3 2010 to Q2 2011; Singapore

Sources: PAX Q3 2010 to Q2 2011; Hong Kong

Sources: PAX Q3 2010 to Q2 2011; Singapore

For more information contact: Nielsen, Deanie Sultana (Deanie.Sultana@nielsen.com); Synovate, Fion Cheung (Fion.Cheung@synovate.com) 50 HONG KONG BUSINESS | APRIL 2012

HONG KONG BUSINESS | APRIL 2012 51

52 HONG KONG BUSINESS | APRIL 2012


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