Macau business daily, 2015 July 30

Closing editor: Luís Gonçalves

MOP 6.00

Yes, we can Macau International Airport Company Limited.

CAM has announced its intention to repay its three shareholders. Including the Macau SAR Gov’t. Repayment instalments begin this year. CAM will submit the updated schedule to authorities soon to quash market rumours

Year IV

Number 846 Thursday July 30, 2015

Publisher: Paulo A. Azevedo

Page 3

Pressing Priorities

It’s a tough portfolio. Secretary for Administration and Justice Sonia Chan Hoi Fan has her hands full. The gov’t is unlikely to introduce another round of political reform this term, she says. First, authorities must stabilise the results of the previous one (2012). Second, political stability is “very important”. One of her priorities is the fugitives transfer agreement with Hong Kong and Mainland China this year. Plus the “streamlining” of the whole administration structure Page

2

Cecil Chao boosts Macau investment

CE assures social benefits unaffected by austerity Page 6

Page 4

Rural villages won’t escape the net. President Xi’s anti-corruption campaign is now targeting the countryside where petty cadres hold sway. The new focus on rural graft suggests the lifting of pressure on the political elite in Beijing. With the President’s broader reform agenda taking centre stage

Page 10

HSI - Movers July 29

Back to basics

Name

The Roosevelt Hotel Macau is being built near Macau Jockey Club.

But gaming’s off the menu, says hotel representative Arron Iu. The 330-room, 5-star property is opting to focus on F & B with an attractive mix of Western and Chinese restaurants

Page 5

Gaming

www.macaubusinessdaily.com

Tour group visitors to drop by single digit this year Page 5 Gov’t: U.S. human trafficking report fictitious, lacks evidence Page 6

Cheuk Nang is selling up. That is, its Cheuk Nang Plaza HQ in Wan Chai (Hong Kong) to ITC Properties Group. For a price not exceeding HK$800 million. Proceeds will finance property projects in Malaysia and Macau, says chairman Cecil Chao Sze Tsung. Cheuk Nang has 3 million square feet of properties here and in Malaysia

Breath of fresh air

Allegedly corrupt Chinese official deported from Macau Page 4

Pharaonic Dreams Quite a ride. Bloomberg recounts the dizzying ascendancy of the city that became the world’s largest gaming mecca. And is now struggling to keep what it built. All against the backdrop of seismic political, economic, and social developments unfolding in China. Colourful tycoons. Pharaonic dreams. Gamblers with millions to splurge. As one gambling executive put it, it’s the biggest economic consumer experiment in the world

Pages 7-9

%Day

Kunlun Energy Co Ltd

+4.11

China Merchants Hold

+3.48

PetroChina Co Ltd

+2.76

China Shenhua Energy

+2.74

Galaxy Entertainment

+2.69

Wharf Holdings Ltd/Th

-0.50

Want Want China Hol

-0.74

Ping An Insurance Gro

-1.09

Tencent Holdings Ltd

-1.43

China Mengniu Dairy C

-1.91

Source: Bloomberg

I SSN 2226-8294

2015-7-30

2015-7-31

2015-8-1

26˚ 31˚

26˚ 31˚

27˚ 32˚

2 | Business Daily

July 30, 2015

Macau

Regional legal co-operation and streamlining government bodies priorities Secretary for Administration and Justice Sonia Chan Hoi Fan said the government is not likely to introduce another round of political reform in the current term of office Stephanie Lai

sw.lai@macaubusinessdaily.com Photos: Cheong Kam Ka

O

f all the missions that have to be fulfilled since taking office in December, Secretary for Administration and Justice Sonia Chan Hoi Fan has to first seal the fugitives transfer agreement with Hong Kong and Mainland China this year and start “streamlining” the whole administration structure per the Chief Executive’s pledge – although political reform is not a task that is likely to be taken up in her new five-year term.

Ms. Sonia Chan, a veteran civil servant who formerly served as the chief of the Personal Data Protection Office prior to the post of Secretary, is currently engaged in talks with her Hong Kong and Mainland China counterparts on the regional legal assistance in criminal matters with the aim of legislating the outcome of the agreement within this year, she said in an exclusive interview with De Ficcao - Multimedia Projects group of publications, Business Daily, Macau Business and Business Intelligence.

“Regarding legal assistance in criminal matters, what we are discussing with Hong Kong is the handing over of fugitives, as well as [the giving] of evidence and exhibits,” Ms. Chan told us. “But with Mainland China, the issue we’re discussing is only the transfer of fugitives.”

Macau signed an agreement with Hong Kong in 2005 regarding the transfer of sentenced persons, which entails that the Hong Kong persons in jail here or Macau persons imprisoned in Hong Kong can be returned to their home city to serve their sentence.

But it is only since 2013 that both jurisdictions have embarked upon discussions concerning the transfer of fugitives, the Secretary noted.

Extradition

Ms. Chan declined to comment, however, on whether the extradition agreement to be signed with Hong Kong can apply to cases predating the agreement, stressing that both Macau and Hong Kong are still mulling the content of the agreement which cannot be disclosed in detail at the moment.

“The mutual legal assistance [with Hong Kong and the Mainland] is a must. When such an agreement is not in place in our laws, it's a huge hindrance for both the police and the courts when handling cases,” the Secretary stressed.

“I believe that this [the extradition agreement with Hong Kong] is not talked about because of a particular case,” she added, referring to the corruption case involving disgraced former Public Works Secretary Ao Man Long and Hong Kong tycoons Joseph Lau Luen Hung and Steven Lo Kit Sing.

Lau and Lo were each sentenced to five years and three months in March last year over the payment of HK$20 million to Ao to secure land for the luxury property project La Scala. Since Hong Kong and Macau have yet to establish an extradition agreement between them, the pair will not be imprisoned unless they voluntarily visit Macau.

At the moment we have to stabilise the result [of the political reform approved in 2012] first. The stability of the political system for the whole territory is very important Sonia Chan

“Whether this [the La Scala] case emerges or not, the legal assistance [regarding fugitive transfer] is essential. And we hope that we can soon settle the agreement with Hong Kong and with Mainland China,” the Secretary remarked.

Another political reform unlikely

It is unlikely that the current administration will undertake another political reform during this five-year term, as its goal is largely to diversify the city's economy and maintain its

current political structure for “stable development”, Ms. Chan said.

“At the moment, we have to stabilise the result [of the political reform approved in 2012] first. The stability of the political system for the whole territory is very important,” she said.

“Now the economy here has to follow the diversification path, which is a subject that the government is paying more attention to, as well as the aspect of social policies.”

The political reform conducted in the previous administration basically enlarged the number of seats of the committee electing the city's Chief Executive from the original 300 to 400.

The reform also provided more seats for the directly elected legislators and indirectly elected legislators – although the outcome remains that the proportion of the directly-elected legislators does not exceeding half of the Assembly.

While not introducing any big changes to political structure, the current government is, however, looking at amending the city's electoral law within this year to further curb votebuying activities and introduce more competition to the indirect election system for the Legislative Assembly, the Secretary said.

“We are working with the Commission Against Corruption [on electoral law amendment]. We would like to change the electoral system and make it fairer,” the Secretary said. “But we have yet to enter into a detailed discussion [regarding] the articles of the law. And we are still analysing

the opinions we have received about the law.”

Restructuring the structure

The government is also busy with the restructuring of the civil service departments and bureaus in order to “streamline” the whole administration, a goal that Chief Executive Fernando Chui Sai On has mentioned on several occasions as he would like it to be lean and efficient in his current term of office.

Ms. Chan said that the government would make a detailed announcement of the first batch of departments that are to be restructured or amalgamated by mid-August.

But according to previous reports, within this year the Civic and Municipal Affairs Bureau will be stripped of its functions in the fields of culture, leisure and sport – with these functions being taken up by the Cultural Affairs Bureua and the Sports Development Board. The Legal Affairs Bureau and Law Reform and International Law Bureau will also be amalgamated this year.

“The biggest [budget for employment] goes to the police force, which needs to be sufficiently equipped, as well as to the new hospital to be built because more doctors and nurses will be needed,” Ms. Chan told us. “But for the rest of the administration, the [employment] budget will not increase much. This budget has already been very strictly controlled, and this will continue to be the case for next year.”

Business Daily | 3

July 30, 2015

Macau CAM to repay SAR Government Macau International Airport Company Limited (CAM) is to repay its three shareholders, including the Macau SAR Government, by instalments and phases from 2015. The decision, among other items on the agenda, was unanimously approved by all members attending the extraordinary general assembly meeting of CAM held yesterday morning. The company said in consideration of the unpredictable changes of the peripheral economic environment in the future which may affect the company’s revenue, and in order to guarantee the safe and smooth operation of Macau International Airport, it will submit to the MSAR Government the updated repayment schedule adjustment when necessary

CE assures social benefits unaffected by austerity

C

hief Executive Fernando Chui Sai On has stressed that the government’s finances are very sound and that social welfare and various benefits would not be affected even though the government is ready to implement austerity measures.

Last week, Secretary for Economy and Finance Lionel Leong Vai Tac claimed that

the government may need to implement austerity measures from August as the city’s gaming revenues in July may not meet the target of MOP18.35 billion (US$ 2.29 billion).

The CE told reporters on Tuesday evening that July gaming revenues are estimated to amount to some MOP18 billion, stressing

the city’s fiscal reserves are sufficient to cope with any fluctuations in the economy.

Asked by reporters whether the government would halt the cash handout scheme from next year, Mr. Chui claimed that the scheme had been supported by residents and the government would like to continue sharing the economic fruits with society.

The Chief Executive also stressed that the current adjustment in the economy is normal after the economy had rapidly surged in the past decade, adding the government will continue working on economic diversification and regional co-operation, as well as the development of gaming and non-gaming elements.

K.L.

Tour group visitors to drop by single digit this year

T

he number of visitors travelling to Macau on tour groups in 2015 may drop by a single digit vis-a-vis a year ago, Cheong Chi Man, Vice President of the Macau Travel Agency Association, told Chinese language newspaper Macau Daily.

Mr. Cheong said that for the major source of tourists to Macau, which is the Mainland market, the gambling factor is no longer exclusive in the SAR, as many casinos have been operating in Asia and the regional competition in the gaming industry has become fiercer.

The travel agencies association head appealed to

the government to put more resources into improving the operating environment, as well as arranging for industries to go outside of Macau to promote the city and communicate and co-operate more with their counterparts in other regions in order to attract more tourists.

While at the beginning of this year, the tourism capacity of the city had aroused heated discussion, representatives of the tourism industry are not very optimistic with regard to the number of visitors to Macau on an annual basis.

As the official data shows, in the first half of this year visitor arrivals dropped 3.5 per cent to 14.75 million compared to the same period of last year.

4 | Business Daily

July 30, 2015

Macau Ng Kam Wa & Chan Man Tak appointed new PSP deputy heads Secretary for Security Wong Sio Chak has appointed Ng Kam Wa and Chan Man Tak as the new deputy directors of the Public Police Security Force (PSP), the Official Gazette announced yesterday. The two, in fact, had already been the acting deputy heads of PSP before the appointments. According to the announcement, the term of the two new police leaders will last for one year. Mr. Chan was previously the chief commander of the Police Tactical Intervention Unit, while Mr. Chan was the director of the Macau Police Department.

Cecil Chao sells HK headquarters to finance projects in Macau

C

heuk Nang (Holdings) has agreed to sell its Cheuk Nang Plaza HQ in Wan Chai to ITC Properties Group for a price not exceeding HK$800 million (US$103.22 million) according to a filing by ITC Properties with Hong Kong Stock Exchange after trading hours on Monday.

“The proceeds from the sale will be used to finance our property projects in Malaysia and Macau,” chairman Cecil Chao Sze Tsung told South China Morning Post. Mr. Chao told the newspaper that Cheuk Nang had three million square feet of properties in Macau and Malaysia, adding that most of the company’s projects in Hong Kong and

Mainland China had been completed.

The 55,621 square foot 31-floor commercial building with 23 car parking spaces on Hennessy Road in the neighbouring SAR generates

a monthly rental income of HK$1.5 million, according to the Monday filing.

The price tag translates into HK$14,383 per square foot, some 9 per cent lower than the previous asking

Allegedly corrupt Chinese official deported from Macau Local police said the case involved expelling an individual staying in Macau illegally, rather than turning him over to the Mainland authorities Joanne Kuai

joannekuai@macaubusinessdaily.com

L

ast week, an allegedly corrupt Chinese official was arrested in Macau according to an announcement made by the Chinese anti-graft watchdog. However, Macau Judiciary Police deny they have transferred the suspect to Mainland police, saying they have merely deported him because he was illegally staying in the SAR. The Chinese economic fugitive, Wu Quansen, was among Interpol’s 100

most-wanted fugitives, and suspected of corruption. He was arrested in Macau last Thursday and escorted back to Mainland China, according to an announcement by the Guangdong Provincial Commission for Discipline and Supervision.

According to a statement released by the Macau Judiciary Police yesterday, Wu applied for residency in Macau through the Macau Trade and Investment Promotion Institute

price. The building was priced at around HK$880 million last year.

Cheuk Nang expects to realise a gain of about HK359 million from the sale.

ITC Properties is a Hong

(IPIM) investment scheme in 2011.

His residency permit was granted with an expiry date of 2017.

Macau police said that by late May this year, the Interpol branch of the bureau had received notification by the Mainland police that Wu was suspected of criminality and was wanted.

Police informed IPIM and according to the police statement due to Wu’s involvement in criminal charges and being wanted by Mainland Police IPIM cancelled the residency permit it had granted to Wu in accordance with law, as well as with the permission of the Secretary for Economy and Finance.

Judiciary Police added in its statement that since Wu had no legal right to stay in Macau the Public Security Police deported him.

The police stressed that the case was one of deporting an illegally staying individual, rather than turning over the relevant individual to Mainland police.

The suspect, Wu Quanshen, aged 59, was former party secretary of Dadun Village in Guangzhou, capital of neighboring Guangdong Province.

According to Guangdong authorities, he is suspected of making use of his position to accept massive bribes for village projects.

Guangdong police said Wu fled to Guinea-Bissau in West Africa when the corruption case was brought to light in March 2012. The Guangdong watchdog received information that Wu was hiding in Macau in May and the office established a task force and came to Macau and made the arrest with the assistance of the police in Macau.

Wu is the first one to be caught but the lowest-level official among Interpol’s 100 most-wanted Chinese fugitives suspected of corruption. The mostwanted list of economic fugitives was issued by Interpol's National Central Bureau of China in April, 2015. Many suspects on the list are believed to have fled to America, Canada, or Australia to escape punishment.

Kong-based corporation with its shares listed on the Hong Kong Stock Exchange.

It is principally engaged in property development and investment in Macau, Mainland China and Hong Kong, according to the company profile on its official website. It also engages in development and investments of hotel and leisure operations, securities investment and the provision of loan financing services.

‘The Company considers that the acquisition provides a good opportunity for the Group to enlarge its property portfolio, broaden its earnings base and generate stable and recurring rental income to the Enlarged Group,’ the Monday filing reads.

HSBC Life’s gross premiums shrink almost one-third in 2014

T

he value received by HSBC Life in gross premiums during 2014 diminished almost by one third in comparison to 2013, as the amount declined to MOP113.8 million from MOP116.8, down 31.5 per cent year-on-year.

The trend concerning gross premiums for the British company involved in financial services contrasts sharply with the overall life insurance market trend for 2014. Last year, the gross premiums market in the territory increased 39.7 per cent to MOP6.93 billion from MOP4.96 billion.

Consequently, the performance of the HSBC Life during 2014 was reflected in its market share. While in 2013 the life insurance branch of the company occupied 2.4 per cent of the overall market, in 2014 the share went down 0.8 percentage points to 1.6 per cent.

In spite of losing one third of its gross premiums last year, the company still managed to improve its financial results. In 2014, HSBC Life losses amounted to MOP11.8 million, a reduction of the losses totalling MOP15.2 million, as in 2013 the company generated MOP27 million in losses.

HSBC has been providing insurance in the territory since 1996 and at the moment provides life, under the HSBC Life company, and non-life insurance services with HSBC Insurance Asia.

This notwithstanding, and according to AMCM, the latter is going through a running-off process.

Business Daily | 5

July 30, 2015

Macau

MGTO Director: Number of visitors increasing in July The Director of Macau Government Tourist Office offers full support to the government if it is considered that a cut in the budget of the Office is needed as part of the austerity measures João Santos Filipe

jsfilipe@macaubusinessdaily.com

T

he number of visitors to Macau is increasing in relation to the previous month, according to the Director of Macau Government Tourist Office (MGTO) Maria Helena de Senna Fernandes. While there is no official data concerning July – as the month has not yet ended – feedback received by MGTO from the sector indicates that more visitors are coming to the territory.

“We don’t have the data about the number of visitors for July yet.

However, if we compare July with June, then we believe July will have a larger number of visitors.

At least this is the indication of our observations and from the feedback of the tourism sector”, Maria Helena de Senna Fernandes said yesterday after being asked about the effects of the loosening of transit visas for Mainland citizens. She stressed, however, that it is still too early to make a connection between the changes to the transit visa policy and this increase.

Yesterday, the Director of MGTO attended the Roosevelt Hotel Macau Conceptual Exterior Design Competition Awards Ceremony at the Macau Design Centre. The competition challenged local artists involved in design to display their talent. On the sidelines of the event, Ms. Fernandes commented on a hypothetical cut to the budget of MGTO as part of the austerity measures announced by the Secretary of Economy and Finance should gaming revenues for July dip below MOP18 billion.

“If this is considered necessary we will follow the strategy defined by the government. We are part of government and we will follow its policies”, she said.

Support for travel agencies

During the third quarter of this year the Legislative Assembly will discuss a revision of the current Vehicle Tax Law, with tourist vehicles possibly being de-listed from tax exemption.

Travel agencies have already raised awareness regarding the impact this measure may have on their financial health.

“It’s very hard to predict the impact of this measure on the tourism sector.

This process is not being handled by the Tourism Office but by another government body. This policy is related to the control of vehicles circulating”, she stated. “I know travel agencies are worried about the impact but we will continue to work closely with them. On the one hand, they may have increased costs with this measure but on the other hand we may find a solution for cutting their costs in terms of promotion outside of Macau”.

After the outbreak of Middle East Respiratory Syndrome (MERS) was declared effectively ended by South Korean authorities, as no new cases have appeared since July 3, Hong Kong announced it would end its

travel warning for the country as early as Friday. According to Ms. Fernandes Macau may take similar action, once the Heath Bureau declares it is safe to travel to South Korea.

“We’re aware of the situation and are always in contact with the Health Bureau. They have a system to monitor these situations, which follows the standards of the World Health Organization. If no new cases are identified in two to three days we may tell our residents that they can travel to Korea again”, she explained.

In relation to the episode in casino Kam Pek, in which a man chopped another over a debt payment, and how it could affect the image of the territory in the eyes of the tourists, the MGTO Director said it was an isolated event and that the police force through their best efforts have transformed the territory into a very safe place.

Roosevelt Hotel Macau scraps gaming venue The Roosevelt Hotel Macau, which is being built near the Macau Jockey Club, in Taipa, will not have gaming areas. The information was revealed by Arron Iu, a representative of the hotel.

“We’re planning to invest mainly in Food and Beverage with a good mix of Western and Chinese restaurants. We believe this is the best strategy. So we’re not considering gambling”, he said.

Although the project was initially planned to open in 2015, the target date is now the first to second quarters of next year.

“We had some problems with documents, which caused delays. However, all is solved and we expect the hotel to open in the late first quarter of next year or during the second quarter”, Mr. Iu explained.

The Roosevelt Hotel Macau will be a 5-star hotel offering around 330 hotel rooms.

6 | Business Daily

July 30, 2015

Macau Brands

Trends

Modern Bohemian Raquel Dias newsdesk@macaubusinessdaily.com

Government: U.S. human trafficking report fictitious, lacks evidence The government said the allegations lack factual evidence to support them, while some of the inferences are fictitious Kam Leong

kamleong@macaubusinessdaily.com

S

hanghai Tang is a brand reference for Asia. It has managed to combine Chinoiserie with the cool trends of fashion delivering a unique style of its own, which is a rarity in the fashion industry.

For the coming cold season, Shanghai Tang is staying true to itself with simple and minimalist lines, both for the ladies collection as well as for the gent’s. Oriental lattice patterns are embedded into geometric quilting and padded jackets, along with leather patches and dashes of colour that express Shanghai Tang’s Menswear modernity and on-the-go attitude.

Relaxed fit outerwear in nylon embodies an athletic and modern attitude.

Signature intarsia sweaters with striking ombré shirts complete the look with a graphic and artistic edge.

For ladies, the idea is to bring that old glamour back to 2015, whilst being up to date. The brand manages that by doing textured knits in vibrant red and minimalist whites that inject a breath of modernity into feminine staples. The airy pleated skirts demand a graphical boldness with the use of stripes in contrast to flattering peplum flares in digital prints and shirting cottons for a daring twist on a classic silhouette.

Nothing could be as good as wearing local and, well, in terms of high fashion, Shanghai Tang is as local as it gets.

T

he Office of the Secretary for Security said yesterday that it does not agree with the U.S. State Department’s latest human trafficking report, which accuses the city of slackening its efforts in protecting human trafficking victims.

In addition, the local government slammed the report as lacking factual support, and for being partly fictitious.

The U.S. State Department’s Office for Monitoring and Combating the Trafficking in Persons said in the Trafficking in Persons Report for 2015 that ‘Macau authorities do not fully comply with the minimum standards for the elimination of trafficking’.

In addition, the American authority also places the city in the second tier which includes governments who do not comply with the U.S. Trafficking Victims Protection Act but are making efforts to do so.

‘The conjectures and the inferences that the report made on the SAR Government do not comport with the actual situation in Macau,’ the Secretary’s Office responded in a statement yesterday. ‘[These allegations] lack factual evidence to support them, while some of the inferences are even fictitious. Hence, the Security Office firmly disagrees with the report.’

The Security Office claimed that the government has greatly emphasised the issue of human trafficking, saying it has been preventing and combating related illegal activities by following international strategy and criminalising such activities.

In addition, the Office perceives that its work in preventing and combating human trafficking, as well as protecting victims, had reached ‘significant effects’, claiming the

number of human trafficking-related activities are decreasing in the city.

In the U.S. report, the local authorities said that it had demonstrated decreased efforts in protecting trafficking victims, by identifying only five victims of forced prostitution, which is a sharp decline from 38 in 2014, of whom 24 were child victims.

Moreover, the city is identified as ‘primarily a destination’ and less a source territory for women and children subjected to sex trafficking and forced labour.

‘The Security Office reaffirms that it would not tolerate any crimes related to human trafficking. In addition to applying a series of targeted measures, it will maintain close contact with the law enforcement bodies of nearby countries and regions to prevent and combat any crimes related to human trafficking,’ the Office stressed.

Chinese man hacked in Kam Pek Casino

Applications for Taiwan investment visa start tomorrow

A

T

36-year-old Chinese man was hacked and injured in Kam Pek Paradise Casino by a 49-year-old Chinese man at around 7:00pm on Tuesday over money matters.

According to Public Security Police (PSP), the suspect, who was caught by police outside the casino following the assault, was trying to collect on debts from the injured but failed. He thus went to buy a chopper in a supermarket nearby and went back to the casino and hacked the 36 year-old man.

The injured was found with three hack wounds to his neck and right hand. He was sent to Hospital Conde S. Januário for treatment but was not in a critical condition.

PSP said two policemen standing guard outside the casino found the suspect running from the property with a chopper in his hand on Tuesday. One of the policemen drew his gun to stop the man, who was later subdued by the officers.

K.L.

he applications for the special resident visa for so-called Foreign National Entrepreneurs who are willing to invest and start a business in Taiwan will start tomorrow, the local Ministry of Foreign Affairs (MOFA) announced on Monday.

This policy, which is open to Macau and Hong Kong residents, is part of the strategy of the local government to attract investment to the region. However Mainland residents will not be allowed to participate in the programme.

In the first two years, the

new Taiwanese programme will be run on a ‘trial’ mode, which means that for this period there will be an annual quota of 2,000 for the number of Resident Visas for Entrepreneurs.

Macau applicants from outside Taiwan should submit their applications to the Bureau of Macau Affairs under the Mainland Affairs Council. However, if they are already living in Taiwan, they should submit their application to the National Immigration Agency under the Ministry of the Interior.

Business Daily | 7

July 30, 2015

Macau

Slumping Macau calls in superheroes as graft fight hits casinos The city is bigger than any other gaming centre because Beijing allows it a casino‑gambling monopoly in the world’s second-largest economy.

But now, Macau is in big trouble as it’s on the front line of seismic political, economic, and social developments taking place across the border

B

arely 10 years ago, Francis Lui (pictured) and his family were building a relatively modest fortune largely from quarrying rock in Hong Kong and processing slag from blast furnaces on Mainland China. Today, in the Chinese enclave of Macau, they preside over two palatial casinos that alone generate vastly more gaming revenue than the entire Las Vegas Strip. They're also acquiring a stake in the Monaco royal family-controlled company that operates the Casino de Monte- Carlo.

And yet standing beneath the 24-karat gilded cupolas atop the white-and-gold towers of his flagship 3,800-room Galaxy Macau resort, Lui insists his journey from grit to glitz hasn’t changed his low-key lifestyle.

“Personally, I’m not a gambling man,” he says.

In one sense, that may be true.

Lui, 59, prefers walking the family dog to playing high-stakes baccarat or poker. He even hesitates before picking up a deck of cards for a photo shoot. But in reality, the soft-spoken, U.S.-educated billionaire is in the process of placing a far bigger bet than any of the high rollers who wager as much as US$250,000 a hand in the Galaxy’s most exclusive VIP rooms.

Having just spent US$3.1 billion doubling the size of the Galaxy, he’s now pressing ahead with another US$7.4 billion-worth of investments.

And that’s just a part of the US$27 billion that global casino companies such as Las Vegas Sands, Wynn Resorts, and MGM Resorts International plan to spend over the next few years in the world’s largest but most-troubled gaming market.

Macau, an autonomous, 30 square kilometre (12 square mile) former Portuguese colony of just 640,000 people, is bigger than any other gaming centre because the

government in Beijing allows it a casino-gambling monopoly in the world’s second-largest economy. It’s now in big trouble because it’s on the front line of seismic political, economic, and social developments taking place across the border.

Massive crackdown

A massive corruption crackdown

by Chinese President Xi Jinping has scared off Macau’s best customers - big spenders who fear they’ll be accused of using the territory’s 35 casinos and numerous luxury shopping malls to spend or launder ill-gotten gains. Last year, these so-called VIPs accounted for 70 per cent of all Macau casino takings. Now, the junket operators who used to bring them to Macau are luring at least some of their clients to other Asia Pacific gaming destinations, including the Philippines, South Korea, Singapore, Australia, and Cambodia.

Macau’s casino owners are also battling a range of increasingly stringent government regulations, ranging from a restriction on the number of gaming tables they can add at new properties to a smoking ban that will force customers as addicted to nicotine as they are to baccarat to spend less time gambling.

It all adds up to a massive slump just as Lui and his rivals are embarking upon a major expansion. Macau’s gaming revenue plummeted 37 per cent to US $15.2 billion in the first half of the year. During the 18 months ended June, the decline wiped more than US$100 billion from the value of six of the world’s biggest casino companies. From its January 2014 peak, the Bloomberg Intelligence Macau gaming index had plunged 57 per cent as of July 28. In a March 18 report on Macau’s implosion, Hong Kong–based investment bank CLSA described it as a ‘death spiral’.

Before the collapse, Lui’s father, Galaxy Entertainment Group Chairman Lui Che-woo, 85, was Asia’s second richest individual, with a fortune of US$22.5 billion, largely as a result of the family’s 45 per cent stake in the company. By July 27, the elder Lui was almost US$12 billion poorer, according to the Bloomberg Billionaires Index.

Undeterred, Francis Lui, who as Galaxy deputy chairman runs the world’s second biggest listed casino empire on behalf of his father, says he can restore investor confidence.

He’s wagering that the consumer revolution in China will ultimately trump the impact of the corruption crackdown. Since 1978, 500 million Chinese citizens have emerged from poverty, according to the World Bank.

Hengqin salvation

A l th o u g h th e g o v e r n m e n t i s determined to staunch the flood of

We’re living here in Macau in one of the biggest economic consumer experiments in the world Grant Bowie, CEO of MGM China Holdings

illicit money leaving the country, it also wants to boost growth and is encouraging legitimate spending by a newly enriched middle class in tourist destinations such as Macau.

“We’re living here in Macau in one of the biggest economic consumer experiments in the world,” says Grant Bowie, CEO of MGM China Holdings, which next year will open its second Macau casino.

Macau’s fate may be tied to developments on Hengqin, an island triple its size located across a narrow strait. Galaxy is the first of Macau’s six casino licensees to acquire land on Hengqin, which is part of Guangdong Province and which Beijing wants to develop into a non-gaming leisure destination full of golf courses, Disney-esque theme parks, and other family-focused attractions. In planning a US $1.6 billion, 2.7 square kilometre resort, Lui is betting that Macau - linked to Hengqin by a six-lane bridge - can transform itself from a destination whose resorts are more than 90 per cent dependent upon gambling revenues to a global entertainment hub combining the allure of two of America’s most popular destinations.

“It will be like having Las Vegas and Orlando, Florida, right next to each other instead of 2,000 miles apart,” Lui says.

While even a struggling Macau may well generate at least five times the gaming revenues of Las Vegas this year, it won’t be easy for the territory to surpass the desert metropolis as an entertainment centre. Macau is far less diversified than Vegas, which last year earned most of its resort revenue, 64 per cent, from shows, hotel rooms, restaurants, and other non-gaming sources. (continued on next page)

8 | Business Daily

July 30, 2015

Macau

A Gentleman’s Club with Pharaonic

(continued from previous page)

A

clutch of the world’s most colourful tycoons are betting big on Macau. They include American billionaires Steve Wynn and Sheldon Adelson. Wynn Resorts and Adelson’s Las Vegas Sands earn more than twice as much casino revenue from Macau as they do from their home market. Then there are the heirs to the estate of the late Kirk Kerkorian; in June, they inherited a 16 per cent stake in MGM Resorts International, which derives about one-third of its revenue from the territory. Australian billionaire James Packer’s Melbourne-based Crown Resorts gets almost half its income from Macau.

The city also remains the main business base of three members of the billionaire Ho dynasty, whose patriarch, Stanley Ho, ran gaming in the territory for 40 years before losing his monopoly in 2001. Stanley Ho, now 93 and the father of 17 children, is chairman of SJM Holdings, which owns 20 Macau casinos, including the flagship Grand Lisboa. Daughter Pansy Ho, 53, is a partner with MGM and co-chairman of its China unit. Son Lawrence Ho, 38, is cochairman and CEO of and a partner with Packer in Nasdaq-listed Melco Crown Entertainment, which operates a casino and hotel complex named City of Dreams.

These multinational magnates are investing heavily to provide nongaming entertainment, extra hotel rooms, and more shopping for the new mass market clients they hope to attract. In Lui’s case, that meant doubling the size of a casino that’s been open for only four years. Designed like a high-rise Southeast Asian potentate’s palace, the Galaxy now sprawls over a square kilometre or so of what’s becoming Macau’s main gaming precinct, Cotai. Lui has increased the number of hotels inside the Galaxy complex from three to six, including the world’s first all-suite Ritz-Carlton.

Now, he plans to double down again by developing an adjoining chunk of prime land in Macau before starting work across the water on Hengqin.

Lawrence Ho and Packer’s Melco Crown plan to open their US$3.2 billion Studio City resort later this year, accompanied by a Martin Scorsese-directed promotional film starring Brad Pitt, Leonardo DiCaprio, and Robert De Niro. The still-incomplete Hollywood-themed, Gotham City-like art deco building features what the company says is the world’s first Batman flight simulator.

Out back is what Ho and Packer say is Asia’s tallest Ferris wheel, in the shape of a figure eight.

In March, Steve Wynn is due to open a second Macau casino, the US$4 billion Wynn Palace. Later in 2016, MGM China, which has had the MGM in downtown Macau since 2007, plans to open a US$3 billion, 1,500-room casino built in rectangular blocks to resemble a stack of Chinese jewelry boxes. Also next year, Adelson, whose flagship, eightyear-old The Venetian features an indoor Grand Canal plied by singing gondoliers, will open the US$2.7 billion Parisian with the requisite Eiffel Tower replica out front. Stanley Ho’s SJM has also turned to France for inspiration. Scheduled to open in late 2017, its US$4 billion, 2,000-room Lisboa Palace is partly modelled on Versailles.

Pharaonic dreams

It all sounds like a pharaonic exercise in overbuilding. And yet tiny Macau, with only 27,000 hotel rooms, compared to Las Vegas’ 150,000, attracted 31.5 million visitors last year, two-thirds of them from the Mainland and many of them daytrippers. The new construction aims to add 19,000 more rooms by 2018.

Macau needs to expand capacity if it is to attract enough mass market gamblers to offset the dwindling number of high rollers. Even some of the most experienced and successful casino tycoons are “sailing in uncharted territory,” as Adelson, 82, acknowledged on a conference call in April. Adelson’s Las Vegas Sands is the world’s biggest gaming company, and his behemoth Venetian casinos in Las Vegas and Macau have

The rules in Macau are that Beijing makes the rules. But trying to understand Beijing is like trying to read tealeaves through frosted glass Stephen Monticelli, founder and president of Mosaic Investments

made him the world’s 29th richest individual. Wynn picked up on Adelson’s theme a few days later in his own teleconference. “Uncertainty,” he said, “is the plaguing word of the day in Macau.” Then Packer chimed in. Speaking about the corruption crackdown, he said in May, “When and how that ends, no-one knows.”

Amid this uncertainty, some investors glimpse opportunity.

Mark Mobius, executive chairman of Templeton Emerging Markets Group, says the graft purge has benefited Macau. “Once they scrap the image of being a centre for money laundering and other illicit activities, Macau will be transformed into an entertainment centre like Las Vegas,” says Mobius, who oversees US$45 billion and declines to say whether he has been buying Macau-related shares. “The casinos have to move in that direction. They don’t have a choice.”

Galaxy bet

U.S. investor David Winters says his money is on Lui. “Our sense is that Galaxy will be the big winner when the clouds clear and the rain stops and the fear subsides,” says Winters, who manages US$1.5 billion, including Galaxy shares, at Wintergreen Advisers. “They have built a beautiful facility, have a lot of

land bank, don’t have any debt, and are ahead of the curve in providing what the government wants.”

In June, Galaxy’s share of the Macau gaming market jumped 3.8 percentage points from a month earlier to 22.2 per cent, narrowing the gap with market leader Sands China, which fell 3.8 percentage points to 22.7 per cent. SJM had a market share of 22 per cent; Melco Crown, 14.1 per cent; MGM, 10.2 per cent; and Wynn, 8.8 per cent.

Francis Lui isn’t bragging yet. He says the big test of his new property will come in October, when China has a weeklong National Day holiday and tourist arrivals traditionally reach their height.

Having made one winning bet on Galaxy, Stephen Monticelli, founder and president of Mosaic Investments, a former hedge fund that now manages Monticelli’s own money, is betting the stock’s price has fallen enough for him to have another wager. “I first bought the stock when it was trading at HK$2 and sold at between 8 and 14 dollars,” Monticelli says.

Since then, Monticelli has watched Galaxy shares soar to HK$83.20 in January 2014 and then plunge. When they hit HK$38, Monticelli bought back in again. “The Luis are either brilliant or fortunate,” he says. “The rules in Macau are that Beijing makes the rules, and Galaxy fits exactly in with what Beijing wants Macau to become.”

Not that Monticelli is ever entirely sure what Beijing’s rules are, saying “Trying to understand Beijing is like trying to read tealeaves through frosted glass.”

Xi factor

That’s the biggest conundrum facing the casino companies: the Chinese government’s attitude to Macau and the foreign companies that operate there. Grant Govertsen, a Macaubased analyst at Union Gaming Group, a Las Vegas investment bank, doesn’t believe the anti-corruption crackdown was aimed specifically at Macau. “Macau was just collateral damage - but pretty significant collateral damage,” he says.

Business Daily | 9

July 30, 2015

Macau

c dreams Macau’s former business model didn’t impress Xi. In December, China’s leader paid an official, twoday visit to Macau to celebrate the 15th anniversary of the territory’s return to Chinese rule. On part of his trip, Xi stopped in at a People’s Liberation Army firing range for some target practice. But more importantly, he also took aim at Macau’s slavish dependence upon Chinese gamblers, saying the city should diversify to position itself as a global tourism and leisure hub. “Certain deep-seated problems formed over the years have surfaced,” Xi said, without mentioning the gaming industry directly.

He didn’t need to. The Macau Government promptly announced what it described as a “midterm review” of the six companies’ gaming licences, the 20-year concessions of which expire from 2020 to 2022.

While many analysts believe all the gaming licences will be renewed, Hong Kong–based political and corporate risk consultant Steve Vickers isn’t so sure. “It cannot be assumed as a given that all of the existing six concessionaires -especially the foreign ones - will retain their concessions, at least as currently structured,” says Vickers, who’s CEO of Steve Vickers & Associates. One possible outcome, he says, is that the government will award another concession to a Chinese company - making the competition even more cutthroat.

Barely a year ago, the casino companies’ big bets on Macau would not have seemed very risky. Once a crumbling, crime-ridden colonial outpost where the only attempts at refinement were ‘no spitting’ signs in the casinos, Macau transformed itself following its return to China in 1999. In 2001, Stanley Ho’s monopoly ended, and the five other casino companies entered the fray.

casino leader, with US $7.1 billion in revenue. By 2013, that figure had increased to US$45 billion—seven times that of the Strip. Last year, Lui’s two most important casinos, Galaxy and the smaller StarWorld, alone took in US$9 billion, compared with combined revenue of just US$6.4 billion for the 41 casinos on the Vegas strip. For at least part of its winning run, Macau was also the world’s bestperforming economy, surging 26.2 per cent in 2010.

Then, late last year, Macau’s fortunes reversed direction in an equally spectacular manner.

In addition to the corruption crackdown, the sharply slowing Chinese economy - down to 7 per cent growth in the second quarter of

Newcomers

All the newcomers had experience running casinos except the Luis, who had made their money through quarrying, construction, and slag before branching into hotels. Despite their lack of experience, Lui Che-woo had good connections in China. He had served on the Chinese People’s Political Consultative Conference, a government advisory body, and had even had an asteroid named after him

by Chinese scientists.

As new casinos opened, Macau embarked upon a decade of explosive growth. In 2006, it overtook the Las Vegas Strip to become the world

Macau was just collateral damage but pretty significant collateral damage Grant Govertsen, analyst at Union Gaming Group

2015 from an average 9.8 per cent since 1978 - deterred some visitors.

And a Chinese stock market bubble provided unwelcome competition for punters who discovered they could get as many thrills from betting on roller-coastering Shanghai and Shenzhen-listed equities as they could from travelling to Macau to play baccarat, blackjack, roulette, and the Chinese dice game sic bo.

Gross domestic product in Macau shrank by 25 per cent in the first three months of this year, making the world’s biggest gaming hub the world’s worst-performing economy.

Amid this slump, the Luis aren’t just expanding in and around Macau.

On July 25, they announced that Galaxy is acquiring 5 per cent of Société des Bains de Mer et du Cercle des Étrangers à Monaco, or SBM, the 152-year-old company that owns the Monte Carlo casino indelibly linked in popular culture with the suave fictional secret agent James Bond.

“It helps us build our profile in a global sense,” Galaxy’s vice president for investor relations, Peter Caveny, says of the deal. SBM, which is listed on Euronext but is majority owned by the principality of Monaco, also disclosed that LVMH Moet Hennessy Louis Vuitton is separately taking a similar stake.

Light at the end of the tunnel?

Has Macau bottomed out? The territory does have some things going for it. Sometime within the next five years, a 36 kilometer-long (22 mile-

We’re going to ace it Francis Lui, Galaxy deputy chairman

long) bridge will span the Pearl River Delta to link Macau with Hong Kong.

So, instead of having to take an hourlong ferry ride, Hong Kong visitors will be able to drive there. Most importantly, Hong Kong’s airport, which handles 63 million passengers a year versus Macau’s 5.5 million, will essentially become Macau’s local airport, a mere 30-minute drive away.

“It’s going to be a game changer for Macau,” says Union Gaming’s Govertsen.

Another factor in Macau’s favour: Mass market gamblers, although betting less than the disappearing high rollers, actually provide the gaming companies with a higher profit margin because the casinos don’t have to pay commission to the VIP junket operators. Evidence of this came on July 22 when Sands China, which has the biggest share of the mass market, reported a second quarter profit that, although down 30 per cent, beat analysts’ estimates. Wynn Resorts will release its second quarter results on Wednesday in Las Vegas.

Macau’s history shows the gaming industry and the economy can change with lightning speed. Such was the case during the global financial crisis, when Galaxy’s share price plunged 94 per cent and Las Vegas Sands teetered on the brink of bankruptcy before swiftly rebounding. Govertsen says he’s advising clients that the current descent may be bottoming and they should stay in the market.

“When the recovery comes, it will be pretty sharp,” he says. “And the risk of continuing to be negative on Macau is that you could miss a lot of it.”

Back at the Galaxy casino, Francis Lui has no doubt - suggesting he’s more of a gambling man than he lets on. Asked to pose for a photograph holding a king of spades, he discards the card instantly in favour of one of the four in the deck that has a higher value. “We’re going to ace it,” he says.

Bloomberg

10 | Business Daily

July 30, 2015

Greater China

President Xi’s graft push goes rural The country’s top prosecuting body declared its own drive against rural graft last week

C

hinese President Xi Jinping, who has likened his nationwide corruption purge to hunting tigers and swatting flies, is sending Communist Party graft-busters after an even more annoying pest: mosquitoes.

The term has been used in state media reports to describe a new initiative targeting corruption in rural villages where petty cadres hold sway. While tigers lurk far away, such mosquitoes are usually “buzzing around the corner” and “sucking blood,” the official Xinhua News Agency wrote in a commentary published July 4.

The push against rural graft suggests a policy shift by Xi almost

Pressing continued attacks on individual members of the current and former leadership could, in my view, prove divisive and destabilizing Andrew Wedeman, politics professor, Georgia State University

three years into a campaign that has brought down more than 100 senior officials, including top generals, a former top presidential aide and China’s retired security chief. With so many potential rivals locked away, Xi can afford to relieve some pressure on the political elite in Beijing to focus on his broader reform agenda.

“At some point, Xi Jinping needs to back away from hunting big political tigers,” said Andrew Wedeman, a politics professor at Georgia State University who specializes in China’s political economy and corruption.

Xi will need the power he’s accumulated during the campaign to enact an economic plan to double gross domestic product by the end of the decade. China faces its slowest growth in 25 years and has deployed an array of state inventions to halt a stock collapse that’s shaken foreign confidence in Xi’s reforms.

Last mile

The anti-graft campaign has weighed on the economy, shaving about 1 percentage point off GDP, according to a Bank of America Corp. analysis released in April last year, as officials shy away from gift-giving and displays of wealth.

That’s not to say Xi’s no longer caging tigers. Last Friday, the party’s Central Commission for Discipline Inspection announced a probe into sitting Hebei provincial party chief Zhou Benshun, the latest former aide of disgraced security ex-chief Zhou Yongkang to fall. On Tuesday, the party dismissed Zhou Benshun from his posts.

But the numbers show highprofile prosecutions have slowed.

The party investigated 102 senior party officials between Xi’s rise to power in November 2012 and the National People’s Congress in March, according to Xinhua, or about 3.5 a month. In the first six months of this year, such probes averaged 2.5 a month.

Meanwhile, the CCDI on July 18 described the push against local officials -- or “mosquito squashing” -- as the campaign’s gruelling “last mile.” The country’s top prosecuting body declared its own drive against rural graft last week, saying the initiative would last two years, according to the party run People’s Daily.

Broken windows

“After going through the explosive first few years, the anti-graft drive has entered a steady phase,” said Zhuang Deshui, a Peking University governance professor. “While it keeps a certain rhythm in catching corrupt officials, the focus has shifted to eliminating the breeding grounds of corruption.”

Authorities haven’t explained how their mosquitoes differ from the flies targeted since the campaign’s earliest days. Rather, the new terminology emphasizes their capacity for harm.

Xi invoked the “broken windows theory” -- the concept associated with New York Mayor Rudy Giuliani’s 1990s crackdown on squeegee men -while urging greater attention to petty graft. The party must both “make no

exceptions for the powerful” and “not indulge minor offenses,” Xi told the ruling Politburo on June 26, according to Xinhua.

‘Dare not’

The party should implement rules and laws to ensure “officials dare not be corrupt, cannot be corrupt and do not want to be corrupt,” he said.

Authorities opened more than 12,600 cases involving low-level officials in the first half of the year, according to an articled posted on the CCDI website on Friday. “Flies are still all over the place and the task of swatting flies is still daunting and urgent,” it said.

Steve Tsang, who heads the University of Nottingham’s School of Contemporary Chinese Studies, said Xi must continue the campaign to keep potential opponents on the run.

Transition point

It remains unclear whether the crackdowns have weakened China’s culture of corruption. While Xi has made it easier to demote inept officials and set up centres to teach cadres “clean governance,” he’s only strengthened a political system that depends on the party to police itself.

An article published by the CCDI days after Zhou Yongkang was sentenced to life in prison last month said the campaign was at “a critical point of transition.” If the party can’t produce a long-term cure, it will lose the people’s trust, it said.

Bloomberg News

Rollercoaster stock market has more room to drop Worries the government is preparing to exit the market was the trigger for the biggest fall since February 2007 on Monday Bill Savadove

F

asten your seat belts investors: China’s volatile stocks still have room to drop, but analysts say keeping the rollercoaster on the tracks will depend on how the government manages its eventual exit from the market.

An 8.48 percent plunge on Monday -- the biggest in eight years -- renewed fears about the government’s management and the health of the underlying economy, in which growth has already slowed to levels unseen since the global financial crisis.

In moves widely criticised as anti-market, the government has intervened by barring some investors from selling, setting up a war chest to buy stocks and threatening to arrest those who engage in short-selling -- a bet prices will go lower.

But after an exuberant, government-engineered 150 percent rise over the 12 months to mid-June when the market peaked, and a 29 percent correction between

Monday, was the trigger for the biggest fall since February 2007.

‘Everybody is leaving’

then and Tuesday, analysts said prices can go still lower.

“A big rebound seems unlikely now,” Zhang Gang, an analyst from Central China Securities, told AFP. He expects the Shanghai market to test support at 3,500 points and then at 3,200.

“The (government) measures are generally on the right path, but it takes time for the market to recognise it,” Zhang said. “After the risk is resolved, the market

will perform better next year.”

The key will be how the government manages divestment of its newly acquired stock holdings without spooking tens of millions of “mom and pop” investors, the main force in China’s markets who trade on rumour and speculation.

Worries the government is preparing to exit the market, despite repeated denials including the latest on

Other negative factors are out of the control of securities regulators: an expected US interest rate hike affecting global activity and China’s own slowing growth.

But exactly where the bottom might be, nobody knows.

Gu Luxian, a former bank employee who trades stocks full-time after leaving his job, plans to return to the market after it falls at least another 20 percent.

“I’ll wait until the market slumps to 2,800 points to buy stocks again. Everybody is leaving the market, so why stay?” he told AFP. But Japan’s Nomura believes the plunge represents a buying opportunity and urges its clients to selectively pick up stocks.

“Market consolidation may continue until the interim results season in mid-

August upon more positive micro-level and macro-level data,” Nomura said in a research report. “We suggest investors take advantage of this likely second bottom to buy stocks with structurally sound fundamentals.”

Regardless, volatile trading will reign and could impact the world’s second largest economy as a slowdown in financial activity cuts into growth.

US analyst Tom DeMark, founder of DeMARK Analytics, told Bloomberg News that behaviour in the Chinese stock market mirrored the 1929 Wall Street Crash, which helped trigger America’s economic “Great Depression”.

He expects the Chinese market to fall to 3,200 in the next three weeks and says government measures to stem the slide are futile.

“You just cannot manipulate the market.

Fundamentals dictate markets,” he said.

AFP

Business Daily | 11

July 30, 2015

Greater China S.Africa’s yuan payments rise The number of South African payments denominated in yuan increased by 33 percent over the past year thanks to its strengthened bilateral relations with China, global transaction services organisation SWIFT said yesterday. In June, 31.3 percent of direct payments between South Africa and China/Hong Kong were in yuan, compared to 10.8 percent in June 2014 and only 4.6 percent in June 2013, according to SWIFT. China’s central bank signed a currency swap agreement worth 30 billion yuan (US$4.8 billion) with South Africa’s central bank in April, aiming to encourage bilateral trade and investment.

Trade with ASEAN growing Trade and investment between China and the Association of Southeast Asian Nations (ASEAN) have grown as mutual political trust has fostered deeper integration, a vice commerce minister said yesterday. Trade between China and ASEAN rose 1.6 percent year on year to reach US$224 billion in the first six months of the year, accounting for 12 percent of China’s total foreign trade, Vice Commerce Minister Gao Yan said. Gao made the remarks at a press briefing of the 12th China-ASEAN Expo which will be held in the Guangxi Zhuang Autonomous Region between September 18 and 21.

Tmall.hk launches duty-free shopping platform

President Xi heads the top rulers body marching to the latest national CPC congress

Vehicle sales may shrink for the first time in 17 years The state-backed China Association of Automobile Manufacturers this month slashed its 2015 growth forecast to a 3 per cent increase

A

utomakers may sell fewer vehicles in China this year for the first time since at least 1998 as demand slows in the world’s largest market, according to the low end of Ford Motor Co.’s revised projection.

Ford is estimating industrywide sales to be between 23 million and 24 million units this year, Chief Financial Officer Bob Shanks said Tuesday, compared with the 23.5 million sold last year. The low end of that forecast would represent the first decline in at least 17 years, according to

official sales data. Before 1998, only production figures were available.

“It’s clear we’ve seen a market slowdown in the market there in the industry,” said Mark Fields, Ford chief executive officer, according to a transcript of the call. “We’re still very bullish on China, but it’s going to go through its fluctuations and that’s what happens in emerging markets and we’re going to work our way through it in a positive way and grow the business.”

Ford’s forecast is the bleakest assessment to date by a major

multinational carmaker of demand in China, where sales have slowed due to a combination of slowing economic growth, registration curbs and a volatile stock market. The state-backed China Association of Automobile Manufacturers this month slashed its 2015 growth forecast to a 3 percent increase, the slowest expansion in four years.

“This may not be the last downward revision from automakers,” said Steve Man, Hong Kong-based analyst with Bloomberg Intelligence. “If another city caps new car registrations, the weak sales may continue through 2016.”

For carmakers including Ford, General Motors Co. and Volkswagen AG, China is now growing slower than their respective home markets.

Even Japanese automakers, which are doing better this year in China than their European and American counterparts, have warned of a “downward spiral” of excessive competition, capacity and discounting that will eventually affect them.

Ford previously estimated China industry sales this year to be 24.5 million to 26.5 million vehicles.

Bloomberg News

Tmall.hk, an online shopping platform for overseas goods under e-commerce powerhouse Alibaba, launched an international duty-free shopping platform on Tuesday. Consumers with outbound air tickets can purchase duty-free goods via Tmall.hk’s website or mobile app and retrieve their items at designated duty-free shops using their payment confirmation text or barcode when they finish their overseas trips. The Shilla Duty-free Shop of the Republic of Korea and Thailand’s KingPower Duty-free Shop have both signed agreements with Tmall.hk to sell their products via the platform.

Volvo China JV truck exports surge

China’s second-largest automaker, Dongfeng Motor Corp., said yesterday that its joint venture with Sweden’s Volvo Group exported 150 percent more trucks in the first half of 2015 than the same period last year. Dongfeng Commercial Vehicles (DFCV), in which Volvo Group holds a 45-percent stake, exported 3,900 heavy-duty and medium-duty trucks in the January-June period to countries including Vietnam, Myanmar, Pakistan, Russia, Chile and Peru. The surge suggests full-year exports will probably far exceed the joint venture’s target of 5,000 trucks, said a spokesman with Dongfeng Motor Corp..

12 | Business Daily

July 30, 2015

Greater China

Russian banks turn to Hong Kong Companies have been able to win loans from Chinese banks even as U.S. and European sanctions shut many out of global markets Fion Li and Eduard Gismatullin

R

ussian banks hobbled by sanctions are exploring funding sources in Hong Kong to help the nation’s companies refinance US$117 billion in external debt due in the coming year.

OAO Gazprombank, Russia’s third-largest lender, is applying for licenses to offer securities services in the city, while Vnesheconombank and OAO Sberbank said they are monitoring opportunities.

The yield on October 2015 yuan bonds of VTB Bank JSC, the nation’s second-largest, was 8.04 percent on Tuesday, 121 basis points below its similar ruble debt. Moscow Exchange forecast last week that Russian companies and banks will list yuandenominated bonds on its bourse.

Russian companies have been able to win loans from Chinese banks even as U.S. and European sanctions shut many out of global markets since conflict broke out in Ukraine in 2014. China is encouraging international issuers to sell Dim Sum notes, denominated in offshore yuan, as it seeks to make the yuan a rival for the U.S. dollar as a reserve currency. The renminbi has the second-lowest volatility in major currencies and is the world’s second most-used currency for trade finance.

“Russian corporates have a hard time issuing U.S. dollar bonds as several companies are excluded from the primary market because of the U.S. and European sanctions,” said Victor Verberk, Rotterdam-based global co-head of credit at Robeco Groep NV. “It makes sense that Russian corporates are looking for alternate sources of funding for their business. Using the Dim Sum market may be one of them.”

December rout

VTB Bank was the first Russian Dim Sum issuer, raising 1 billion yuan (US$161 million) in a threeyear debt sale in 2010 at 2.95 percent. Since 2012, lenders from the nation including Gazprombank and Russian Standard Bank have raised 7.5 billion yuan in the market, data compiled by Bloomberg show.

State banks have suffered from a weaker ruble and sanctions and would be interested in a channel to access hard currency Egor Fedorov, analyst, ING Groep NV

Links between Moscow and Beijing have become warmer lately. Russia hosted a BRICS and a Shanghai Cooperation Organisation meetings some weeks ago

Yuan bonds sold by Russian companies tumbled in December when the ruble plunged to an all-time low and oil prices slumped. They haven’t sold any new debt in the market since January 2014.

Gazprombank plans to organize a yuan bond sale of about US$500 million in Hong Kong for Russian state-owned gas producer OAO Gazprom, a bank official said on June 19. It is also discussing financing plans for a client, Petroleos de Venezuela SA, including a possible 10 billion yuan sale this year, he said.

Gazprom spokesman Sergei Kupriyanov declined to comment when asked for updates on the sales.

“The sanctions are having an impact in the West and there is thinking that it will be easier to break through in China, which has funds available for investments,” said Egor Fedorov, a Moscow-based analyst at ING Groep NV. “State banks have suffered from a weaker ruble and sanctions and would be interested in a channel to access hard currency.”

Higher cost

Any issuers may face higher borrowing costs. The yields on outstanding yuan bonds sold by Russian companies ranged from 7.6 percent to 8.8 percent, compared with an average 4.3 percent on Dim Sum bonds, according to data compiled by Bloomberg and a Deutsche Bank AG index.

Higher costs have also dragged on overall offshore yuan bond sales. Issuance has dropped 33 percent in the first seven months from a year earlier, data compiled

by Bloomberg show.

“Russian issuers have been cost-sensitive and the market is not favourable” as a whole, said Steve Wang, Hong Kongbased head of fixed-income research at BOCI Securities Ltd., a subsidiary of China’s third-largest bank.

Economic ties

Closer ties between Russia and China help. The Asian country was Russia’s biggest trading partner in the first five months, accounting for 11.2 percent of total turnover compared with 8.7 percent

each for Germany and the Netherlands. Russia’s trade slid 32.8 percent from the year-earlier period.

Chinese investors bought as much US$1 billion of ruble debt this year, Finance Minister Anton Siluanov told state channel Rossiya 24 at a BRICS summit on July 9 that brought together leaders from Brazil, Russia, India, China and South Africa. This month, VTB became the first Russian bank to win a license to trade in China’s interbank bond market. Iron-ore miner Metalloinvest Holding Co. borrowed US$750 million from a syndicate including Chinese banks this month.

The yuan has been held at around 6.2 a dollar in the past four months as China hopes a stable exchange rate can bolster its reservecurrency bid and ease capital outflows. Its one- month implied volatility was 1.25 percent, the second-lowest in major currencies except the greenback-pegged Hong Kong dollar. That compares with 19 percent for the ruble. The currency was little changed at 6.2089 in Shanghai yesterday.

“It is important for many corporates that potential currency risks can be hedged,” said Robeco’s Verberk. “The fact that the yuan is still managed toward the U.S. dollar makes it a more reliable market with manageable foreign-exchange risks.”

Bloomberg News

editorial council Paulo A. Azevedo, José I. Duarte, Mandy Kuok Founder & Publisher Paulo A. Azevedo | pazevedo@macaubusinessdaily.com Newsdesk João Santos Filipe, Luis Gonçalves, Michael Armstrong, Stephanie Lai, Óscar Guijarro, Kam Leong, Joanne Kuai GROUP SENIOR ANALYST José I. Duarte Brands & Trends Raquel Dias Designer Francisco Cordeiro WEB & IT Janne Louhikari Contributors James Chu, João Francisco Pinto, José Carlos Matias, Larry So, Pedro Cortés, Ricardo Siu, Rose N. Lai, Zen Udani Photography Carmo Correia Assistant to the publisher Laurentina da Silva | ltinas@macaubusinessdaily.com office manager Elsa Vong | elsav@macaubusinessdaily.com Agencies Bloomberg, Reuters, AFP, Xinhua, Lusa, Project Syndicate Printed in Macau by Welfare Ltd.

Business Daily is a product of De Ficção – Multimedia Projects Address Block C, Floor 9, Flat H, Edf. Ind. Nam Fong Av. Dr. Francisco Vieira Machado, No. 679, Macau Tel. (853) 2833 1258 / 2870 5909 Fax (853) 2833 1487 editor editor@macaubusinessdaily.com newsroom newsdesk@macaubusinessdaily.com Advertising advertising@macaubusinessdaily.com Subscriptions sub@macaubusinessdaily.com

Business Daily | 13

July 30, 2015

Asia

Japanese butter on the table in Pacific trade talks

S. Korean dept store sales revised down

The push for liberalisation comes as Japan's agricultural sector is fighting a losing battle with demographics as more and more farmers retire Hiroshi Hiyama

J

apan has been grappling with a severe butter shortage that critics say highlights a bigger problem with the country's protected agricultural sector, a key sticking point in high-profile trade talks this week in Hawaii.

The United States, Japan, and 10 other Pacific Rim countries are looking to finalise the most ambitious trade deal in decades, a vast free-trade bloc encompassing 40 percent of the world's economy.

But the proposed Trans-Pacific Partnership (TPP) has drawn the ire of Japan's politically powerful agriculture lobby and sparked public protests by farmers over fears it will mean an onslaught of cheaper foreign imports.

Free-trade backers counter that Japan's food growers have been living behind sky-high tariffs and other protectionist barriers for too long, creating an inefficient system that puts overpriced food on supermarket shelves.

The butter market, where domestic production has not been keeping up with demand and imports are tightly restricted, highlights a wider problem, they say.

The Japan Dairy Association has warned that butter demand will outstrip supply by more than 7,000 tons this year, prompting the government to resort to emergency imports to fill the gap.

Butter shortages last year provoked anguish for shoppers, especially in the run-up to the Christmas cake-baking season, with grocery stores nationwide forced to resort to rationing.

"It is tempting to dismiss this (latest) episode as an amusing footnote, but it highlights the broader failure of Japan's agricultural policy," says Marcel Thieliant from research firm Capital Economics.

"The command economy approach... prevents farmers from responding flexibly to swings in demand."

'Status quo spells demise'

Japan has myriad regulations and high tariffs on farm products -- the

levy on imported rice can reach an eye-watering 800 percent -- that have been a key sticking point in Tokyo's talks with Washington over the TPP. The government is now considering cutting levies as Prime Minister Shinzo Abe looks to overhaul Japan's agricultural sector -- part of his wider plan to jumpstart the world's number three economy.

The move to open up the market for key products including beef and rice to foreign competition has already put him on a collision course with the country's powerful farm lobby.

"Trying to protect the Japanese farming sector with tariffs has not created a lucrative industry," says Toshihiro Nagahama, chief economist at Dai-Ichi Life Research Institute.

"Maintaining the status quo would only mean the eventual demise of the sector."

The push for liberalisation comes as Japan's agricultural sector is fighting a losing battle with demographics as more and more farmers retire -- the average age is 67 -- without any young people to replace them.

This is exacerbated by the fact that agricultural production is dominated

Trying to protect the Japanese farming sector with tariffs has not created a lucrative industry Toshihiro Nagahama, chief economist, Dai-Ichi Life Research Institute

by small-scale producers who rely on subsidies, while government regulations effectively shut out big firms.

Rice is another example of the problem, some say. Even though it is revered staple, much of Japan's output comes from families, who grow the grain on small plots part-time while also working in other sectors.

'No easy solution'

At the root of the butter problem is a wider dairy deficit that has seen farmers prioritising the raw material for sales of liquid milk.

Herds have been cut over recent decades as demand slimmed in line with a rapidly ageing population.

Japan has about 18,600 dairy farming households -- down 10,000 in the past decade -- and that could keep falling if Tokyo cuts tariffs, said Tetsuo Ishihara, managing director at the Japan Dairy Industry Association.

"With many producers retiring, the number of milk cows is falling.

There is no easy solution to reverse the trend. Farmers' worries about TPP are making the situation worse."

Last year's butter imports -10,000 tons -- were just the latest government move to fill the void.

Dairy giant New Zealand, which is part of the trade talks, has reportedly pointed to Japan's butter shortage as an example of why trade in the sector needs to be liberalised.

While Japan's farmers nervously watch the talks -- also including Australia, Brunei, Canada, Chile, Malaysia, Mexico, Peru, Singapore, and Vietnam -- some see few other options for an inefficient sector.

"The TPP could help boost exports of quality Japanese farm products to foreign markets," said Nagahama at Dai-Ichi Life Research.

"The government can take preventive measures to stop causing catastrophic damage to farmers. But we don't have a choice except to make farming more competitive and not protect it.

"We have to make it a profitgenerating industry."

Reuters

Sales at top South Korean department stores in June fell more than reported earlier to mark the worst drop on record, revised government data showed yesterday, as an outbreak of Middle East Respiratory Syndrome (MERS) prompted consumers to cut spending. The trade ministry said sales at department store chains run by Hyundai Department Store, Lotte Shopping and Shinsegae Co fell 11.9 percent from a month earlier.

Preliminary data had shown a 10.7 percent fall. The same data showed discount store sales in June dropped 10.2 percent.

LG Electronics 2Q profit slumps South Korea’s LG Electronics Inc said on Wednesday its quarterly profit skidded 60 percent, plummeting below estimates, as sales of televisions and smartphones buckled under weaker demand and intense competition from rivals. LG, the world’s No. 2 TV maker after Samsung Electronics Co Ltd, said second-quarter operating profit fell to 244 billion won (US$211 million) from 610 billion won in the same period a year earlier. That was its weakest three-month profit since fourth-quarter 2013, and well below a 395 billion won mean estimate from a Thomson Reuters I/B/E/S survey of 33 analysts.

Nintendo swings to Q1 operating profit The firm reported a surprise first-quarter operating profit, helped by a weaker yen and strong sales of its “amiibo” figurines which are sold as accessories to their popular games. Nintendo swung to an April-June operating profit of 1.1 billion yen (US$9.3 million) from a loss of 9.5 billion yen a year earlier.

Analysts on average expected a loss of 6.3 billion yen, according to Thomson Reuters data.

Virgin Australia cuts costs to reduce losses Australian airline Virgin Australia said yesterday that its annual net loss narrowed as it cut costs by limiting its seat capacity to bolster demand and drive up fares. The carrier, due to announce detailed full-year results on August 7, said in a statement it made a loss in the 12 months ended June 30 of A$93.8 million (US$69 million), compared with a loss of A$261.8 million a year ago. Along with its larger rival Qantas Airways, Virgin Australia recently ended a price war that had resulted in wide losses for both firms in recent years.

14 | Business Daily

July 30, 2015

International U.S. consumer mood darkens Consumer confidence suffered its biggest blow in four years in July on a less upbeat jobs outlook, while home appreciation in major cities stalled in May, suggesting a spring pause in housing demand. The disappointing data comes as Federal Reserve policymakers meet to consider whether the U.S. economy is strong enough to warrant an end to the Fed’s near zero interest rate policy, perhaps as soon as September. The Conference Board, an industry group, said its index of consumer attitudes fell to 90.9 this month from a downwardly revised 99.8 in June. It fell far short of a forecast reading of 100.0.

Honeywell to buy Melrose’s utility Honeywell International Inc has made its largest purchase in more than a decade, agreeing to buy the utility consumption metering business of Britain’s Melrose Industries Plc for about US$5.1 billion. The move is the first major deal for Honeywell, the U.S. diversified industrial manufacturer, since it laid out a five-year plan in March 2014 to target at least US$10 billion in acquisitions. Investors have been eager to see how industrial companies use their capital as many of their markets struggle for growth. The acquisition will give Honeywell access to Elster Group’s metering technology and customers.

Peugeot beats turnaround goals PSA Peugeot Citroen rebounded to a first-half profit, the French carmaker said yesterday, turning the page on three years of losses as a recovery plan led by Chief Executive Carlos Tavares bears fruit. Posting 571 million euros (US$631 million) of net income, after a 114 million loss the same time last year, Peugeot met key goals three years early but warned against hasty conclusions in the face of a Chinese slowdown and other approaching hurdles.

First-half revenue rose 6.9 percent to 28.9 billion euros, the company said.

Man Group gets H1 performance fee boost British hedge fund manager Man Group posted forecast-beating first-half results yesterday, boosted by performance fee gains and a rise in profits that sent its shares higher. After a quarter in which markets were roiled by political troubles in Greece and a sharp drop in the Chinese stock market, hitting performance of its AHL investment strategies, the firm said its other units, including GLG, had done well.

Adjusted pre-tax profit in the six months to the end of June was US$280 million, up 89 percent from the prior year’s US$148 million, boosted by investment gains.

British American Tobacco beats expectations British American Tobacco, the world’s No. 2 cigarette company, reported better-than-expected performance for the second quarter, helped by cost savings and market share gains. All big tobacco companies are grappling with falling sales in many markets due to increasing regulation, higher taxes, economic weakness and growing health consciousness. While cigarettes remain a highly profitable business, most of the large players now also sell e-cigarettes, which heat nicotine-laced liquid into an inhalable vapor. The company said yesterday revenue fell 5.9 percent to 6.40 billion pounds (US$9.99 billion) in the six months to June 30.

Brazil investment grade rating is at risk, S&P warns The economy is expected to shrink this year and possibly in 2016 Walter Brandimarte

S

tandard & Poor’s said Brazil could lose its coveted investmentgrade rating in the coming year if fallout from a number of corruption investigations further stymies economic growth and implementation of austerity measures.

The warning is a setback to Finance Minister Joaquim Levy’s efforts to win back investor confidence in Latin America’s largest economy, headed to a steep recession.

S&P affirmed Brazil at BBB-minus, its lowest investment grade rating, and revised the outlook on that rating to negative from stable, signalling a downgrade is possible over 12 to 18 months.

Investors said the threatened downgrade should be a wake-up call to the government.

“This is the consequence of years of bad fiscal policies. They are finally taking their toll on Brazil,” said Will Landers, who oversees US$2.1 billion in Latin American equities at BlackRock Inc. “We need to see how the government deals with this decision.”

Although some Brazilian government officials had fretted about the country’s ratings, few saw the S&P revision coming so soon. “This caught the team by surprise,” a Finance Ministry official said.

Asked about S&P’s decision, Planning Minister Nelson Barbosa said the government is working to improve the economy and that those efforts will bear fruits.

Brazil’s Finance Ministry said in a statement that the government remains committed with fiscal austerity and structural changes aimed at improving public spending.

Brazil’s Finance Minister Joaquim Levy

The Ministry said it will go ahead with plans to speed up collection of tax debts and to sell stakes in state-run companies to increase revenues.

Levy himself considered the S&P warning an incentive for Congress to speed up the approval of austerity measures, a government source who heard the minister’s remarks said.

Some lawmakers seemed to agree.

Senator Romero Juca, a leader with Brazil’s largest party, the PMDB, said Congress “needs to act fast not to let the situation deteriorate even further.”

Yet most market participants now expect Brazil to lose its investment grade from S&P and at least one other rating agency by the end of 2016, a Reuters poll showed.

Levy has been trying to retain Brazil’s investment grade rating through spending cuts and tax increases aimed at curbing fiscal deficits that ballooned during President Dilma Rousseff’s first term.

But his strategy has fallen short.

Last week, the government slashed its budget savings target for this year and the next.

Government revenues have plunged since the beginning of the year. Inflation remains above target, forcing the central bank to raise interest rates.

A massive corruption scandal at state-run oil company Petrobras has also damaged investor sentiment, along with a growing political crisis which included calls for Rousseff’s impeachment.

Loss of the investment-grade rating would boost financing costs for Brazil’s government and companies. It also would hurt dollar inflows to the country since many investors are barred from buying junk-rated securities.

S&P was the first of the Big Three ratings agencies to raise questions about Brazil’s investment grade. Both Moody’s Investors Service and Fitch Ratings have the country at BBB, two notches above junk, with a negative outlook.

Reuters

Russia stops forex purchases to replenish reserves Some analysts believe the central bank is seeking to keep the rouble within a desired range, often assumed to be 50-60 against the dollar

R

ussia’s central bank said yesterday it had stopped its operations to replenish its international reserves from Tuesday because of a rise in market volatility.

“The Bank of Russia from 28 July has stopped operations in the framework of replenishing international reserves, which was connected with the rise in volatility on the domestic currency market,” the bank said in a statement.

The bank “has repeatedly noted that it will minimise the influence of its operations for replenishing international reserves on the currency market, operationally correcting the volume of foreign currency purchases,” it said in emailed comments explaining its decision.

The bank began daily purchases of foreign currency in May as part of a long-term strategy of rebuilding its forex reserves.

It said at the launch of the operations that it would buy between US$100 and US$200 million a day but has typically been purchasing US$200 million.

It was not clear how long the central bank intends to suspend its forex purchases, but the wording of its statements was similar to when it last suspended the operations on June 5.

It also cited market volatility then, but the bank resumed forex buying after one working day.

On Tuesday the dollar’s value against the rouble rose above 60 for the first time since mid-March, symbolising how the rouble is again

coming under strong pressure because of sinking international oil prices.

Dmitry Polevoy, an economist at ING Bank in Moscow, said suspending forex purchases was “logical” given that prices for oil, Russia’s main export earner, were at their lowest in several months.

Some analysts believe the central bank is seeking to keep the rouble within a desired range, often assumed to be 50-60 against the dollar - a de facto return to the policy of an exchange range corridor that was formally abandoned last November when the rouble was floated.

However, the central bank has repeatedly denied that it is targeting particular levels for the rouble, insisting that the floating regime remains intact.

Reuters

Business Daily | 15

July 30, 2015

Opinion

The problem lies not in our wires shareholders, but our executives Business

Leading reports from Asia’s best business newspapers

BANGKOK POST

James Saft

Confidence among small and medium-sized enterprise (SME) operators fell in the second quarter on mounting anxiety over their earnings and the country’s economic health, while their expectations over the next three months continued to deteriorate. The country’s economic growth was most concerning for SMEs, said Benjarong Suwankiri, head of TMB Analytics, the research unit of TMB Bank. He said 60.2% of respondents indicated economic conditions were also a concern, the highest level since the TMB-SME Sentiment Index started three years ago.

Declining purchasing power increased SME business owners’ fears about the economy.

Reuters columnist

THE KOREA HERALD South Korean steelmakers have been sued by their rivals in the United States on anti-dumping charges, a trade association said yesterday. AK Steel and four other major U.S. steelmakers filed anti-dumping and countervailing duty petitions against South Korea and seven other countries, according to the Korea International Trade Association.

The petitions, filed with the U.S. International Trade Commission and the Department of Commerce, claim that the unfairly imported steel products are hurting their businesses, and that steelmakers from the eight countries have been receiving significant subsidies from their respective governments.

THE STRAITS TIMES Facebook co-founder Eduardo Saverin and Temasek Holdings, Singapore’s state-owned investment company, are among the main investors in a new venture capital fund that will take stakes in technology companies in Southeast Asia. The Golden Gate Ventures Fund II LP has already raised US$35 million (S$47.72 million) and expects to gather an additional US$15 million, said Vinnie Lauria, managing partner of Singapore-based Golden Gate Ventures, in an interview. “We took the step to bring in strong local partners for the fund,” Lauria said, while declining to comment on how much Temasek and Saverin, who lives in Singapore, are investing.

NEW ZEALAND HERALD ANZ bank says it will keep contributing to the KiwiSaver accounts of staff members who go on parental leave in a bid to help what it says is an increasing gender gap for women’s retirement savings.

New Zealand’s largest bank, which is also the largest KiwiSaver provider, said from October it would continue to pay the employer contribution of KiwiSaver for both men and women while they take time off to have a family. The announcement was made yesterday after it revealed research which claims Kiwi women are likely to retire with US$60,000 less than their male counterparts.

C

orporate cash hoarding, low investment and the buy-back culture: the problem may not be so much shareholders as executives.

The reluctance to invest by companies on both sides of the Atlantic is one of the enduring puzzles of the post-crisis years and is widely blamed for holding back both growth and employment.

Andy Haldane, chief economist at the Bank of England, is the latest to wade into the debate, last Friday calling insufficient investment “one of the main reasons world growth had been sub par” and bemoaning that profits instead go to finance dividends and share buybacks.

“They are almost eating themselves, taking their internal funds and distributing that to shareholders rather than investing themselves,” he told the BBC. Haldane said the proportion of UK company profits used for share buybacks or dividends had increased by six to seven times since the 1970s, now accounting for 70 percent of profits, laying the blame squarely on the philosophy that gives primacy to the interests of shareholders.

That idea “shareholder value maximization” (SVM) comes in for a lot of criticism, and rightly so, as it’s been observed to lead to short-termism. Haldane appealed instead to a vision that would reach a different balance in serving the interests of shareholders, employees, clients and other stakeholders.

But SVM is misnamed, as it conflates the teacher saving for retirement, who has precious little control over company strategy, with the executives who do and who are paid largely in shares. That executive compensation system, heavy on

share options, creates a set of perverse incentives: to skimp on investment today and to manage earnings by buying back shares.

This creates an illusion of higher profitability, one often rewarded by the stock market, but which can leave companies hollowed out, with little new product and a dwindling franchise due to underinvestment.

Economist Andrew Smithers has tied the growth of bonus and share option culture to changes in corporate behaviour.

The limited time nature of share options makes the bar higher for executives hoping to benefit themselves from investment or research spending they might authorize.

As well, volatility in reported public company earnings has increased massively, allowing insiders, who come and go with more frequency, more opportunities for timing the issuing of share options and their redemption. Any option trader can tell you that the value of an option is driven by its volatility rather than any longterm measure of return.

Unicorns Defending a gambit into an area well beyond the already wide remit of the Bank of England, Haldane asserted company strategy is a concern in part because the financial crisis was the result of banks seeing high returns and using borrowed money to create them.

Again, that’s right, but only part of the story. The driving force behind reckless risk-taking at the pre-crisis banks was very likely employees who wanted to use other people’s money to back speculations they themselves would benefit from disproportionately. Certainly the banking industry has no good recent record of shareholder value maximization.

Corporate shorttermism poses a serious problem, both for the economy, which is dragged down by low investment, and for investors themselves

If you want examples of how to overcome the dynamic of low investment and selfserving earnings management, look no further than privately held companies, particularly in technology. Because they are more closely held, shareholders are better able to channel executive energy toward building for the future.

There are now well over 100 “unicorns,” privately held companies with billion dollarplus valuations. Including such names as Uber and Airbnb, these companies are investing furiously for the future. To judge by the valuations they attract, their investors believe they will be taking substantial marketshare away from the publicly traded companies now eating their own seed corn.

None of this might surprise John Asker and Alexander Ljunggvist of New York University and Joan Farre-Mensa of Harvard Business School, who authored a 2014 paper that found that listed companies invest less than their private peers and are less sensitive to opportunities.

Many investors, at least those with the option to invest in nonpublic companies, are voting with their feet, seeing the share buyback and earnings management game for what it is: a drag on long-term returns.

Corporate short-termism poses a serious problem, both for the economy, which is dragged down by low investment, and for investors themselves, who will ultimately be left holding the bag if companies don’t grow and innovate.

The best way to solve that isn’t by widening the remit of companies, but by reforming executive compensation and giving long-term savers real control.

Reuters

16 | Business Daily

July 30, 2015

Closing Authorities confiscate 20 billion yuan in graft cases

Government to regulate local debt more strictly

China’s top anti-graft agency, the Central Commission for Discipline Inspection (CCDI), has confiscated 20.1 billion yuan (about US$3.2 billion) while investigating graft cases. The money has been turned over to the national treasury. The money was seized after November 2012, when a key CPC decision was made on fighting graft, according to Han Jinping of the CCDI. A part from money, the haul includes gifts and property. Economic losses amounting to 38.7 billion yuan were also retrieved. Losses are incurred when state assets are sold at a low price, or enterprises receive undue taxes breaks.

China will increase regulation over the ways local governments can raise debt as the economy still faces relatively large downward pressure, the country’s Finance Minister Lou Jiwei (pictured) said yesterday. Lou told officials meeting to discuss fiscal issues that China will guide private investment into key and fragile sectors while stepping up efforts to quicken the construction of key projects, according to a statement on the ministry’s website. China will also push forward with reforms on consumption tax and improve its resources tax system, Lou added. China has been trying to deal with a local debt estimated at 17.9 trillion yuan.

July official factory PMI seen steady Services have been a lone bright spot in the Chinese economy, offsetting persistent factory weakness

G

rowth in China’s manufacturing sector likely steadied in July but remained at a subdued pace, a Reuters poll showed, fuelling hopes that a slowdown in the world’s second-largest economy may be gradually bottoming out.

The official manufacturing Purchasing Managers’ Index (PMI) likely stood at 50.2 in July, on par with the previous month’s reading, according to the median forecast of 20

economists in the poll.

But growth was tepid, with the reading just above the 50 point mark that separates contraction from expansion on a monthly basis.

“Momentum remains soft as real activities saw little improvement in June,” ANZ economists said in a note, adding that the indicator could edge down to 50.1 in July.

The flash Caixin/Markit PMI released last week showed China’s factory activity

contracted by the most in 15 months in July, reinforcing views that the struggling Chinese economy needs more stimulus.

The official survey looks more at larger, state-owned firms, while the Caixin/Markit survey focuses on smaller firms.

Weighed down by a cooling property market, factory overcapacity and sluggish domestic demand, China’s economy grew 7 percent in

the first six months of the year, which is in line with Beijing’s full-year target.

But the equity market panic since mid-June has fuelled concerns about the health of the economy and risks to the financial system.

China’s stocks suffered their biggest one-day fall since 2007 on Monday and gyrated wildly again on Tuesday despite a fresh pledge by regulators to lend further support to the market.

China’s top economic planner said on Tuesday that it was optimistic on the outlook for the economy in the second half of 2015, but was paying close attention to volatility in stock markets.

While economists at Nomura said China’s economy was “far from being in a crisis scenario”, they said shaken investors could cut back on spending and investment, which could impede a broader economic recovery that had been expected in the second half of the year.

Market watchers also fear that some companies may be facing heavy losses after speculating in stocks, although the overall amount of leverage is hard to quantify.

Still, Nomura said the selloff “should only have a limited negative impact on the real economy”.

The central bank has cut interest rates three times this year, in a bid to support an economy headed for its poorest performance in a quarter of a century. Many economists expect further policy easing in coming months.

The PMI factory numbers will be released on Saturday, August 1, alongside the official service sector PMI.

Michael Jordan loses China trademark suit

Hong Kong’s Exchange Fund income down by two-thirds

Barclays profits jump awaiting new CEO

A

T

T

Beijing court has dismissed a trademark case brought by US basketball superstar Michael Jordan against a company using a similar name and logo to his Nike-produced brand, a report said.

The former Chicago Bull is arguably the most popular international basketball star in China and is known in the country as “Qiaodan”, a Chinese version of his name.

He asked Chinese authorities in 2012 to revoke the trademark of Qiaodan Sports Co, accusing the sportswear firm of misleading consumers about its ties to the six-time NBA champion.

As well as the name, Qiaodan’s products carry a silhouette of a leaping basketball player resembling the “Jumpman” logo used by US sporting goods giant Nike to promote its Air Jordan brand.

Authorities refused Jordan’s request, and a lower court in Beijing did the same. He appealed to the Beijing Higher People’s Court, which has ruled against him, the Chinese news portal Sohu reported. “’Jordan’ is not the only possible reference for ‘Qiaodan’ in the trademark under dispute,” it cited a transcript of the verdict as saying.

AFP

he investment income of Hong Kong’s Exchange Fund, which is used to back the territory’s currency, fell by two-thirds in the first half of 2015 to HK$20.4 billion (US$2.63 billion) due to financial market volatility, the Hong Kong Monetary Authority (HKMA) said.

HKMA, which is the key fund manager, also forecast a tough investment environment ahead.

“The global macroeconomic environment and financial markets will remain highly uncertain in the second half of the year, clouding the investment outlook,” Norman Chan, the chief executive of the HKMA, said in a statement.

“As the start of the U.S. interest rate normalisation draws closer, the timing and trajectory of the U.S. rate hikes will have strong bearing on global financial markets.”

“The aftermath of the Greek debt crisis, the development of the mainland equity markets and other uncertainties will likely bring continuing volatilities to the financial markets, and the investment environment will be more challenging,” Chan added.

The Exchange Fund’s first-half investment income was down by two-thirds compared to the HK$56.4 billion gain a year earlier.

Reuters

Reuters

he bank increased net profits by 43 percent in the first half as cost-cutting and higher revenue offset provisions for settling a series of scandals, the troubled British bank announced yesterday.

Barclays, which earlier this month sacked chief executive Antony Jenkins, said profit after tax increased to £1.611 billion (US$2.512 billion) in the six months to the end of June from £1.126 billion in the first half of 2014.

Pre-tax profits jumped by a quarter to £3.11 billion, said the bank, which has been mired in a series of market-rigging scandals.

“The results reported today represent continued good progress for the business,” said John McFarlane yesterday, who, in the role of executive chairman, has replaced Jenkins on an interim basis awaiting the appointment of a new chief executive officer.

“I am personally pleased with recent progress in the Investment Bank. It has generated a double-digit return,” he said in yesterday’s earnings statement.

Barclays reported an overall group revenue rise of 4.0 percent in the first half to £13.88 billion, while operating expenses dropped by a tenth.

AFP