Macau Business Daily August 21, 2015

Closing editor: Joanne Kuai

MOP 6.00

Pending Deal One month to decide the winner. Bidders hope to pick up Ageas’s Hong Kong life insurance arm.

The unit could be valued at more than US$1b. China Taiping and Anbang have shown interest

Year IV

Number 862 Friday August 21, 2015

Publisher: Paulo A. Azevedo

Page 6

Graduate Talent to Drive Diversification

Gaming revenue’s down. But Cotai 2.0’s on the way. And that means more non-gaming employment HK official: opportunities, says IFT President Fanny Vong. Especially for college graduates. Upcoming projects Macau-HK CEPA strategically important “will require human resources not only in quantity but also in quality,” the Institute for Tourism Page 2 Studies boss declared. This month, IFT was authorised to occupy the East Asia Hall building used Sa Sa pessimistic about by the University of Macau before this institution moved to its Hengqin Campus Page

3

Security Blanket

Page 10

Bank of Japan doubts over next step after yuan depreciation

Page 12

Page 2

Chinese firms holding liabilities in foreign institutions. They’re going to feel the stress of a weaker yuan when paying time arrives.

Firms sold nearly US$100 billion-worth of bonds in overseas markets.

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HSI - Movers August 20

Red Alert

Name

Macau Legend has posted an interim loss of HK$68.44 million. This, versus a profit of HK$226.37 million during last year’s H1. Decreased gaming revenue and higher operating expenses - particularly staffing - were cited. As at June-end, bank balances and cash held by Macau Legend amounted to HK$4.43 billion, of which nearly 70 pct was denominated in yuan

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%Day

China Unicom Hong Ko

+1.55

Wharf Holdings Ltd/Th

+0.91

China Overseas Land &

+0.87

China Resources Powe

-0.20

China Mobile Ltd

-0.25

Belle International Ho

-4.07

Li & Fung Ltd

-4.20

Tingyi Cayman Islands

-4.34

Galaxy Entertainment

-6.08

Kunlun Energy Co Ltd

-6.12

Source: Bloomberg

Gaming www.macaubusinessdaily.com

Page 6

IMF extends currency basket effect in preparation for yuan inclusion

Much of its cash in Hong Kong and U.S. dollars. And ‘quite a few investments in Hong Kong and Macau’. Giving China Overseas Land some defence against renminbi depreciation. The fifth-largest property developer in China says the risk of yuan volatility is ‘manageable’

Making bonds meet

National Day holiday sales

Achilles Heel

I SSN 2226-8294

Wynn Macau’s exposure to VIP business has been its Achilles heel. Dragging profits attributable to shareholders down 60.6 pct y-o-y to HK$1.44b during H1. Non-gaming revenues, including hotel, F&B, retail and others, dropped 23.3 pct to HK$631 million

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2015-8-21

2015-8-22

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2 | Business Daily

August 21, 2015

Macau China attracts US$810 mln from city as at July Local firms injected a total of US$810 million-worth (MOP6.48 billion) of foreign direct investment into Mainland China between January and July this year, the Chinese Ministry of Commerce announced on Wednesday. The country attracted a total of US$72.18 billion of foreign investment during the period, which is a jump of 8.1 per cent year-on-year. Although the investment amount from the Special Administrative Region only accounted for some 1.12 per cent of the total, it represents a notable jump of 78.6 per cent, as compared to the same period last year.

Hong Kong official: Macau-HK CEPA strategically important

H

ong Kong’s Secretary for Commerce and Economic Development, Gregory So Kam-leung, perceives that the Closer Economic Partnership Arrangement Agreement (CEPA) that Hong Kong and Macau are discussing will be “strategically important” for the economic developments of the two Special Administrative Regions.

“Although both Hong Kong and Macau are Special Administrative Regions, the two parties have not signed any bilateral trade agreements.

We think building a closer trade relationship with Macau will bring important strategic meaning to the developments of the two cities,” the Hong Kong official said in a speech during a Hong Kong-Macau economy forum in Hong Kong on Wednesday.

According to Mr. So, bilateral merchandise trade between Macau

and Hong Kong had increased 22 per cent per year between 2010 and 2014, while service trade between the two cities posted an annual growth of 18 per cent from 2009 to 2013.

“We are now discussing the Closer Economic Partnership Arrangement Agreement with Macau, hoping it can boost the development of the two cities further,” the Hong Kong Secretary said.

Mainland China has already signed CEPA agreements with both Hong Kong and Macau.

“The three parties can build a new free-trade platform based on [current CEPA agreements] which will make trade and investment between the parties more convenient, and contribute to economic regional co-operation in Greater China for the long term,” the Hong Kong official said.

China Overseas Land says weak yuan impact on foreign debt “manageable”

S

tate-owned China Overseas Land & Investment Ltd (COLI) said it could manage the impact of a weaker yuan on its foreign currency denominated debt, in a bid to allay concerns about the loans

which dominate its books.

Bank loans and guaranteed notes of China’s fifth-largest property developer by sales totalled HK$103.65 billion (US$13.37 billion) at June 30, the company said, with 78.3 per cent of that amount

denominated in U.S. and Hong Kong dollars.

This exposure to foreign debt is much higher than the around 40 per cent average for the overall property sector as of the end of 2014, analysts said.

“Yuan volatility has an impact (on us) but the risk is manageable,” COLI Chairman Hao Jian Min told reporters after it reported first-half earnings. “This is because much of our cash is in Hong Kong and U.S.

dollars and we have quite a few investments in Hong Kong and Macau.”

He declined to give further details, but the company statement said 30.6 per cent of its HK$78.1 billion bank balances and cash was denominated in Hong Kong and U.S. dollars.

China’s central bank devalued the yuan in a surprise move last week, driving the currency to a 4-year low and raising concerns over a spike in financing costs for developers with high overseas debt ratios.

Rating agency Moody’s said on Tuesday the devaluation was credit negative for Chinese property developers, but it estimated the majority of its rated developers could withstand an up to a 10 per cent depreciation in yuan.

COLI said it had yet to take on any hedging against further fluctuations, but would consider doing so when appropriate.

The company reported a 20 per cent rise in core profit to HK$13.6 billion in the January-June period, and raised its 2015 sales target by 7 per cent to HK$180 billion, after an asset injection from its parent company in May. Reuters

Business Daily | 3

August 21, 2015

Macau

Diversification of tourism driving demand for qualified workforce The President of the Institute for Tourism Studies (IFT) said yesterday the opening of the resorts more focused on non-gaming elements will drive the demand for graduates João Santos Filipe

jsfilipe@macaubusinessdaily.com

G

aming revenues may be declining in the territory but the emergence of non-gaming elements, primarily with the development of the Cotai projects of the sector operators, will continue to increase the demand for qualified workers in the sector, according to the President of the Institute for Tourism Studies (IFT).

Fanny Vong.

“Now, gaming revenue is going down but we are hopeful that the other areas related to the non-gaming elements, such as food and beverage, recreation and leisure activities, which the operators are trying to add to the resorts will increase the workforce required to fill the properties”, Dr. Fanny Vong said to journalists on the sidelines of the

IFT 2015/2016 Student Orientation Ceremony that took place in Macau Tower.

In May, the opening of the resort Galaxy Macau Phase II and Broadway kicked off the second wave of casino openings in Cotai. The next project to open is Melco Crown’s Studio City with the Grand Opening ceremony of the resort slated for October 27. Following that, Wynn, MGM, SJM and Sands will also launch individual projects up to 2017. This expansion of the tourism industry creates optimism in IFT concerning its students’ future prospects.

“We’re looking at the development in Cotai.

Although gaming is slowing down, there are still a few projects that will be coming up and will require human resources not only in quantity but also in quality. The

operators will need people to fill their properties because thousands of new rooms will be added to the Cotai Strip.

We are quite optimistic that our graduates will be able to get some of those positions”, the President of IFT explained.

Expanding plans

For the new academic year IFT will receive 374 new students, which will put the number of undergraduates of the institute at around 1,600 for 2015/2016. However, this number may increase in the future as the IFT has been authorised to occupy the East Asia Hall building used by the University of Macau before this institution moved to its Hengqin Campus.

“Ultimately, with this building we will have the conditions to expand the number of student intake.

We have a few programmes that are quite popular and are always oversubscribed”, she said.

However, the use of the new building is still being considered, besides some nine to ten floors, which will be used as a hotel for the students to occupy.

“The building was just handed over to us in the beginning of August. We will start to do some renovation work this month to convert

some floors into their original use. However, other floors will be used as offices, classrooms, student activity centres and recreation areas but we still need to plan. As such, I’m not sure when they will be ready, maybe next year”, she said.

This year, IFT is celebrating its 20th anniversary and the ceremony yesterday also included the presentation of scholarships, dean’s list and extra-curricular activities awards for students.

4 | Business Daily

August 21, 2015

Macau KEY POINTS Weaker yuan makes HK dollar bets more expensive Unfavourable forex could cut revenues by 8-10 pct - Daiwa Gaming revenues set to fall for 15th consecutive month in Sept

Weak yuan stacks odds against casino revenues

A

weaker yuan could further shrink Macau’s gambling revenues by making it more expensive for Chinese gamers to place their bets, executives say, with one analyst estimating the unfavourable forex rate alone could result in a 10 per cent drop next year.

The special administrative region is the world’s biggest gambling hub and the only place in China where casino gambling is legal. Chinese punters account for more than 60 percent of all visitors to Macau’s 36 casinos.

Bets, however, are made in Hong Kong dollars and not the yuan, which has weakened some 3 per cent against the U.S. dollar since the central bank last week announced a surprise devaluation. Sources involved in the policy-making process told Thomson Reuters it may weaken even further to help struggling Chinese exporters.

The devaluation adds to the challenges facing Macau’s casino industry, which has notched 14 consecutive months of falling gambling revenues as a broader crackdown on

corruption and slowing growth in the world’s second-largest economy kept Chinese gamers away. Revenues are set to decline yet again in September.

“It has been one thing after another,” Galaxy Entertainment Chief Financial Officer Robert Drake told Reuters after the company reported a 66 percent fall in its first-half net profit from a year earlier.

“In the short term we are still assessing the overall impact of the yuan devaluation on the market and what it means for Macau,” he added.

In a recent note, analysts at Daiwa Capital Markets forecast that excluding all other factors, the weaker yuan will have an 8-10 percent downward impact on mass gross gaming revenue next year. The decline in revenues from the VIP segment, which comprises gamblers who bet at least 1 million yuan at a time, could be as much as 20 percent, Daiwa added.

Some junket operators may also take a hit if the yuan weakens dramatically as it could lengthen the time it takes for their clients to repay debts. Junkets are companies or individuals that extend credit to wealthy players on behalf of the casino operator and are responsible for settling any debts.

“It will probably impact the smaller junkets more. If they don’t have cash flow they won’t be able to wait for their players to pay them back,” said Wayne Lio, a senior executive at one of Macau’s biggest junkets, Tak Chun.

Reuters

Business Daily | 5

August 21, 2015

Macau Gov’t spends MOP10 mln on 15th Food Festival The government has allocated some MOP10 million (US$1.25 million) to the 15th Macau Food Festival, the president of the Festival co-ordinating committee, Chan Chak Mo, said yesterday. Mr. Chan said the government’s subsidy supports 80 per cent of the cost of the annual festival, claiming it is impossible to host the event without the government’s financial aid. Meanwhile, the committee president claims that the number of local residents joining the event has decreased in recent years due to the high number of tourists. This year’s Food Festival will be held from November 13 to 29 in Sai Van Lake Square.

Wynn Macau profits plummet 60.6 pct in H1

G

aming operator Wynn Macau says its profits attributable to shareholders had plunged 60.6 per cent year-on-year to HK$1.44 billion (US$179.6 million) during the first half of the year, dragged down by its VIP business.

According to the company’s filing with the Hong Kong Stock Exchange yesterday, its adjusted EBITDA during the first six months of the year posted a 44.9 per cent plunge to HK$2.55 billion from HK$4.62 billion one year ago.

The company’s total casino revenues reached HK$9.62 billion during the first half as compared to HK$15.4 billion one year ago, representing a decline of 37.3 per cent.

Meanwhile, the operator saw its turnover generated

by VIP gaming tables shrink 47.6 per cent year-on-year to HK$253.3 billion from HK$483.7 billion. It said in the filing that the total amount of commissions paid to gaming promoters had also decreased 50.5 per cent year-on-year to HK$2 billion ‘as VIP gross table games win decreased due to decreased business volumes.’

Turnover that the company earned from its mass market tables posted a drop of 11.6 per cent year-on-year to HK$19.2 billion from HK$21.7 billion, while slot machines decreased 27.7 per cent to HK$16 billion from HK$22.2 billion.

The company’s net noncasino revenues, which include rooms, food and beverage and retail and other revenues, saw a decrease of 28.3 per cent yearon-year to HK$631 million.

The gaming operator said the decrease in non-casino revenues ‘was largely due to lower retail sales in the six months ended 30 June 2015.’

Macau Legend dips into the red in H1 The Macau-based casino and hotel operator saw an interim loss of HK$68.44 mln, a performance exacerbated by a plunge in gaming revenue

M

acau Legend Development Ltd. has seen its interim results fall into the red as it has taken less from both the mass market gaming and outsourced VIP play in the period, the casino and hotel operator told the Hong Kong Stock Exchange.

Macau Legend reported a loss of HK$68.44 million (about US$8.77 million) in the first half of this year; this contrasts with a profit of HK$226.37 million which the firm earned a year ago.

Accounting for the loss, Macau Legend said it was primarily due to a decrease in revenue from gaming services as well as higher operating expenses – in particular regarding staff costs.

The loss was also due to an increase in overall depreciation and amortisation charges, particularly the depreciation of Harbourview Hotel which commenced operations on February 2 2015, and the amortisation charges related to New Legend since July 3 2014. New Legend refers to the firm's self-run VIP operation.

Macau Legend's adjusted earnings before interest, tax, depreciation and

amortisation (EBITDA) contracted by 70.4 per cent to HK$128.4 million.

The firm's gaming revenue fell by 31.3 per cent to HK$449.9 million, resulting from less takings from mass market tables and outsourced VIP gaming tables.

In the period, the firm operated a total of 150 gaming tables at Pharaoh's Palace Casino in the Landmark Macau and Babylon Casino in Macau Fisherman's Wharf.

In the results filing, Macau Legend said that the 35 new-to-market tables that it was granted by the Gaming Inspection and Co-ordination Bureau (DICJ) in October last year have not yet been put into use during the interim period, although the firm did not explain why that was the case.

Macau Legend's self-run VIP operation has contributed approximately HK$62.2 million of gaming revenue through the “VIE structure”.

Macau Legend shareholders approved in July last year a variableinterest-entity (VIE) agreement between wholly-owned subsidiary Hong Hock Development Co. Ltd. and VIP gaming promoter New Legend

VIP Club Ltd., which enabled Macau Legend to ‘indirectly participate in the gaming promoting business’, and ‘have a greater control over the management and marketing of New Legend’.

While Macau Legend has announced its loss for the first half of this year, the firm does not share an entirely gloomy outlook for its business in the coming months.

‘Recently we have gradually seen a certain shift towards more supportive policies such as the easing of transit visa limitations in July 2015 which should help boost visitations to Macau, and we are optimistic that this and other upcoming measures will favour the VIP and premium mass businesses in the upcoming seasonally stronger months,’ Macau Legend stated in the filing.

The firm's overall interim revenue declined by about 23.9 per cent to HK$698.2 million, as its non-gaming revenue was also down 5.4 per cent to HK$248.3 million when less earnings had been achieved from hotel and catering operations at Landmark Macau.

S.L.

Nearly 70 pct of Macau Legend’s bank balances and cash denominated in yuan In the results filing, the casino and hotel operator noted its exposure to exchange rate risks as the exchange rate of the yuan to Hong Kong dollar may fluctuate significantly. As at June-end, the bank balances and cash held by Macau Legend amounted to HK$4.43 billion, of which nearly 70 per cent was denominated in yuan, while the remaining was denominated primarily in Hong Kong dollars and Macau patacas.

The firm spoke of an unrealised exchange loss of about HK$5.6 million being recognised in the interim results, as its yuan fixed deposits were retranslated into Hong Kong dollars at the June 30 exchange rate.

6 | Business Daily

August 21, 2015

Macau opinion

Domestic Bliss

Pedro Cortés

Lawyer* cortes@macau.ctm.net

O

ne of these fine days there will be a demonstration against the city’s domestic helpers because one of them is suspected of perpetrating a crime against a baby in a case now under investigation.

Macau is really a very picturesque and unique place where there is an Association for everything, including the hiring of domestic helpers and the calling of demonstrations when things go wrong.

Surely, no right-minded person would condone what allegedly happened. But unlike some illuminati who do not know what the rule of law is I respect the work of the judicial authorities. They are competent to investigate and, if sufficient evidence emerges, to hear the person in fair trial.

Catapulting the alleged bad behavior of one person in an isolated case onto the entire honourable profession is, frankly, cynical and hypocritical.

Fortunately, such cases are scarce and authorities have intervened accordingly.

Domestic helpers, particularly in Macau, are intrinsic elements of a multicultural society.

They are here because their countries do not offer economic conditions for a good life.

They are quite often treated as second class citizens in terms of their rights. The cost of housing here forces them to live in less than opulent splendour. Unfortunately, there are no demonstrations for better conditions. And then, when something happens, they are guilty of everything, when in fact the families should be vigilant in terms of those they hire and with the babies and kids that most of the time are educated by the helpers and not by their relatives.

Some of the helpers are university graduates.

But all of them are human beings who must be treated equally.

Maybe the demonstrators will also champion the healthcare of their maids, and better living conditions for them and their families.

Or for their kids to live near them and not be segregated because of race, religion and place of birth. Or even to give them better wages.

Some Macau residents really should undertake a careful examination of a genealogy tree and understand that the vast majority arrived in Macau as refugees or to fight for better conditions than they could find in their home countries. After that examination, they should conclude that they are privileged to live in a place that received them some decades ago without imposing upon them what they would now impose on others.

We would have a more tolerant way of living. We would be capable of accepting the differences and destroy some paradigms that hold the progress of this city back.

Once and for all, not only for the domestic helpers’ case but also for all non-resident workers: Macau - our current prosperous Macau - would not be the same without them. We wouldn’t have the casinos built, the services provided to tourists, our streets clean and our elderly in good and decent condition. They are and must be part of society and not just numbers or quotas to be discarded like chewing gum as the wind changes. For those who still discriminate, a glance at Article 43 of the Macau Basic Law should help: ‘Persons in the Macau Special Administrative Region other than Macau residents shall, in accordance with law, enjoy the rights and freedoms of Macau residents prescribed in this Chapter [Chapter III Fundamental Rights and Duties of the Residents]’.

That’s the wording of the law; all we need do now is put the spirit into practice. *Part-time Lecturer at the Chinese University of Hong Kong

Sa Sa pessimistic about National Day holiday sales

T

he recent depreciation of the yuan and the fluctuations in China’s A shares are factors that can impact Mainland Chinese consumers’ willingness to shop in Hong Kong and Macau, Hong Kong-listed cosmetics retailer Sa Sa International Holdings Ltd. chairman Simon Kwok Siu Ming said.

Speaking to media following a

shareholders’ meeting on Wednesday, Mr. Kwok said he was not optimistic about sales for the upcoming National Day Golden Week starting October 1 – a peak time for Mainland visitors to travel to Hong Kong and Macau.

The depreciation trend seen in other currencies – namely the euro, Japanese yen and Korean won – have also impacted Sa Sa’s business as some

visitors have sidestepped Hong Kong.

While believing that the recent yuan depreciation could affect consumers’ willingness to shop in Hong Kong and Macau, Mr. Kwok said that the depreciation has so far not overly impacted the retailer’s financials as its operation on the Mainland accounts for less than 4 per cent of its turnover.

S.L.

Ageas shortlisting bidders for US$1 bln Hong Kong business

A

geas, the insurer that emerged from the collapse of Fortis, has narrowed the list of bidders for its Hong Kong life insurance arm, people familiar with the matter said.

Hong Kong billionaire Richard Li’s FWD Group and Fosun International Ltd. are among the firms invited to submit final offers, the people said.

The wholly-owned unit could be valued at more than US$1 billion, one of the people said, asking not to be identified because the discussions are confidential.

Ageas is selling the business to focus elsewhere in Asia, including in

mainland China where new business premiums jumped 52 per cent in the first half. Its Hong Kong operations reported 33 million euros (US$36.5 million) net income in the first six months of the year, accounting for about 7 per cent of Ageas’s total earnings.

The company, which controls Belgium’s biggest life insurer, aims to pick a winner in about a month, one of the people said. China Taiping Insurance Group Ltd., which controls Ageas’s Chinese joint venture, and Anbang Insurance Group Co. had earlier shown interest in the business, the people said.

Representatives for Ageas, FWD and Fosun declined to comment. A press official for Taiping also declined to comment, citing the so-called quiet period ahead of an earnings announcement, while Anbang’s press office didn’t respond to an e-mail seeking comment.

Corporate GEG donates over 600 duvets to local charities Galaxy Entertainment Group (‘GEG’) is dedicated to contributing to the community and continuously encouraging team members to share their love and concern with the underprivileged. Consequently, GEG has collected and donated over 600 duvets to charitable organisations for the betterment of the underprivileged this winter. GEG

volunteers have visited four charitable organisations – namely, the Happy Market of the Fuhong Society of Macau, Good Fortune Charity Shop of Caritas Macau, General Union of Neighbourhood Association of Macau, and the Women’s General Association of Macau - to donate more than 600 duvets, hoping to spread care and love to those in need.

Li is seeking to buy back the insurance operations he sold in 2007 to Fortis, the Belgian-Dutch financial services company now called Ageas.

Li, the son of Asia’s richest man, controlled the Hong Kong business when it was known as Pacific Century Insurance Holdings Ltd. The tycoon re-entered the insurance industry in 2012, forming FWD Group after he bought ING Groep NV’s insurance and pension units in Hong Kong, Macau and Thailand for 1.64 billion euros.

Fosun, led by billionaire Guo Guangchang, has spent US$5.7 billion acquiring insurance assets in the past two years, according to data compiled by Bloomberg. Any deal for the Ageas business would mark the conglomerate’s first insurance purchase in Hong Kong, the data show.

Bloomberg

8 | Business Daily

August 21, 2015

Greater China

Firms with foreign debt face headwinds as yuan softens ANZ analysts said in a report yesterday that the yuan would end the year at 6.55 per U.S. dollar Michelle Chen

C

hinese companies that have been active raising cheap funds in global capital markets are facing increasing pressure as the yuan has come off its track of steady appreciation and is expected to fall further in coming months.

The mismatch between their foreign currency liabilities and yuan-denominated revenues means interest expenses and principal payments of these loans and bonds will increase in yuan terms when the Chinese currency depreciates.

In 2014, Chinese firms sold nearly US$100 billion of bonds in overseas markets, a record that was more than double the previous year’s total, according to Thomson Reuters data. More than 70 percent of these bonds were denominated in G3 currencies.

“We’ve got many inquiries from big Chinese companies after the yuan’s sudden fall

last week as they have sizable foreign debt,” said the head of China corporate business at an Asian bank in Hong Kong.

“I would say they will consider more yuandenominated debt in their future financing activities as there’s no currency risk, and funding cost in the mainland has also declined a lot.”

Chinese developers are among the leading issuers in overseas debt markets. A

Moody’s report said the 42 rated Chinese developers they analysed had about 35.5 percent of foreign currency debt on average at the end of 2014.

Most of these companies have not hedged foreign currency risk either because they did not expect the yuan to devalue significantly, or they were unwilling to pay the hedging cost.

China Overseas Land & Investment said on Wednesday

more than 80 percent of its debt is denominated in foreign currencies, most of it in U.S. dollar and Hong Kong dollar.

It has not done any hedging, but is considering whether to do so.

China Vanke, the country’s largest property developer, said it would hedge against its new offshore debt.

Though Moody’s believed most rated developers with material foreign debt exposure

could withstand up to a 10 percent depreciation, the rating agency said the exchange rate reform is credit negative for property developers.

The yuan lost 3 percent against the dollar last week, the biggest weekly loss on record, as the central bank surprised the market by devaluing the currency. It shifted its currency regime which allows greater exchange rate flexibility.

Many banks have revised down their forecasts for yuan performance following the unexpected move.

ANZ analysts said in a report yesterday that the yuan would end the year at 6.55 per dollar and move towards 6.85 by end 2017.

Some companies have started to switch to the onshore market to raise funds as funding costs are declining due to China’s accommodative policy to support slowing growth, and there is no foreign currency risk.

The offshore yuan bond market in Hong Kong is already suffering from a shortage of supply in the primary market as Chinese firms that used to be dominant issuers have left.

Issuance of so-called dim sum bonds stood at 130 billion yuan (US$20.32 billion) from January to July, down 45 percent from the same period in 2014, Thomson Reuters data showed.

Reuters

Chocolate de as stocks an

Two-year crackdown has Luc Cohen and Dominique Patton

O

n China’s version of Valentine’s Day, big international chocolate makers like Hershey are not feeling the love.

Hunger for the dark delicacy in the world’s second-largest economy has hit a soft spot as the government cracks down on bribery gifts and a meltdown in the stock market has made consumers nervous.

Smaller, local chocolate makers appear to be making slight gains, but the big multinationals are struggling to match recent growth rates in a crowded marketplace.

The Chinese market is “a challenging one and we’re certainly finding that out,” the chief financial officer of Hershey Co said on a recent conference call.

Earlier this month, the U.S.-based confectionery giant said sales of its Shanghai Golden Monkey chocolates would fall to less than half the US$200 million it initially expected this year.

President Xi Jinping’s two-year corruption crackdown has already hurt sales of cars and other luxuries.

On top of that, the country’s benchmark Shanghai SE Composite Index has collapsed 27 percent since mid-June, rattling consumers’ confidence and their willingness to splurge on sweets.

Business Daily | 9

August 21, 2015

Greater China Fiscal, tax system reform essential in medium-term plan

Li & Fung profit falls 20%

CPCCC addresses reforms with six plans covering state owned enterprises, fiscal and tax, finance, judiciary, people’s livelihood and party building

F

iscal and tax reform, one of six reforms reviewed by China’s Central Leading Group for Deepening Overall Reform at its latest meeting, is likely to top the agenda in the next five years, experts say.

At Tuesday’s meeting, President Xi Jinping urged Communist Party of China and government officials at all levels to show greater determination and perseverance in advancing reforms and to find solutions to new problems arising from the reforms.

Fiscal and tax system reform will be vitally important for the 13th Five-year Plan (2016-2020), which is high on the agenda of October’s plenary session of the Communist Party of China Central Committee, experts agreed.

“The reform will concentrate on budget management, tax reform and the fiscal relationship between central and local governments,” said Ba Shusong, chief economist at the China Banking Association.

“China needs to deepen the fiscal and tax system reform in order to build a modern fiscal system,” said Ba. Tax reform will focus on the introduction of property tax,

adjustment of consumption tax and renovations of individual income tax, according to Ba. The theme for the tax reform is to “cut indirect taxes” like consumption tax and “add direct ones” such as property tax, said Gao Peiyong, president of the National Academy of Economic Strategy, which is affiliated with the Chinese Academy of Social Sciences.

For the financial relationship of central and local governments, Gao

believes the reform will delegate more power to local government for tax income in order to help them balance income and expenditure.

For years China has struggled to rein in local government debt.

There is no official public data on the size of the problem, but the National Audit Office estimated direct local government debt at 10.9 trillion yuan (US$1.7 trillion) at the end of June 2013.

Xinhua

New Hong Kong customs chief

s already hurt sales of cars and other luxuries

That massive deficit gives the confectionery industry confidence that it has the potential for long-term growth in China. But the near-term outlook is not as robust.

In total, China is expected to consume 220,700 tonnes of chocolate this year, or an increase of 6.3 percent on last year.

That is on a par with recent annual growth rates, but there are concerns that those rates are not sustainable.

Taking on tao

Cocoa market suffers

The shortfall in demand is hurting the global bulk cocoa market, threatening to leave big processors like Olam International Ltd and Cargill with idle capacity after a years-long build up based on booming Asian demand.

Cocoa grinding, a key indicator of demand, fell 12 percent in Asia in the second quarter to 142,345 tonnes. It sunk to three-year lows in the fourth quarter of last year.

“If their growth rates are going to drop dramatically or even flat line, then we’re going to have massive overcapacity,” said Shawn Hackett, president of Hackett Financial Advisors in Florida, a futures brokerage and research firm specializing in agricultural commodities.

The popularity of chocolate has surged in China over the last decade

Leaders urge professional Tianjin response President Xi Jinping and other top Communist Party of China (CPC) leaders have issued a call for hard work and professionalism in response to the Tianjin explosions, after hearing a report on the rescue and follow-up work yesterday.

Xi presided over a meeting of the most senior members of the CPC Central Committee’s Political Bureau that demanded thorough investigation into the cause of the blasts. The Thursday statement said saving lives and treating the injured should be prioritized, and that more efforts must be made to clean up the site.

emand melts in China nd bribes decline

“People used to buy expensive chocolate as gifts, but now they no longer do it, so the consumption falls,” said Zhao Yanping, secretary-general of the China Association of Bakery & Confectionery Industry.

That means that yesterday’s Qi Xi Festival, celebrating the mythological meeting of thwarted lovers, and usually marked by the exchange of chocolates and other gifts, may be a damp squib.

Li & Fung Ltd., the world’s largest supplier of clothes and toys to retailers, reported first-half core operating profit slumped 20 percent amid weak demand in the U.S. and Europe. Core operating profit fell to US$182 million for the six months ended June from US$227 million a year earlier, the company led by billionaire Chairman William Fung said in a statement yesterday. That compared with the US$200 million average estimate of two analysts surveyed by Bloomberg. “The oil price decline in the U.S. did not help consumption this time around,” Deutsche Bank analyst Anne Ling wrote.

Earlier this month, Hershey said sales of its Shanghai Golden Monkey chocolates would fall to less than half the US$200 million it initially expected this year

as a growing middle and upper-class consume more western goods day-today and as treats on holidays like Qi Xi. China, home to roughly 20 percent of the world’s people, consumed just 0.2 kilograms of chocolate per person in 2014, compared with 2.2 kg in the United States, according to data from market research firm Euromonitor International.

A further problem for international competitors is growing competition.

Locally-produced ‘tao’ brands like Amovo or Bouquet are taking off, with 17 percent of consumers saying they had bought them.

“These small players are getting more popular online,” said Xu Ruyi, head of research at Mintel China.

Hershey has cited growing competition as one of the reasons for its lagging sales.

Rival U.S. company Mars Inc, which leads the Chinese market, declined to comment, and third-place Ferrero SpA of Italy did not respond to requests for comment.

No. 4 Nestle SA of Switzerland, which sells a wide array of foods in China, said last week that its confectionery segment contributed to overall growth in China despite a “difficult” economic situation.

Revving up sales may not be easy in the short term. Past growth was built partly on expanding sales to new consumers in second- and third-tier cities in China, but now those places are saturated and chocolate makers must convince Chinese consumers simply to eat more, said Xu at Mintel.

That may be an uphill battle, even for lovers. Zhu Wenqing, a 23-yearold student in Beijing, said she does not eat as much chocolate as before: “I don’t want to gain too much weight.”

Reuters

China’s State Council yesterday appointed Tang Yun Kwong as the Commissioner of Customs and Excise Department of Hong Kong Special Administrative Region (HKSAR). The decision was made in accordance with the Basic Law of HKSAR and the nomination by Leung Chun Ying, HKSAR’s chief executive, the State Council said in a statement.

Guidelines on marine development issued The State Council, China’s cabinet, issued guidelines for the scientific development and environmental protection of China’s marine territory yesterday.

The National Plan for Developing Marine Functional Zones, ratified by Premier Li Keqiang, is an extension of a similar one issued for development on land in 2011.

It stipulates that methods of exploitation should be based on the features, capacities and potential of environments including inland seas, territorial waters, exclusive economic zones and continental shelves under China’s jurisdiction. The State Council said the plan promotes protection and sustainable development of the marine environment and safeguards national interests.

Mainland tourist arrivals in Dubai up A total of 241,000 Chinese tourists visited Dubai in the first half of 2015, a 25 percent increase year on year, a senior UAE tourism official said on Wednesday. This increase confirms the growing partnership between China and Dubai, Issam Kazim, CEO of the Dubai Corporation for Tourism and Commerce Marketing (DCTCM), told a media briefing. As many as 200,000 Chinese expatriates live in Dubai, Kazim noted.

Dubai’s official tourism body DCTCM runs four offices in China in Beijing, Shanghai, Guangzhou and Chengdou, he said.

10 | Business Daily

August 21, 2015

Greater China

Freer yuan prompts IMF to extend current currency basket effect The liberalization creates potential headaches for U.S. President Barack Obama as he prepares to host Chinese President Xi Jinping at a summit in September Ting Shi

T

he yuan’s surprise devaluation roiled global markets and drew scorn from Donald Trump.

Still, China’s new market-driven exchange rate bolstered its bid to join the world’s most elite currency club.

As the yuan’s fall broke a rally in the Standard & Poor’s 500 Index and prompted a commodities selloff, some U.S. politicians were quick to label China a currency manipulator and raise fears of a new foreign-exchange war. China indicated the August 11 move gave market forces greater say as it tries to sway an International Monetary Fund review to include the yuan alongside the dollar and euro as a global reserve currency.

The shift to the more flexible exchange rate should boost the nation’s case for the yuan to be included in the IMF’s so-called Special Drawing Rights, said Eswar Prasad, a trade policy professor at Cornell University who previously headed the IMF’s China division. The move is “consistent with other signals that China is making slow but steady progress toward market-oriented reforms, such as capital-account opening, exchange-rate flexibility and interest-rate liberalization,” he said.

Congress objections

“China has done what the Treasury has repeatedly asked for,” said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics in Washington and author of “Markets Over Mao: The Rise of Private Business in China.” “If a few members of Congress object, that is a problem for the executive branch, not China. It should bolster their

chances, it is what the fund asked for. I think the angst about the new system will be alleviated over the coming weeks.”

The IMF and the U.S. Treasury have been pushing China to loosen the rigid exchange-rate mechanism that restricts the yuan’s moves. The Washington-based fund only conducts its SDR review every five years and that may have accelerated China’s efforts to get the yuan included in the group of currencies held as reserves by the world’s central banks that currently includes the U.S. dollar, euro, yen and British pound.

The People’s Bank of China said on August 11 that price submissions for the yuan’s daily reference rate must now consider the prior day’s close, foreign-exchange demand and changes in major currency rates.

The IMF, which rejected the yuan in 2010 on the grounds that it wasn’t “freely usable,” called China’s move a “welcome step,” while cautioning the change had no direct effect on the SDR review.

Breakneck growth

China has been seeking reserve status as part of a campaign to play a larger role in the post-war global economic order designed and dominated by the U.S. Membership of the reservecurrency club would be a crowning achievement after three decades of breakneck growth that saw the Chinese economy take its place as the world’s second-largest after the U.S. The devaluation may ensure there’s enough time for the emotions to ebb before the Xi-Obama summit, said Arthur Kroeber, Beijing-based

You cannot control your currency for 10 years and take a few actions over the space of a week, and say, ‘Look, we are now a freely usable currency Fraser Howie, director, Newedge Singapore

“The timing chosen was actually fine,” said Ding, who spent a decade at the IMF in Washington as its senior economist on cross-country economic research. “You need to allow ample time to run the new mechanism before review, and leave enough time gap to facilitate its assessment.”

To qualify for the basket, the country must be a major exporter, and the currency must be “freely usable.” IMF staff said this month the yuan trails its counterparts on key benchmarks and “significant work” remains to show it qualifies as a reserve currency. The IMF on Wednesday delayed any implementation on changing the basket for nine months, until September 2016, a move staff had proposed to minimize disruption if the yuan was added. The decision will be taken by the end of this year.

Political element managing director at GaveKal Dragonomics, an independent global economic research firm.

“There is no good time to do these things; moreover, it seems clear in retrospect the PBOC did not anticipate the very negative market reaction,” he said. “Waiting until after the summit would have been far too late to build credibility with the IMF.”

IMF chances

Standard Chartered Plc in Hong Kong revised its forecast for the yuan’s SDR chances to 80 percent by the middle of next year from 60 percent by the end of this year, said Ding Shuang, the bank’s chief China economist.

The IMF executive board, which represents the fund’s 188 member nations, must approve any change to the currency basket, a requirement that adds a political layer to the technical analysis done by staff. The U.S. has 17 percent of votes in the IMF’s executive board.

China’s system of maintaining trading bands to limit the yuan’s fluctuations means the yuan can’t be deemed as freely usable, said Fraser Howie, director at Newedge Singapore and co-author of “Red Capitalism.”

The onshore spot rate in Shanghai is currently limited to moves of 2 percent on either side of a daily fixing set by the PBOC. Bloomberg News

Business Daily | 11

August 21, 2015

Asia

Retailers bounced from zero to 18 in August, a good sign for private consumption

Japan business cautiously optimistic Retailers’ mood rebounded from the prior month’s sharp drop Tetsushi Kajimoto and Izumi Nakagawa

J

apanese business morale improved in August and it is seen likely to remain steady, a Reuters poll found, offering a hint of economic recovery and improved confidence as firms look past the second quarter’s export slump and weak consumer spending.

The Reuters Tankan which closely tracks the central bank’s quarterly tankan survey - could be a source of comfort for policymakers under pressure to deploy fresh

stimulus to spur growth after Monday’s negative secondquarter growth data.

The poll of 516 big and mid-sized firms between August 3 and 17, of which 277 responded, showed business managers were cautiously optimistic about pick-up in domestic demand, although a slowdown in China - Japan’s biggest trading partner clouds the outlook.

Retailers’ mood rebounded from the prior month’s sharp drop, which led gains in

the broader service sector.

Manufacturers’ morale hit its highest in a year, helped by food processors, oil refiners and steelmakers as oil and other commodity prices fell.

“We are able to smoothly pass on costs from inputs to the selling price. Thanks to a shortage of materials, we have reduced losses stemming from bargain sales of excess inventory,” said a manager of a food processor.

Some retailers said in the Reuters monthly poll that sales

on the existing-store basis have risen from a year earlier as the pullback from last year’s sales tax hike has finally faded.

“The number of customers is rising at our stores nationwide. Moreover, the supply network is improving,” said a retailer. Another retailer noted: “The long heat wave has spurred sales of summer goods.”

The Reuters Tankan sentiment index for manufacturers rose from 14 to 17 in August, the highest

Australian fund managers flex collateral muscles in bank swap deals Traditionally, investment banks have required funds to post collateral but rarely reciprocated, a fact that has changed since Lehman Brothers’ collapse Cecile Lefort

A

ustralian fund managers are flexing their muscles against long-dominant investment banks, demanding the banks provide them with more equitable protection in the A$29 trillion (US$21 trillion) credit and interest-rates swaps market.

Investment funds are stipulating that banks post collateral in overthe-counter derivatives agreements to protect funds should a bank become insolvent, and are widening the classes of collateral they themselves wish to post.

Traditionally, investment banks have required funds to post collateral but rarely reciprocated, a fact that has changed since Lehman Brothers’ collapse in 2008 made clear the risks bank insolvency could pose in such agreements.

“Banks were worried about us, but we were not allowed to worry about them,” said James Alexander, head of fixed income at Nikko Asset Management. “Now, we can demand collateral from them.”

Investment funds are pressing counterparty banks to accept a more

diverse range of assets as collateral beyond the usual cash or government bonds which funds consider a drag on their balance sheets.

Earlier this month, Colonial First State, one of Australia’s top investment firms with about A$200 billion of assets under management, deployed a “credit support deed” in a deal that allows it to provide collateral of its own choosing and to ring-fence it from the counterparty.

Swap deals are usually based on a standard document created by the industry’s International Swaps and

reading since it hit 20 in the same month a year ago. The index is seen improving further to 19 in November.

The service-sector index rose three points to 27, after tumbling from a record high 36 recorded in June. The index is seen holding steady in November.

Retailers bounced from zero to 18 in August, a good sign for private consumption, which accounts for roughly 60 percent of the economy.

Reuters

Derivatives Association (ISDA), yet can vary greatly in the detail.

Colonial has taken a bond held by one of the firm’s funds, placed it in a segregated account and then provided an equitable mortgage on the asset as collateral, ensuring the legal title to the asset stays with the fund.

“That way, it removes a number of weaknesses of the standard credit support agreement,” said Tony Adams, head of Colonial’s global fixed income and credit team in Sydney.

Of particular concern to funds was the risk they could lose control of the assets. Under typical master agreements, the collateral to be returned need only be of the same type and value as the collateral posted, not identical.

That meant an asset manager who, say, posted a two-year government bond could be given a 10-year bond of the same value in return when the contract ends, potentially breaching portfolio mandates and affecting a fund’s duration strategy.

Nikko Asset Management, which manages A$24 billion of assets in Australia, said it was also exploring alternative collateral assets such as stategovernment bonds and those issued by supra-national institutions - typically AAA-rated borrowers such as the World Bank or the Asian Development Bank.

Reuters

12 | Business Daily

August 21, 2015

Asia

Doubts over yuan put Japan’s central bank in a bind There is as yet scant political pressure for BOJ action but central bankers are wary about it

KEY POINTS Devaluation in China’s yuan could hit broader Asian demand BOJ hoping exporters will drive wage growth, consumption

Leika Kihara

BOJ reluctant to add to massive monetary stimulus

C

hina’s devaluation of the yuan exposes an undefended flank in the Bank of Japan’s (BOJ) efforts to jolt its flagging economy out of decades of deflation, which rely heavily on a solid pick-up in overseas demand.

A growing number of Japan’s central bankers are privately voicing concern that the problems behind China’s currency move will hit Asian demand harder than expected, threatening a Japanese export rebound they hope will stave off the need for another splurge of monetary easing.

Since April 2013 the bank has ploughed 170 trillion yen (US$1.37 trillion) into a radical quantitative easing programme that some, including some policymakers on the bank’s board, think has gone far enough - particularly given its questionable returns. Inflation remains barely above zero, for all the firepower thrown at it.

Many are wary of the rising costs of the programme, the potential for asset bubbles, and the distortion to markets - especially the government bond market, which is increasingly dominated by the BOJ. Some also fear the programme lets central government

off the hook on fiscal reform, too.

When the BOJ reviews its long-term forecasts in October, sources familiar with its thinking say it would be very reluctant - and at this point still unlikely - to act again, but if China’s woes hit exports enough to push Japan into recession this quarter, it cannot be ruled out.

“The risks surrounding Asia have risen. But it’s too early to give up,” said one of the sources, adding that China’s troubles alone won’t trigger immediate BOJ action.

At the moment, analysts still mostly agree with the bank that growth will rebound in July-September after contracting in April-June.

But a new slump in oil prices, weak domestic consumption and fragile overseas demand have rekindled market speculation the BOJ may be forced to ease in October.

Turning tide

For now, Japanese policymakers remain sanguine on the yuan’s devaluation. As long as it doesn’t go much further than the 3 percent it has already fallen, an uptick in cheaper Chinese imports will

have a negligible impact on its efforts to raise inflation.

But some fear Beijing’s action might be just the opening salvo in a bid to use currency policy to arrest a deepening slowdown that could hurt broader Asian demand and therefore Japan’s exporters.

The BOJ is banking on export profits to help fuel a rise in wages that in turn would underpin growth in domestic consumption and a virtuous cycle that would push inflation towards its 2 percent target.

If that cycle is disrupted, the head of steam generated by its massive moneyprinting stimulus would fall flat.

The importance of an export drive loomed ever larger after data on Monday showed Japanese GDP shrank in AprilJune thanks to soft consumption.

Japanese exporters are already feeling the pinch in China.

Industrial and military equipment maker Komatsu saw operating profit slide 22 percent in April-June as demand for its construction machinery in China halved from a year ago.

Hitachi Construction Machinery also took a hit from slumping Chinese demand for its power shovels.

“The Chinese government calls it the ‘new normal’, but from where we’re standing things are abnormal right now,” said Tetsuo Katsurayama, the company’s chief financial officer.

Government officials have even signalled that further BOJ easing would be unwelcome if it spurs further falls in the yen, pushing up import costs and denting consumption.

But some analysts suspect the political tide could turn if the economy remains weak, especially with premier Shinzo Abe’s support slipping ahead of upper house elections next year.

While Economics Minister Akira Amari said there were no plans to prepare a fresh stimulus package, some lawmakers are already calling for extra fiscal spending of around 3 trillion yen.

“The BOJ has blamed oil for tame inflation, but the economy has also been too weak to accelerate inflation,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.

“If growth remains weak enough to trigger fiscal spending, the BOJ probably has no choice but to deploy stimulus too.”

Reuters

Malaysia says no ringgit peg or capital controls Country’s international reserves fell below the US$100 billion mark as of July 31 Al-Zaquan Amer Hamzah and Trinna Leong

M

alaysian Prime Minister Najib Razak said yesterday he would not peg the ringgit to the U.S. dollar or implement capital controls as he sought to calm fears about the sliding currency and capital flight from Southeast Asia’s thirdlargest economy.

Najib, who has come under severe criticism after being embroiled in a scandal over indebted state fund 1Malaysia Development Berhad (1MDB), is trying to reassert his leadership over his government and a stumbling economy.

“The flexibility of our exchange rate is important to absorb global adjustments

and volatility,” Najib said in a statement.

The ringgit, Asia’s worst performer this year with losses exceeding 17 percent against the dollar, was steady on Thursday after the comments and found some respite as China’s yuan rallied.

With debts of over US$11 billion, 1MDB is being investigated for allegations of graft and financial mismanagement. Najib sits as the chair of its advisory board.

Najib has sought to ride out the political storm by reining in dissent within his party and government. He sacked his deputy last month and replaced the attorney general amidst a probe into 1MDB. The 62-year-old has also faced criticism for taking his eye off an economy suffering from weak global commodity prices and falling domestic consumption.

Najib, who also serves as finance minister, met economists from local and foreign financial institutions this week, promising to “proactively manage the economy going forward”, he wrote on Facebook.

Separately, Malaysian central bank Governor Zeti Akhtar Aziz said foreign exchange reserves had fallen but it was not a cause for worry.

“We’ve seen it decrease before and there’s no issue to be concerned because that’s what the reserves are there for, to represent a buffer to adjust during such periods,” she told reporters.

Malaysia’s international reserves fell below the US$100 billion mark as of July 31, boosting doubts over abilities to defend the worst-performing Asian currency so far this year.

She also backed the prime minister’s comments on ruling out a dollar peg for the ringgit.

“There’s no intention of moving to a less flexible regime like a peg exchange rate regime,” Zeti told reporters. “The fact that we can adjust allows the rest of our economy to remain more stable.”

Reuters

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Business Daily | 13

August 21, 2015

Asia S. Korea’s central bank chief says easy monetary policy has limits

Korean financial minister says yuan pressures on economy

Governor added central banks around the world should monitor economic and financial imbalances and other negative side effects that can result from accommodative monetary policy

Bank of Korea Governor Lee Ju-yeol

S

outh Korea’s central bank governor yesterday expressed scepticism over the lasting effects of easy monetary policy on demand, saying that structural reforms are crucial to foster sustainable economic growth.

“Since the effects of accommodative monetary policy in boosting demand cannot last for a long time, structural reforms to enhance productivity in

the financial and labour sectors are essential for sustainable growth,” said Bank of Korea Governor Lee Ju-yeol in opening remarks at an international conference hosted by the central bank.

Lee added central banks around the world should monitor economic and financial imbalances and other negative side effects that can result from accommodative monetary policy.

“In Korea, for example, a series of policy rate cuts has been accompanied by rapid growth of household debt,” he said.

“So we are now closely looking at the risks in the financial system due to the build-up of household debt, as well as at the macroeconomic risks, such as the shrinking of consumption capacity.”

South Korea’s central bank has lowered interest rates four times since last year to a record-low 1.50 percent, with the last cut taking place in June.

Household debt has grown rapidly as South Koreans took advantage of low borrowing costs to buy homes, spurred on by a government campaign to boost real estate transactions. In a response to growing worries over mounting debt, South Korea unveiled a set of measures aimed at mitigating risks from household borrowing in July.

Due to growing household debt and global uncertainties stemming from the pending rate hike by the U.S. Federal Reserver, most analysts now forecast the BOK will stand pat for the rest of 2015.

Reuters

India’s central bank governor warns on devaluation contagion Rajan has repeatedly warned about the dangers of competitive devaluations for emerging markets such as India

C

entral bank governor Raghuram Rajan said China’s devaluation of the yuan was not a concern, but warned of the dangers of “tit-for-tat” actions by other countries if the move was part of a long-term competitive devaluation.

The rupee has fallen more than 2 percent against the dollar since the yuan devaluation, slumping at one point to its weakest since September 2013, when India was in the midst of its worst currency turmoil in more than two decades.

The outlook on emerging Asian currencies in the past two weeks also deteriorated to its worst in years, as bearish bets on the Chinese yuan hit their largest in more than five years after the surprise devaluation, a Reuters poll showed yesterday.

Although Rajan added he did not believe the actions from the People’s Bank of China were an indication of a long-term devaluation, he warned of the dangers.

“I think if the Chinese depreciation holds to about this level, it’s not something that one should be overly concerned about,” Rajan said at a banking event in Mumbai.

“If it’s part of a process of getting competitive advantage through ... longer term depreciation it has to be worrisome across the world, partly

I think if the Chinese depreciation holds to about this level, it’s not something that one should be overly concerned about Raghuram Rajan, Reserve Bank of India, Governor

Central bank governor Raghuram Rajan

because you could have tit-for-tat actions,” he added.

Rajan, a former chief economist for the International Monetary Fund, has repeatedly warned about the dangers of competitive devaluations for emerging markets such as India.

Without naming examples, he expressed concerns that there were already such devaluations taking place over the past few years.

“Across the globe because of weak demand we have seen significant efforts to depreciate one’s currency,” he said yesterday.

“That’s a worrisome trend across the globe because there is only so much global demand and if we all are trying to capture it by depreciating our currency then it becomes a free for all.”

Reuters

South Korea’s finance minister said yesterday that China’s decision to devalue the yuan puts “considerable pressure” on South Korea’s economy due to the global financial turmoil it has sparked. “It’s true that (the devaluation) has laid considerable pressure on the local economy as volatility in the local stock and foreign exchange markets has increased and worries have risen over the competitiveness of exporters who compete with Chinese counterparts,” Finance Minister Choi Kyung-hwan told parliament. The minister also said the devaluation can help Korea’s exports, but his fresh remarks were seen as a step back from his earlier ones.

Australia shares hit 2015 closing low on broad selloff

Australian shares posted their lowest close for 2015 yesterday following a broad-based selloff sparked by worries about slowing Chinese economic growth and uncertainty about when the Federal Reserve will raise U.S. interest rates. The S&P/ASX 200 index fell 1.7 percent, or 91.6 points, to 5,288.6 - the lowest closing level since mid-December. All the major banks and miners finished in the red. Commonwealth Bank led the big four lenders with a 2.7-percent fall. BHP Billiton shed 3.1 percent. New Zealand’s benchmark NZX 50 index slipped 0.1 percent, or 7.6 points, to finish at 5,742.5.

Japan Post triple listing to raise up to US$14 bln The first tranche of the triple IPO by Japan Post Holdings and its two financial units, Japan’s biggest sale of stateowned assets in almost three decades, is expected to raise up to 1.7 trillion yen (US$14 billion), DealWatch reported. The government aims to raise 600-800 billion yen from the Japan Post Holdings Co offering, 500-700 billion yen from that of Japan Post Bank and 130-160 billion yen from Japan Post Insurance, said DealWatch, a Thomson Reuters publication, citing people familiar with the matter.

N.Z. advances in ASEAN-wide open skies agreement The New Zealand government yesterday welcomed an open skies air services agreement with Cambodia as another step to an aviation accord with the 10 countries of the Association of Southeast Asian Nations (ASEAN). Transport Minister Simon Bridges said the agreement with Cambodia would provide improved air links between the two countries. “ASEAN is one of our most important regional partners. Good air links with other member countries help improve New Zealand’s connectivity with the region and boost visitor arrivals,” Bridges said in a statement.

14 | Business Daily

August 21, 2015

International Greece pays ECB on maturing government bond – gov’t source Greece made a 3.2 billion euro (US$3.56 billion) payment to the European Central Bank on a maturing government bond yesterday, tapping cash from its first disbursement of bailout money, a senior government official said. “The payment was made, the funds are on their way,” the official told Reuters, declining to be named. Greece received the first tranche of funds from its new bailout loan yesterday after the European Stability Mechanism approved a rescue of up to 86 billion euros on Wednesday.

U.S. consumer prices up slightly

Valeant nears deal for “female Viagra” maker In the 12 months through July, the CPI climbed 0.2 percent Canada’s Valeant Pharmaceuticals International Inc is nearing a deal to pay US$1 billion for Sprout Pharmaceuticals, the company that just won approval to sell the first drug that aims to boost a woman’s libido, the Wall Street Journal reported.

Valeant would pay US$500 million in cash upfront and another instalment next year for Sprout and its pink libido pills that will be sold under the brand name Addyi, the Journal reported, citing a person familiar with the matter. The U.S. Food and Drug Administration late on Tuesday approved Sprout’s drug for pre-menopausal women.

Bank of NY Mellon sued by U.S. regulator A U.S. regulator sued Bank of New York Mellon Corp on Wednesday over US$2.06 billion in residential mortgage-backed securities purchased by a failed Texas bank, and accused it of breaching its duties as bond trustee to protect investors. In a complaint filed in Manhattan federal court, the Federal Deposit Insurance Corp, which sued in its capacity as receiver for the former Guaranty Bank, said it suffered more than US$440 million in losses when it sold the securities in March 2010. The FDIC filed a similar lawsuit against US Bancorp.

Equatorial Guinea’s economic capital two-week blackout A drought and a surge in demand for electricity have left the residents of Equatorial Guinea’s economic capital of Bata virtually without power for two weeks, authorities and residents said Wednesday. The government has urged Bata’s hundreds of thousands of residents to be “patient”. “We have a special situation this year, there is too much drought. Bata has grown a lot in recent times, the demand for electricity has surged,” Gabriel Mbega Obiang Lima, the minister for mines, industry and energy, said on national television.

Norwegian crown drops after growth data The Norwegian crown fell to its lowest in over seven months against the euro yesterday after Norway’s economy slowed in the second quarter, leaving the door open for more monetary easing in coming months. The crown has fallen 10 percent in the past three months against the euro as prices of crude oil, Norway’s main export, fell, dampening overall investment and pushing up unemployment. The euro rose 0.4 percent to 9.2734 crowns, its highest since early January. Norway’s overall economy shrank in the second quarter, with the mainland growing at a measly 0.2 percent.

Lucia Mutikani

U

.S. consumer prices rose only slightly in July as airline fares recorded their biggest drop since 1995, but tame inflation pressures will probably not discourage the Federal Reserve from raising interest rates this year.

The Labour Department said on Wednesday its Consumer Price Index edged up 0.1 percent last month, with gasoline and food prices increasing marginally. July’s rise marked a sixth straight monthly increase.

While inflation remains soft, a strengthening economy, marked by a tightening labour market and a firming housing sector, should give the U.S. central bank confidence it will gradually move toward its 2 percent target, economists said.

“Fed officials made clear that they do not need to see higher inflation before hiking. They just need to have reasonable confidence it will return to mandate,” said Michelle Girard, chief economist at RBS in Stamford, Connecticut.

Most economists have been expecting the Fed to raise its shortterm interest rate next month for the first time in almost a decade.

Futures markets on Wednesday

trimmed bets for a September liftoff after minutes of the Fed’s July 28-29 meeting showed policymakers remained concerned about weak inflation and tepid wage gains, even as an improving job market had drawn them closer to a rate hike.

“It was a mixed message, but it still seems inevitable that we will get higher rates,” said Macrae Sykes, analyst at Gabelli and Co in Rye, New York.

In the 12 months through July, the CPI climbed 0.2 percent. It was the second month the annual CPI increased after plunging crude oil prices pushed it into negative terrain in January.

Signs of an ebb in the disinflationary trend, combined with easing labour market slack and a pickup in economic growth are likely to be welcomed by policymakers.

Gradual rate hikes

Any monetary tightening by the Fed is likely to be gradual given the dampening effect on inflation of a strong dollar, renewed weakness in oil and other commodity prices, and China’s devaluation of the yuan, which should push down import prices.

Swiss watch exports decline as Asia plunges Shoppers may also forgo a Swiss watch in favour of an Apple Watch as they are in similar price segments Corinne Gretler

S

wiss watch exports slid the most in more than five years in July amid plunging shipments to Asia, as Chinese tourists bought more timepieces in Europe and avoided South Korea following the outbreak of a deadly virus.

Exports fell 9.3 percent to 1.9 billion Swiss francs ($2 billion), the steepest monthly decline since November 2009, according to figures released Thursday by the Federation of the Swiss Watch

Industry. Sales to China tumbled 40 percent, compared with a 49 percent increase in July 2014. Shipments were down 20 percent to South Korea and 29 percent to Hong Kong, offset partly by higher exports to Europe.

“The China export number may be shocking on first glance, but it needs to be compared to the extremely high exports of last year,” said Rene Weber, an analyst at Bank Vontobel AG in Zurich. Switzerland’s watch

“The low inflation profile will certainly keep the Fed communicating a gradual glide path, but little in the July CPI report suggests that hikes should be delayed,” said Gennadiy Goldberg, an economist at TD Securities in New York.

Goldberg noted that the sixmonth annualized pace of the CPI accelerated to 2.9 percent from 1.3 percent in June.

Although the so-called core CPI, which strips out food and energy costs, rose only 0.1 percent last month, that was largely because of the 5.6 percent decline in airline fares.

Economists expect the drop in air ticket prices, which was the largest since December 1995, will be temporary. Housing costs shot up 0.4 percent, the biggest increase since February 2007. That was on top of a 0.3 percent gain in June.

With the rental vacancy rate near a 22-year low, housing costs are likely to continue pushing higher, which should support underlying inflation.

In the 12 months through July, the core CPI increased 1.8 percent.

It was the fourth time in five months that the 12-month change was 1.8 percent.

Reuters

industry has been struggling in China since 2012, when the country began a crackdown on extravagant spending among government officials. Last year’s political protests in Hong Kong, where wealthy Chinese purchase watches and jewellery at lower tax rates than on the mainland, still weigh on the industry.

China’s recent devaluation of the yuan adds to its woes as it may impact sales when converted into local currencies and tourists may spend less abroad.

All price segments saw a decline in units and value, with watches costing 200 francs to 500 francs having the steepest drop of 15 percent. That’s more negative for Swatch than Richemont, said John Guy, an analyst at MainFirst Bank AG. The decline in watch shipments to South Korea came after the country faced an outbreak of the Middle East Respiratory Syndrome, which Weber said kept Chinese tourists away. The country said the virus was no longer a concern on July 28.

The debut of the Apple Watch is an additional cause of worry for the Swiss watch industry, as it may lead retailers to reduce orders of timepieces on concern of rising competition.

Bloomberg News

Business Daily | 15

August 21, 2015

Opinion Business

wires

Leading reports from Asia’s best business newspapers

Local innovation for local problems

VIETNAM NEWS

Muhammad Hamid Zaman

The Viet Nam-EAEU (the Eurasian Economic Union) free trade agreement was signed in May, but penetrating this large market is not an easy task, experts said. Speaking during an online dialogue at the Government website chinhphu.vn, Nguyen Hoai Nam, Deputy General Secretary of Viet Nam Association of Seafood Exporters & Producers (VASEP), spoke of the obstacles facing the local fisheries sector in a discussion on FTA Viet Nam-EAEU, in a bid to help businesses take advantage of opportunities. The EAEU, which includes Russia, Armenia, Belarus, Kazakhstan and Kyrgyzstan, was launched in January.

Professor of biomedical engineering at Boston University

THE PHNOM Penh POST In a bid to encourage companies to list on Cambodia’s beleaguered stock exchange, a new prakas (ministerial decision) released yesterday will allow businesses to delay their monthly prepayment of tax on profit to the end of the year, according to an announcement on the Cambodia Securities Exchange. The prakas was released to complement an earlier directive giving listed companies a 50 per cent tax break for three year. Firms that qualify with the Securities and Exchange Commission of Cambodia will immediately enjoy the delay in prepayment of tax.

THE STRAITS TIMES The sharp falls in regional currencies threaten to hammer Singapore exporters already battling the effects of a slowing global economy. The Malaysian ringgit, the Indonesian rupiah and the Thai baht have all taken a beating in recent weeks, which is making shipments from those nations relatively cheaper while lifting the prices of goods from here. Malaysia, Indonesia and Thailand are among Singapore’s top 10 markets for non-oil domestic exports so any softening in demand will be keenly felt here. The ringgit has been particularly hard hit, crashing 9.4 per cent against the Singdollar.

THE AGE The state government has released the draft environmental impact statement into the Abbot Point port expansion in north Queensland. And within minutes of release, it had already come under fire from conservationists, who called for the project to be cancelled. State Development Minister Anthony Lynham said the release of the EIS was “a milestone for the sustainable development of the Galilee Basin” that would create jobs for Queenslanders. “We’ve delivered on our election commitment to protect the Great Barrier Reef and the nationally-significant Caley Valley wetlands,” he said.

A

s we learn more about the threat from substandard and counterfeit medicines, it is becoming clear that it is a far greater problem than previously thought. It is also a scourge that is most acutely felt in developing countries, where fake and lowquality pharmaceuticals kill more than 500,000 people a year and affect millions more by contributing to the emergence of diseases that are resistant to existing treatments.

Compounding the problem is the approach taken by policymakers in the developing world, who are far more likely to look for solutions abroad than at home.

This shortsightedness is a grave mistake that impedes innovation and progress. When it comes to tackling high-impact health challenges like the proliferation of fake or inferior drugs, local solutions and local innovations are not only likely to be central to any successful effort; they have the potential to provide benefits that go far beyond the scope of the original problem.

Throughout the developing world, but most evidently in Africa, two groups are interested in finding tools to combat the menace of bad drugs. One group, comprising students, entrepreneurs, and researchers, seeks solutions that are local, original, and tailored to the needs of their societies. Its members are quick to share ideas and eager to collaborate.

While this group has produced some innovative solutions – for example, the Ghanaian entrepreneur Bright Simmons is using mobile technology to address the counterfeit-drug problem – many more passionate local inventors and entrepreneurs must get involved.

The other group is made up of government officials, including

regulators. They, too, are deeply concerned about the scourge of low-quality and fake drugs, but they are reluctant to rely on local innovation. In their minds, the solutions already exist, in the form of high-end technology designed and developed in the world’s richest countries. The challenge, for this group, lies in finding the financial resources to import these technologies.

For developing-country leaders, the effort needed to create an ecosystem that supports innovation simply appears too great, and the return on investment too little. At countless conferences and symposia, ministry officials and government personnel insist that funds must be found to import solutions, à la carte.

Research and innovation, or engagement with local entrepreneurs and inventors, is, unfortunately, never on the agenda. There simply is little interest in tapping into the enormous pool of intellect, passion, and energy at home.

Officials would be wise to reconsider. There is mounting evidence that sustainable solutions must have local support and local partners.

Raising funds to import solutions from abroad addresses just one part of the challenge.

Many countries lack the resources to install, operate, and maintain equipment that has not been designed locally.

As misuse and neglect causes equipment to malfunction, more funds become required or the program simply dies. Not only does this approach fail to nurture local ecosystems of innovation, which is deeply frustrating; it also fails – repeatedly – to solve the problem at hand.

While some solutions in the area of drug-quality testing have come from African

There is mounting evidence that sustainable solutions must have local support and local partners. Raising funds to import solutions from abroad addresses just one part of the challenge

entrepreneurs like Simmons, such examples are extremely rare, and many are developed in the diaspora with the support of organizations from outside the region. For the most part, such initiatives never engage local students. Local curricula do not focus on local challenges or promote local innovation.

And yet local talent is critical for solutions that are both original and sustainable. Indeed, by nurturing an inclusive culture of research, local innovation has the potential to provide benefits that extend far beyond the specific problem that is being addressed.

Nurturing the participation of underrepresented groups and creating opportunities for education and learning not only creates goodwill and promotes transparency and accountability.

Building a stable foundation for future research also enables more productive public-private partnerships and stronger links between academia and domestic industry, thereby promoting economic growth.

Foreign organizations, such as aid agencies or pharmaceutical companies, do have a role to play in boosting local innovation.

They can support it financially, create new partnerships, and encourage policymakers to give it more credence.

The international community has a role to play as well.

This year, the United Nations will adopt the Sustainable Development Goals, marking the start of the next phase of global efforts to eradicate poverty and improve health.

As the example of developing countries’ on-going fight against counterfeit and low-quality medicines shows, success will depend – far more often than not – on local innovation.

Project Syndicate

16 | Business Daily

August 21, 2015

Closing China continues cash injections into money market

Thailand reshuffles cabinet to focus on troubled economy

Central bank pumped another 120 billion yuan (nearly US$19 billion) into major commercial banks and brokerages via reverse repurchase agreement (repo) yesterday. It is the second reverse repo this week after the People’s Bank of China (PBOC, pictured) unexpectedly put the same amount of liquidity into the market on Tuesday.

The first marked the largest single-day cash injection since January 2014. The yield for the seven-day reverse repo still stood at 2.5 percent, according to a PBOC’s statement. The PBOC has made net money injections of 150 billion yuan this week, markedly up from 5 billion yuan a week ago.

Thai Prime Minister Prayuth Chan-ocha (pictured) has reshuffled his cabinet, appointing a new finance minister and a new deputy premier to oversee the economy as the military government seeks to spur growth. Apisak Tantivorawong, former president of state-owned Krung Thai Bank, has become finance minister, replacing Sommai Phasee, according to a proclamation yesterday. A government adviser, Somkid Jatusripitak, who is also a former finance minister, has been appointed deputy prime minister in charge of reviving economic growth. Somkid was a deputy prime minister and commerce minister in a deposed Prime Minister Thaksin Shinawatra government.

Taiwan July export orders fall for 4th month One bright spot was U.S. orders, which rose 10.9 percent, although those from Japan and Europe fell 8.8 and 3.3 percent, respectively Roger Tung and Michael Gold

T

aiwan’s export orders contracted for a fourth month in July as demand from China continued to deteriorate, rattling its trade-reliant Asian neighbours and pointing to slower global growth.

A shaky economic situation in China, Taiwan’s largest trading partner, puts a lid on demand for the island’s advanced tech goods and p re ss ur es ot her A sian economies who rely on Chinese domestic spending.

Taiwan’s Ministry of Economic Affairs said yesterday it did not rule out a full-year drop in overall export orders, which would be the first in six years.

“The weak export orders foretell that exports will remain sluggish not only for Taiwan, but also for the region,” ANZ Research economist Louis Lam said in a report.

Orders overall fell 5 percent last month from a year earlier, worse than a 4.5 percent decline forecast in a Reuters poll. In June, orders

had fallen 5.8 percent after shrinking 5.9 percent in May, the fastest pace in more than two years.

China’s yuan, which has depreciated by 2.9 percent since last week, has caused waves around the world as authorities battle a slowdown in the world’s second-biggest economy.

This weakness was reflected by a 14.1 percent drop in China orders, the largest among all major trading partners.

However, the yuan’s fall may be a net benefit for firms such as contract manufacturer

S. Korea’s first woman PM jailed for illegal funding

S

Hon Hai Precision Industry Co Ltd, who hire Chinese workers to manufacture goods like the iPhone from Apple and pay them in yuan.

“The yuan depreciation may have some positive impact on tech firms who send goods to China for final assembly,” Taiwan’s Economic Minister Woody Duh told a news conference ahead of the data.

Tech slump

Taiwan’s export orders, which are seen as an indication of the strength of Asian exports and of global demand for technology, have been weakening after

surging last year from strong demand for Apple iPhones.

Slumping orders have hit manufacturers, although many are farmed out to production sites in China operated by Taiwanese tech companies.

Communication-related goods such as phones, smartwatches and servers saw healthy 8.4 percent on-year growth, the ministry said, and were the only tech category to post gains.

Orders for precision goods such as flat panels tumbled 19.4 percent, however, amid falling prices.

The government said last week that Taiwan’s exports are expected to fall 7.1 percent this year, the biggest annual drop in six years, with economic growth for 2015 forecast to also hit a six-year low.

The central bank has held its official interest rate but has eased policy by guiding the overnight interbank rate lower since China’s devaluation, in a bid to weaken the currency to buffer its economy and exports.

Elsewhere in Asia, South Korea’s finance minister said yesterday that China’s decision to devalue the yuan puts “considerable pressure” on South Korea’s exportreliant economy due to the global financial turmoil it has sparked.

To drive growth, Taiwan officials have also eased restrictions on property investment, announced a fund to spur mergers and acquisitions and raised planned spending on infrastructure by 13 percent next year over 2015.

Alibaba joins arms maker to offer location services

Kazakhstan floats tenge, currency tumbles

I

K

outh Korea’s first female prime minister was headed for jail yesterday after the Supreme Court upheld a conviction and two-year prison sentence for accepting illicit political funds.

Now 71, Han Myeong-Sook served one year as prime minister from April 2006 under the administration of then-president Roh Moo-Hyun.

In 2010, she was tried on charges of receiving 880 million won (US$760,000) from a businessman in illegal campaign funding for her eventually unsuccessful 2007 bid to secure her party’s presidential nomination. Han was acquitted by a district court which found the businessman’s testimony unreliable, but that verdict was reversed in 2013 by the high court which sentenced her to two years’ imprisonment.

She was allowed to remain free pending her appeal, but yesterday’s Supreme Court ruling means she will now go to prison. Currently a sitting MP, Han will automatically forfeit her seat in the National Assembly.

She was the first woman to hold the post of prime minister in South Korea, and will now become the first former premier to find herself behind bars.

nternet giant Alibaba has joined forces with China’s biggest defence company to offer location-based services using a home-grown satellite navigation system that competes with the US GPS network, the firms said.

New York-listed Alibaba and China North Industries Corp. (Norinco) have created a 2.0 billion yuan (US$313 million) joint venture to offer services using Chinese satellite navigation system Beidou, Norinco said in a statement on its website.

Each company has a 50 percent stake in Shanghai-based Qianxun Weizhi network, which was set up on Tuesday, it said.

Norinco, a leader in China’s military trade, is a sprawling state-owned group selling everything from tanks to air defence systems. It is the authorised company for research and applications for the Beidou system, state media said. Beidou, which began offering both commercial and public services in late 2012, says on its website it has a network of 35 satellites. Its services are centred on the Asia-Pacific region but it is scheduled to provide global coverage by 2020, and it is viewed as a competitor to the global positioning system (GPS) developed by the United States.

AFP

AFP

Reuters

azakhstan’s under-pressure tenge lost more than a quarter of its value yesterday after the oil producing central Asian nation, hit by a sharp fall in world crude prices, introduced a freely floating exchange rate for the currency.

Acting against a backdrop of devaluation and depreciation in the currencies of some of its major trading partners and rivals, Kazakhstan’s government and central bank said the country’s economic policy would henceforth be based on inflation targeting.

“This is not a devaluation, this is a transition to a freely floating rate when the market itself determines a balanced exchange rate on the basis of demand and offer,” central bank Governor Kairat Kelimbetov told a news conference broadcast from the capital Astana.

The official tenge rate tumbled by 26.2 percent to 255.26 per dollar on the Kazakhstan Stock Exchange in response to the policy shift.

Kazakhstan, Central Asia’s largest economy and No.2 post-Soviet oil producer after Russia, suffered a 40 percent fall in exports between January and July, said National Economy Minister Yerbolat Dosayev. Imports shank by 20 percent in the same period, he said.

Reuters