Macau Business Daily October 18, 2016 by Business Daily

Fiscal surplus drops 33 pct y-o-y, with expenses up 3 pct Budget Page 6

Tuesday, October 18 2016 Year V Nr. 1153 MOP 6.00 Publisher Paulo A. Azevedo Closing Editor Kelsey Wilhelm Economy

Gaming

Security services see highest increase in receipts for 2015, at MOP1.7 bln Page 6

Analysts predict next figures could show China growth slowing down Page 9

Gaming

Analysts: arrest of Crown employees could be good news for MSAR gaming industry Page 7

Losing faith Private poll

www.macaubusinessdaily.com

Q3 revenues see first quarterly increase since Q2, 2014 Page 7

SME

Declining appreciation for government policies, lower levels of recognition of their own skills and decreasing business satisfaction are weighing down local entrepreneurs, who, despite the negatives, still see entrepreneurship as a viable career option. So says the latest Entrepreneurship Environment Index. Human resources remain the largest problem, and nearly 20 pct of surveyed entrepreneurs said they’d given up on their own businesses. Page 2

Annual summit

Inbound investment flows slump 67 pct in 2015

India says BRICS should double trade volume Page 10

What’s the delay?

Execution rates of zero were seen in a large number of government projects during 2015, according to the government’s budget execution summary presented to the Legislative Assembly yesterday, sparking outcry. Fifty-eight of the projects, all related to public works, never got off the ground, sometimes due to “time constraints” said the Secretary for Economy and Finance. The Secretary promised an enquiry into why and thorough budget assessments in the future.

Capital A total of MOP9.1 bln in inward direct investment flows was seen in 2015, a near 67 pct drop y-o-y. Negative inward flows were seen in the gaming sector, amounting to MOP6 bln. On the flip side, the Banks & Securities sector surged 57.2 pct y-o-y to MOP7.8 bln, and construction soared 142 pct to MOP2.4 bln in direct investment inflows. Direct investors continue to be primarily from the Mainland, accounting for MOP7.4 bln in 2015. Page 4

September home transactions double

Real estate Average housing prices fell while transactions of residential properties jumped in September, with a total of 934 transactions in the MSAR during the month, double that of the same period in 2015. Average prices decreased by 2 pct y-o-y to MOP81,769 per square metre, a 31 pct drop month-on-month. Page 5

Glittering times

Budget Page 3

HK Hang Seng Index October 17, 2016

23,037.54 -195.77 (-0.84%) Worst Performers

Cathay Pacific Airways Ltd

+0.58%

Tencent Holdings Ltd

-0.10%

Galaxy Entertainment Group

-4.25%

Sino Land Co Ltd

-2.12%

Hang Seng Bank Ltd

+0.35%

CLP Holdings Ltd

-0.13%

Sands China Ltd

-3.29%

CNOOC Ltd

-1.92%

China Resources Power

+0.15%

Power Assets Holdings Ltd

-0.14%

China Unicom Hong Kong

-2.83%

China Mobile Ltd

-1.81%

China Resources Land Ltd

+0.10%

Kunlun Energy Co Ltd

-0.17%

China Mengniu Dairy Co Ltd

-2.70%

Li & Fung Ltd

-1.55%

MTR Corp Ltd

0.00%

China Overseas Land &

-0.21%

Bank of East Asia Ltd/The

-2.37%

China Life Insurance Co Ltd

-1.45%

25° 26° 26° 27° 26° 31° 25° 30° 26° 29° Today

Source: Bloomberg

Best Performers

WED

THU

I SSN 2226-8294

FRI

SAT

Source: AccuWeather

Gold market World Gold Council says Mainland gold demand will keep a steady pace in the coming months. The commodity has recovered its shine recently as other options for storing wealth lost steam. In the meantime, Singapore is trying to set its footprint on the price of gold, bringing the London benchmark to Asian markets and challenging China’s latest steps. Pages 9 & 13

2 Business Daily Tuesday, October 18 2016

Macau Start-up Latest Entrepreneurship Environment Index drops

Not so entrepreneur-friendly Local start-ups have become less confident in their overall operations, the government’s policies and their own skills Kam Leong kamleong@macaubusinessdaily.com

he city’s entrepreneurship environment has taken a turn for the worse as local start-ups’ appreciation of government policies has decreased. Meanwhile, local entrepreneurs have also shown lower recognition of their own skills, according to the latest Macau Entrepreneurship Index report. The report, released by the Small & Medium Enterprises Association of Macao, is in its second edition, following the group’s first report launched in July. For this edition, the association interviewed 200 local start-up entrepreneurs aged above 18, between July 25 and August 30 of this year. The report indicates that the city’s latest Entrepreneurship Environment Index has reached 46.2 points out of 100, which is below the average of 50 points, as well as representing a decrease of 2.4 points compared to the 48.6 points registered in the first edition. The decline in the Index is due to the surveyed entrepreneurs showing lower levels of confidence in the government’s direct or indirect policies to boost the development of new startups in the territory. The sub-index ‘Entrepreneurship Policy’ thus went down by 1.2 points to 50.6 points compared to the previous report. In addition, the ‘Entrepreneurship Recognition’ sub index decreased by 3.1 points, to 36.2 points, compared to the previous report, reflecting a lower level of recognition among the

interviewed entrepreneurs of their skills in running a business. Meanwhile, the ‘Entrepreneurship Value’ sub index scored 51.9 points, a drop of 3.1 points. However, the report notes that the score reflects that start-up entrepreneurs are still quite optimistic about the related values for entrepreneurship, such as agreeing that entrepreneurship is a viable career option.

Less satisfied

On the other hand, the interviewed entrepreneurs scored their overall business satisfaction at 5.6 points out of 10, which is slightly down by 0.1 points compared to the first edition. Of the surveyed start-ups, 47.5 per cent gave a grade of “average” when questioned whether their current turnover, profit or overall satisfaction had met their initial expectations,

with 29.5 per cent believing that their current business was not meeting expectations, while 23 per cent thought their businesses had achieved better results than initial estimations. A total of 48.5 per cent of these entrepreneurs indicated that human resources were the biggest challenge for their operations, whilst 44.5 per cent also pointed out capital issues. Some 29 per cent expressed difficulties regarding the government’s licensing policies. Meanwhile, 56 per cent claimed they had enquired, applied for or participated in the government’s Young Entrepreneur Aid Scheme, which offers interest-free loans of up to MOP300,000 (US$37,500) for young people to start their own businesses.

Unidentified opportunities

According to the report, only 18 per cent of the interviewees believe there will be opportunities for start-ups in the coming six months, a drop of two percentage points compared to the first report in July. Moreover, 54.5 per cent think they

have a number of commercial competitors in the market, with only five per cent reckoning they do not have any rivals. The report also notes that 87.8 per cent of the city’s new start-ups have no influence in the market, which is similar to the results stated in the July edition.

The start-ups

Nearly 80 per cent of the interviewees were full-time entrepreneurs, with 68 per cent of these managing their first business, the report says. Seventy-six per cent of these startup businesses were related to personal services, of which retail accounted for 28.5 per cent, while restaurants and cafes accounted for 19 per cent and 8.5 per cent, respectively. The size of these start-ups is primarily micro or small, which refers to businesses with 20 employees or less. The average accumulative investment of local start-ups amounted to MOP957,000, according to the report. But it noted that investment values for entertainment venues and MICE-related businesses reached over MOP3 million, while the investment for e-commerce totalled over MOP2 million on average. Overall, 64 per cent of the interviewees claimed they had not yet achieved a payback from their operations, while nearly 20 per cent claimed they had quit their businesses. The association is urging the government to increase training for local entrepreneurs, as well as to provide more conditions and incentives for entrepreneurship in the city, in order to drive up the success rate of local start-ups and increase the willingness of residents to launch new businesses.

Economy

Receipts and expenditure increased in most sectors last year Despite the performance of the gaming sector last year, receipts and expenditure of establishments operating in various sectors recorded year-on-year increases Cecilia U cecilia.u@macaubusinessdaily.com

The receipts and expenditure of establishments operating in the territory in the sectors of Real Estate Management, Security, Cleaning, Advertising and Conference & Exhibition Organising Services, all posted year-on-year increases, according to official data released yesterday by the Statistics and Census Service (DSEC). The DSEC data shows that in 2015, establishments operating in security services saw the highest increases in receipts relative to other sectors in the service industry, at MOP1.69 billion (US$211 million), up by 41.5 per cent. Expenditure for the security services sector also rose by 40.4 per cent to MOP1.53 billion. Compensation of employees within the

sector accounted for 90.6 per cent of all expenditure, totalling MOP1.38 billion, a year-on-year increase of 44.4 per cent. Receipts and expenditures for establishments operating in cleaning services also saw year-on-year increases of 39.9 per cent and 37.7 per cent, to MOP956 million and MOP830 million, respectively.

Increase in establishments and employees

According to the official data, aside from real estate management services, most industries recorded year-onyear increases in both the number of establishments and persons engaged, with 80 more establishments appearing in advertising services last year, compared to the 521 recorded in 2014. Meanwhile, since security, cleaning

Establishments operating in security services saw the highest increases in receipts

and real estate management services require more labour, these three sectors together engaged a total of 21,402 persons, with the highest numbers appearing in security (8,891) and cleaning (7,099). For real estate management, the DSEC data reveals decreases in both the number of establishments and the number of persons engaged, with

Infrastructure

Taipa roundabout reconstruction contract granted A service contract worth MOP14 million (US$1.75 million) has been granted to engineering consultancy company Ove Arup & Partners Hong Kong Ltd. for works on the reconstruction of the road network near the roundabout at the Macau Olympic Aquatic Centre, according to a dispatch signed by Chief Executive

Fernando Chui Sai On and published in the Official Gazette yesterday. The total payment will be divided into three installments over three years, with the first payment of MOP5.7 million to be paid this year. The second payment of MOP7.1 million will be made in 2017, and a final payment of MOP1.2 million

will be made in 2018. This expense is classified under the ‘Investment Plan’ segment of the MSAR financial budget. The roundabout has been under continual construction due to the section of the Light Rail Transit (LRT) system passing directly through it en route to the hub located in front of the Macau Jockey Club. A.L.

seven fewer establishments and a year-on-year decline in persons engaged of 7.8 per cent.

Gross fixed capital formation

Due to increases in the acquisition of properties and major renovation projects in 2015, the gross fixed capital formation (GFCF) – including the expense of industrial projects such as land improvements, plant and machinery – leapt seven-fold to MOP229 million, compared to MOP28 million recorded in 2014. The GFCF for conference and exhibition organising services, on the other hand, dropped significantly by 70.7 per cent year-on-year to MOP2.14 million, attributed to a reduction in the acquisition of equipment. Moreover, from 2014 to 2015, the cleaning industry saw its GFCF increase by 69.4 per cent to MOP15.48 million. The significant increase was due to the increase in acquisition of vehicles and machinery and equipment in the city.

Business Daily Tuesday, October 18 2016 3

Macau Finance

Zero implementation rates for government investment projects Secretary for Economy and Finance, Lionel Leong Vai Tac says that relevant government departments need to explain the zero implementation rates for some of the government’s investment projects listed in the performance report of the 2015 financial budget Annie Lao annie.lao@macaubusinessdaily.com

egislator Mak Soi Kun questioned why a large number of projects in the MSAR’s Budget and Investment Plan (PIDDA) had implementation rates of zero during the 2015 year, as published in the annual budget performance report presented at a meeting held by the Legislative Assembly (AL) yesterday. Secretary for Economy and Finance, Lionel Leong Vai Tac noted his

agreement on the issue, responding that the government would enquire with various departments in regards to the lack of implementation of the projects, 58 of which relate to public works. Once the feedback is received it will be presented to the AL, the Secretary said. However the Secretary provided a partial answer, noting that: “the zero rate happened due to several reasons, including time constraints of projects and construction delays.” Secretary Leong commented that he hoped the relevant departments could undertake a thorough assessment

Society

GDSE extended for another two years The Office for the Development of the Energy Sector (GDSE) has had its operations extended for another two years, according to a dispatch signed by Chief Executive Fernando Chui Sai On and published in the Official Gazette yesterday. The twoyear extension will take effect from January 1 next year. Any costs incurred from the operations of the GDSE will be classified in the MSAR

budget under the ‘GDSE’ project related funding. The GDSE is tasked with promoting necessary measures for implementing energy conservation, environmental protection, and technical conditions for installation and equipment related to the energy sector, and carrying out studies and overseeing concessions of public services related to the sector, among others. A.L.

when preparing their budgets in order to improve the implementation rate of investment budgets in the future. A vote was taken at the AL with all legislators agreeing to pass next year’s financial expenditure of MOP182 million, a decrease of 0.88 per cent year-on-year.

Demand for Portuguese language

During the AL meeting, Legislator Ma Chi Seng also urged the government to provide more training classes to help local residents to speak both Mandarin Chinese and Portuguese. The legislator noted the need is due to the increasing demand for Macau to act as a trade platform between Portuguese-speaking countries and China. “Since Macau has now become a platform for Portuguese-speaking countries to do business with Mainland Chinese investors and investors from Macau, it is necessary to train the locals to be bilingual and the demand for it is growing quickly,” Ma said.

Legislator Ma also commented that the current education system lacks Portuguese-speaking teachers in the city’s primary and secondary schools. He therefore urged the government to work with local schools as soon as possible to enhance the city’s bilingual language skills. He suggested the government take initiatives to strengthen educational cooperation agreements with education institutions in Portuguesespeaking countries, in areas such as providing language training. Furthermore, Legislator Chan Hong criticized that, despite the city’s history, the Portuguese language has not been popular in the city’s educational system, and since the MSAR’s return to Mainland China there have been less people speaking Portuguese in the city. “According to research conducted by the Language and Culture Research Centre of Macao in 2014, it shows that the use of Portuguese in the city ranged from 0.4 to 0.9 per cent,” Chan added. She suggested the government urgently set up a standard for Portuguese language education in the city and support a long-term plan by investing resources in the area, as well as setting out clear training objectives and specific programs.

4 Business Daily Tuesday, October 18 2016

Macau Capital Negative inward flow to the gaming industry

Inbound investment flows slump 67 pct in 2015 The local banking and security sector, however, attracted more external investment than in 2014 Kam Leong kamleong@macaubusinessdaily.com

he MSAR saw a total of MOP9.1 billion (US$1.1 billion) in inward direct investment flows in 2015, plunging 66.7 per cent yearon-year, the official data released yesterday by the Statistics and Census Service (DSEC) shows. According to the DSEC, the significant drop in inward investment flows was due to a negative inward flow of MOP6 billion registered in the city’s gaming sector, with the

amount of dividends paid exceeding total profits made in the year. However, inflows of direct investment in the Banks & Securities sector surged by 57.2 per cent year-on-year to MOP7.8 billion, while that in Construction also soared by 142.8 per cent year-on-year to MOP2.4 billion. Meanwhile, Wholesale & Retail saw a slight decrease of 0.5 per cent yearon-year to MOP3.9 billion. Overall, the city’s income of inward direct investment registered a yearon-year decrease of 39.8 per cent in the year, amounting to MOP51.5 billion, the first decline seen since

2009. Income generated from the local gaming industry accounted for MOP30.1 billion, down by 47.5 per cent year-on-year. In addition, income earned by Wholesale & Retail fell by 30 per cent year-on-year to MOP6.4 billion, however that of Banks & Securities jumped by 17.8 per cent year-on-year to MOP10.8 billion. The city’s direct investors were primarily from Mainland China, whose investment flows accounted for MOP7.4 billion of the total in 2015, followed by those from Hong Kong and the British Virgin Islands, whose inward investment flows amounted to MOP3.2 billion and MOP2.8 billion for the year, respectively. Nevertheless, the city saw inward

direct investment flows from the Cayman Islands record a negative inflow of MOP6.5 billion.

Investment stock

As at the end of last year, a total of MOP231.8 billion worth of stock of inward direct investment was recorded, increasing five per cent yearon-year while also representing the lowest level of increase seen since 2009. Of the total, MOP123.3 billion was from the Gaming sector, a drop of 4.8 per cent year-on-year. Nearly half of the inward stock investment in the gaming sector was from the Cayman Islands. Banks & Securities attracted stock of inward direct investment of MOP46.5 billion for the whole year of 2015, a surge of 22.9 per cent year-on-year. Of this, 60.7 per cent was from Mainland China. In addition, Wholesale & Retail saw stock of inward investment jump by 17.5 per cent year-on-year to MOP26.3 billion, with investment from Hong Kong contributing 58.1per cent.

Outward investment

Tourism

Alexis Tam meets with international authorities Attending the Global Tourism Economy Forum on Sunday, the Secretary for Social Affairs and Culture, Alexis Tam Chon Weng met with authorities from the governments of Myanmar, Hungary, Zimbabwe and France to discuss cooperation measures in the areas of tourism and education. One of the proposed measures came from Myanmar Union Minister for

Hotels and Tourism, Ohn Maung, who proposed direct flights between the MSAR and Yangon. Secretary Tam indicated that the MSAR Government would start research into this proposal. Hungarian Government Commissioner for Tourism, Gusztáv Bienerth stated that the Hungarian government is happy to assist the MSAR in

promoting its tourism industry in Hungary. Meanwhile, the Zimbabwean Deputy Minister of Tourism and Hospitality Industry, Anastancia Ndhlovu said that the Zimbabwean Government is willing to learn from Macau in regards to promoting tourism, noting that the MSAR is a good platform for promoting Zimbabwean tourism to other Lusophone countries. Secretary Tam remarked to the French Minister for Tourism, Matthias Fekl, that the French and MSAR Governments should promote education, in the form of exchange programs for the youth, in order to encourage in-depth learning of each others’ cultures. C.U.

On the other hand, outward direct investment flows of local enterprises recorded a negative value of MOP5.5 billion for last year, resulting in a net inflow of MOP14.6 billion. At the end of 2015, stock of outward direct investment had decreased by 19.4 per cent year-on-year to MOP24.7 billion. Of the total, investment in Hong Kong accounted for MOP5.6 billion, while that in Mainland China amounted to MOP4.2 billion. Outward direct investment income earned by local companies surged by 22.2 per cent year-on-year to MOP800 million. In particular, that earned by gaming corporations rose by 19.2 per cent year-on-year to MOP500 million. Yet, outward direct investment stock in the Gaming industry declined by 22.9 per cent year-on-year to MOP19.8 billion, while that in Wholesale & Retail also dropped by 9.9 per cent year-on-year to MOP3 billion. In 2015, there were 2,597 enterprises involved in inward direct investment and 64 enterprises in outward direct investment, according to the DSEC.

Technology

FDCT visits Hong Kong for ‘Smart City’ experience Graft

Lou Ngai Wa sentenced to 12 and a half years in jail

Ex-Transport Bureau official convicted of corruption Former Transport Bureau (DSAT) official Lou Ngai Wa was convicted of 42 counts of accepting bribes for illegal actions and 12 counts for sharing economic benefits, the Court of First Instance ruled yesterday. The ex-head of DSAT’s Transport Management Department will stay behind bars for 12 years and six months, in addition to being fined MOP36,000 (US$4,500), the court said. Last year, the disgraced official and his subordinate, Pun Ngai were busted by the city’s graft watchdog, the Commission Against Corruption (CCAC), for allegedly receiving MOP16 million in bribes for helping three companies secure parking lot management contracts from the government. The total value of the

contracts reached MOP68 million, and accounted for around 70 per cent of all public parking contract amounts in Macau. Mr. Pun, the second defendant in the case, was also sentenced to seven years and nine months in jail, after being convicted of 10 violations of confidentiality and 42 counts of accepting bribes for illegal actions. The judge said in his verdict that Mr. Lou had played a decisive role in the case, having intervened in the process of granting public contracts several times, in addition to accepting large amounts of bribes and sharing the economic benefits he gained from illegal actions, according to local broadcaster TDM Radio.

The Chairman of the Macau Science and Technology Fund (FDCT), Ma Chi Ngai, and his colleague Chan Wan Hei paid a visit to the Hong Kong Applied Science and Technology Research Institute Company Limited (ASTRI) with the goal of learning about the latest research information about the ‘Smart City’ concept. Aside from the exchange of information, the FDCT chairman remarked that the visit sought to build up industrial co-operation with ASTRI in regards to ‘Smart City’ projects, as well as ‘Big Data’ – sets of large data that reveal patterns, trends, and associations.

The Chief Executive Officer of ASTRI, Dr Franklin Tong Fuk-kay, hopes to strengthen co-operation between the FDCT and ASTRI. The FDCT, as well as the MSAR Transport Bureau, also conducted an inspection of the current data system regarding the volume of passengers for the Kowloon Motor Bus. The system calculates and collects information about the volume of passengers per bus by surveillance devices, and the information obtained can be used to assist in the adjustment of the number of buses required for the operations. C.U.

Business Daily Tuesday, October 18 2016â&#x20AC;&#x201A; â&#x20AC;&#x201A; 5

Macau Real estate Home transactions doubled in September

Housing prices continued going down in the month Kam Leong kamleong@macaubusinessdaily.com

he city saw total transactions of residential properties jump in September as average housing prices fell, according to the latest official data released yesterday by the Financial Services Bureau (DSF). Last month, a total of 934 housing transactions were registered in the Special Administrative Region, double the 466 transactions registered for the same month last year, as well as representing a month-on-month increase of 25.4 per cent, up from 745 transactions registered in August. Meanwhile, average housing prices in the city decreased by 2.2 per cent year-on-year to MOP81,769 (US$10,221) per square metre, down from MOP83,595 in September 2015. Compared to MOP118,698 per square metre registered in August, the amount fell by 31.1 per cent.

Majority on peninsula

Of the total number of housing transactions, 728 were made for residential units on the Macau Peninsula, accounting for 78 per cent. This number represents a year-on-year growth of 95.7 per cent, and a month-on-month increase of 31.9 per cent. Average housing prices on the Peninsula fell by 4.4 per cent year-onyear to MOP77,432 per square metre, down from MOP80,993 in September 2015. Compared to the average price of MOP109,084 per square metre in

August, the amount fell by 29 per cent. In addition, the number of homes sold and purchased in Taipa also registered year-on-year growth of 164.3 per cent, totalling 185 in September. Compared to 177 transactions in August, the number of transactions in September increased by 4.5 per cent. Contrary to the situation on the Peninsula, the average cost of buying a property in Taipa rose by 2.3 per cent year-on-year to MOP89,963 per square metre. However, when compared to MOP99,126 per square

metre one month ago, the amount dropped by 9.2 per cent. A total of 21 home transactions were made on properties in Coloane, a decrease of 12.5 per cent year-on-year, yet up by 31.3 per cent month-onmonth. Average housing prices in the area recorded an increase of 4.8 per cent year-on-year, and growth of 8.9 per cent month-on-month.

Unit types

In terms of unit types, transactions on completed properties accounted

for 89.3 per cent of the total. There were a total of 834 transactions on completed properties, representing a surge of 114.4 per cent year-on-year, and 24.9 per cent month-on-month. The average cost of buying these types of units came to MOP78,286 per square metre last month, up by 2.4 per cent year-on-year and 1.4 per cent month-on-month. On the other hand, there were a total of 100 transactions for offplan sales during the month, an increase of 29.9 per cent compared to one month earlier and also one year ago. Buyers paid MOP112,332 per square metre on average for these types of units last month, a drop of 5.4 per cent month-onmonth, and one per cent yearon-year.

6 Business Daily Tuesday, October 18 2016

Macau

Budget Tax revenue from the gaming sector reached MOP58.4 billion in the first nine months of 2016

Show me the money The city’s fiscal surplus dropped 33.1 per cent year-on-year in the first nine months of the year, while total public expenses went up 2.9 per cent Nelson Moura nelson.moura@macaubusinessdaily.com

he city’s fiscal surplus between January and September fell by 33.1 per cent year-on-year, down to MOP21.4 billion (US$2.7 billion), while the gaming sector remains the MSAR’s main source of revenue, the latest update of the central account by the Financial Services Bureau (DSF) revealed yesterday. According to the DSF data, the amount generated in fiscal surpluses for the first nine months, despite the year-on-year drop, is over six times the government’s budgeted amount of MOP3.5 billion for the whole year of 2016, coming in at

MOP21.43 billion. Nevertheless, it represents the second year of registered decreases in fiscal surpluses, down from a high point of MOP80.2 billion during the first nine months of 2014.

Revenue down

Between January and September this year, the MSAR government saw its total revenue drop by 11 per cent year-on-year to MOP74 billion, as taxes received from the local gaming sector fell by 10.5 per cent year-onyear to MOP58.4 billion. So far this year, the government has reached 81.4 per cent of the MOP72 billion that is expects to collect for the whole of 2016. For the same period, the city’s total gaming revenues, including all types

of gaming activities such as lotteries and horse racing, went down by 7.5 per cent year-on-year to MOP163 billion, according to the official data released by the Gaming Inspection and Coordination Bureau (DICJ). Meanwhile, the authorities also received less revenue from indirect taxes during the nine months, with a decrease of 14.2 per cent year-onyear to MOP2.7 billion. For the whole year of 2016, the government anticipates total revenue of MOP92 billion and, given the current data, the MSAR has already reached almost 80.4 per cent of its annual target.

Increased expenses

On the other hand, total public expenditure went up by 2.9 per cent year-on-year during the same period, amounting to MOP52.5 billion. Of the total expenses, 94 per cent, or MOP49 billion, was on current expenditure, which saw an increase of 2.8 per cent compared with the

MOP48 billion registered for the same period one year ago. The government’s expenditure on investment plans (PIDDA) jumped by 22 per cent year-on-year in the first nine months of the year to MOP3 billion, representing only 27 per cent of the MOP11 billion planned for investments overall in 2016. The MSAR’s expenses on other investments saw a considerable increase of 77 per cent year-on-year to MOP103.4 million, up from MOP58.4 million recorded for the same period last year.

Planning high

The September-end figures show that the government’s expenditure accounted for almost 60 per cent of the authorized expenses of MOP88.5 billion budgeted for the whole year. The DSF added in the account information that the amount of expenditures transferred to the city’s Social Security Fund totaled MOP12.4 billion for the first nine months of the year, an 8.3 per cent decrease from the MOP13.1 billion transferred a year ago.

Business

AIA rising AIA Group Limited’s new business value grew 33 per cent year-on-year in the first nine months of this year After registering record growth in the first six months of this year, AIA Group Limited (AIA) saw the third quarter of 2016 register its best quarterly values so far, with the insurance company value of new business (VONB) rising 27 per cent year-on-year to US$689 million (MOP5.5 billion), according to a company filing yesterday with the Hong Kong Stock Exchange. In cumulative terms, in the first nine months of 2016, the AIA group registered a total VONB of US$1.95 billion, representing a 33 per cent increase year-on-year from the same period last year. In the third quarter of 2016, AIA also registered a 44 per cent yearon-year increase in annualised new premiums (ANP) to US$1.3 billion,

and a 17 per cent increase in total weighted premium income (TWPI) to reach US$5.6 billion, the release stated. The group has 18 wholly-owned branches and subsidiaries in Asia, including Hong Kong and Macau, with the company considering the Hong Kong market to have ‘delivered another excellent quarter of VONB growth driven by a significant increase in active agent productivity and an excellent result from our partnership business’. No information on the group's Macau market performance in the third quarter of this year was provided in the latest release. For the first six months of 2016, the Hong Kong and Macau segment contributed US$537 million in VONB and US$670 million in operating profit after tax to AIA, as reported previously by Business Daily. According to the group’s release, Asia will continue to be the ‘most attractive and dynamic region in the world for life insurance’ with life insurance markets in the region benefiting from the ‘significant structural economic and demographic trends, rapid urbanisation and increases in disposable incomes’. N.M.

Business Daily Tuesday, October 18 2016 7

Gaming Gaming Local gaming market not targeted by Chinese clampdown on illegal gaming activities

Not a target Analysts believe the Chinese Government's detaining of Crown staff might be an attempt to prevent activities of non-Chinese casino operators, while leaving Macau promoters unscathed Nelson Moura with Bloomberg/Reuters nelson.moura@macaubusinessdaily.com

he recent arrest of at least 18 employees from Crown Resorts Ltd. (Crown) by the Chinese authorities after raids in Shanghai, Beijing, Guangzhou and Chengdu, could be an attempt to target the promotional activities of non-Chinese casinos, analysts from JP Morgan investment bank stated in a release. The detainees are suspected of conducting illegal gaming activities, and include the head of the International Marketing (VIP) team from the Australian gaming company led by James Packer, along with two other non-Chinese national senior marketing executives. ‘It’s difficult to read the real intention behind the crack downs at this point, whether these are isolated incidents or broader clamp downs on casino marketing in general. But, it’s interesting to note that the crack down so far has been limited to foreign casinos, while there haven’t been any cases involving Macau casinos,’ a note released by JP Morgan stated. The investment bank release mentions that Chinese authorities have previously announced they would ‘come down’ on illegal

gambling activities, such as casino marketing or credit extensions by ‘overseas’ operations, and state this could be a deliberate attempt to target ‘foreign’ gaming promoters, while leaving Macau casino promoters and junkets out of the picture. As an example, the investment bank mentions that no negative repercussions were registered for Macau’s gaming sector after an incident in June of last year, in which 13 employees of Korean casinos and 34 Chinese agents working with them were detained for illegal gaming activities, with each receiving a 16-month jail sentence.

Reaching Macau

In terms of the impact on the local gaming market, JP Morgan considers the arrests could prevent foreign casino marketers in China from ‘aggressively promoting for a while’, which could have negative effects on the overall VIP and premium-mass market in Asia, including the MSAR. The analyst and investment firm also don’t expect a medium-term impact on Macau, but believe that foreign casinos will have to be increasingly careful when marketing in China, focusing more on digital marketing. Analysts from Bernstein expressed a similar view, believing

the arrests might have some effect on the Macau VIP market if players and junket agents decide to keep a low profile, but they stated that in general, the ‘current action against Crown Resorts should not be taken as a negative indication against Macau casino operations’. ‘Overall, the Chinese government seems to be making a clear statement about its view on gaming activity being off-shored to foreign jurisdictions, while Macau is not being targeted in the same way,’ stated Bernstein analyst Vitaly Umansky.

Changing the tone

Some analysts presented a more negative outcome for the MSAR to new agency Bloomberg, commenting that the detentions are leading some MSAR gaming operators to pull staff from China. Daiwa Capital Markets Hong Kong Ltd. analyst Jamie Soo believes that Macau’s VIP and highend mass segments will suffer the biggest disruptions, while Tony Tong, founder of Hong Kongbased risk management consulting firm Pacific Financial Services Ltd, stated: “this is a clearer signal to all casino operators and junkets in the region, that the Chinese government doesn’t like gambling and will continue the crackdown on the industry and capital outflow.” However, the focus seems to be further abroad than the MSAR’s local gaming operators, with the main target of the Chinese authorities being gaming operators from the Philippines, South Korea and Australia, who are looking to fill the gap created by Macau’s two-year downturn in gambling revenue, Bloomberg reported. Some analysts suggest Crown misread the enforcement climate in China in regards to marketing its venues, while other operators have toned down marketing over the past two years, focusing on their live shows, restaurants and accommodation. “Crown apparently either thought nothing to worry about, or they have only recently revived operations in [China]. Whatever, they got it wrong,” David Green, an analyst at Newpage Consulting, stated to news agency Reuters.

Gaming Greyhound betting revenues continue to decline

Mass market strikes back While VIP baccarat remained the main source of revenue for casinos in the third quarter of this year, mass market revenues increased 3.9 per cent year-on-year Mass market and slot machine revenues in the third quarter of 2016 increased by 3.9 per cent year-on-year, as total revenue from casino games of fortune rose 1.2 per cent year-on-year, according to data released yesterday by the Gaming Inspection and Co-ordination Bureau (DICJ). Between July and September, income from games of fortune amounted to MOP55 billion (US$6.9 billion), the first quarterly increase seen since the second quarter of 2014, led by the mass market segment, which saw a 3.9 per cent year-on-year increase from MOP25.3 billion to MOP26.3 billion, according to Business Daily calculations.

King baccarat

With a total of MOP28.6 billion in revenue in the third quarter of this year, and despite a small yearly decrease, VIP baccarat retained its position as the main

source of gaming revenue in the city, representing 52 per cent of total revenue from games of fortune, almost the same percentage as during the same period last year. Mass market baccarat generated MOP19.5 billion, registering a decline of 3.6 per cent year-on-year from the MOP18.7 billion recorded during the third quarter of 2015. All in all, revenue from baccarat – including all segments – accounted for MOP48 billion out of a total MOP55 billion in revenue derived from games of fortune, representing a share of 87.2 per cent. At the end of September, the number of gaming tables in town stood at 6,304, an increase of 306 tables from the second quarter of this year, resulting from the openings of Wynn Palace and The Parisian in Cotai in August and September, respectively. Slot machine revenue between

July and September decreased 3.4 per cent year-on-year to MOP2.8 billion, although the number of slot machines in the Macau market increased 11 per cent year-on-year to 15,769, versus 14,213 in the same period last year.

Doomed Canidrome

Revenue from greyhound racing bets maintained its continuous decline since 2011, seeing values in the third quarter of 2016 falling 41 per cent quarter-toquarter to reach MOP13 million, representing 0.02 per cent of the total gaming revenues in this period. In July, the local gaming regulator ordered greyhound track operator, Macau (Yat Yuen) Canidrome Co., to relocate or shut down the track within the next two years. In 2015, the company saw its annual profits drop 82 per cent from MOP26.7 million in 2014 to MOP4.8 million, according to the company’s financial statements. In total, revenue from gaming unrelated to casino games of fortune, such as sports betting, horse and greyhound race betting and lotteries, amounted to MOP215 million, representing only 0.4 per cent of total gaming revenues in the third quarter of 2016. N.M.

“Expending resources on growth rather than innovation in the near term” David Rittvo Executive Vice President, International, The Innovation Group

GS Entertainment Summit 2016 2nd day to highlight the Macau gaming market and its impact on the larger Asian markets. Chairing the second day of programming at MGS Summit 2016, which will take place at The Venetian, Cotai, alongside the three-day MGS Exhibition from November 15 to 17, David Rittvo, Executive Vice President for The Innovation Group, says he is looking forward to being a part of this year’s program, and highlights the diversity and strength of the Macau and Asian gaming markets. Mr Rittvo explains that the second day of the summit will highlight the Macau gaming market as well as its impact and influence on the larger Asian markets. “I’m extremely excited to have Bobby Soper, CEO of Mohegan Sun, to kick-off the day with a closer look at their Inspire Korean Resort, and how Mohegan intends to parlay that development into a larger presence in the region,” said Mr Rittvo. “The remainder of the day will feature panels from the finance and investment area, operators in the market and the junket players.” As the Executive Vice President for The Innovation Group, Mr Rittvo leads the international practice for the company from its New York Office. Mr Rittvo’s focus is on the emerging markets in Asia and Europe, concentrating on business development, project management and strategic advice for clients.

Innovation One of the key topics of this year’s MGS Summit is ‘innovation’, which Mr Rittvo believes is critical to the industry. “Looking at the landscape of Asian gaming, when compared to the U.S. and other world markets, there is still a disconnect between the lack of supply and potential demand. The overall market is still in a growth phase and depending on legislative processes, it will continue to grow over the next three to five years,” says Mr Rittvo. “In my opinion, operators will focus on expending resources on growth rather than innovation in the near term. As that growth matures, it will be important for operators to differentiate through innovation both on the gaming floor and with nongaming amenities, most notably entertainment, to compete,” he adds. In regards to the Macau market, Mr Rittvo says Macau is working very hard to diversify its nongaming offerings. “If you look at comparable markets, like Singapore, Las Vegas and to some extent Manila, they have been able to identify nongaming entertainment offerings that cater both to the inbound tourist market and locals alike. Macau must continue its investments in infrastructure to coincide with the large investments that the gaming operators are making,” he adds.

MGS Summit 2016 Titled ‘New Frontiers: Gaming’s Giant Leap Forward’, the MGS Summit will explore the crucial combination of quality legislation, innovation and investment, and the balance needed to drive new business opportunities in a changing global market. During the three-day event, the key question which will be tackled by representatives from the Government, the global investment community and broad-based gaming and entertainment sector will be: how to bring pioneering new technologies to vibrant new markets with a fresh and visionary political thinking? Featuring more than 15 sessions, the MGS Summit 2016 will gather together representatives from the Chinese Government, major casino and entertainment operators in Macau, Las Vegas and around the world, cultural and service industry experts, legal and international advisors, and the world’s major investment houses to explore the new business landscape and the legislation, technological innovation and financial cooperation necessary to maximise the vast opportunities that lie ahead for the gaming and entertainment industry.

8 Business Daily Tuesday, October 18 2016

Greater China GDP poll

Economic growth seen slowing Analysts expect annual inflation to average 2 per cent in 2016 and 2017 Kevin Yao

hina’s economic growth is expected to cool to 6.6 per cent this year and slow further to 6.5 per cent in 2017, even as the government keeps up policy support to help ward off a sharper slowdown, a Reuters poll showed. The world’s second-largest economy faces nagging downward pressure due to slack global demand that has hurt its exports, as well as risks from painful reforms to cut industrial overcapacity and a growing pile of debt that some analysts fear could spark a financial crisis. The risk of a correction in the highflying property sector could also pose a threat as more local governments rush to restrict home purchases to cool surging house prices and ward

off housing bubbles. While fears of a hard landing appear to have eased, recent data also have highlighted growing imbalances in China’s economy, with growth increasingly reliant on government spending as private investment falls to record lows. “The downside risks to growth remain larger, though, and they can be manifested in a weaker-than-expected property sector or external demand,” economists at HSBC said in a note. “In addition, the slowdown in private sector investment over the past years means that the organic growth momentum of the economy may have declined, requiring policymakers to be more vigilant in terms of keeping policies as supportive as possible.” Last month, the World Trade Organization cut its forecast for global trade growth this year by more than

a third to 1.7 per cent, reflecting a slowdown in China and falling levels of imports into the United States. Still, the median forecast in a Reuters survey of 59 economists was slightly better than a poll in July, when economists pencilled in 2016 growth of 6.5 per cent and 6.3 per cent for 2017. In the latest poll, the highest growth forecast for 2016 was 6.8 per cent and the lowest was 6.3 per cent. The poll also showed China’s economic growth could slow to 6.6 per cent in the fourth quarter of 2016, from an expected 6.7 per cent in the third quarter. The National Bureau of Statistics is due to release third-quarter gross domestic product (GDP) data on October 19. Premier Li Keqiang said last week that China’s economy performed better than expected in the third quarter due to a rebound in factory output, company profits and investment. A construction boom fuelled by government infrastructure spending and a hot property market has boosted

Key Points China economy seen growing 6.6 pct in 2016, 6.5 pct in 2017 Consumer inflation seen at 2.0 pct in 2016 and 2017 C.bank seen cutting banks’ reserve ratio in Q1 2017 C.bank seen cutting benchmark lending rate in Q4 2017

sales and profits for firms making building materials to furniture, though many smaller companies in unrelated sectors continue to struggle. The government has set a growth target of 6.5-7 per cent for this year. The economy expanded 6.9 per cent in 2015, the slowest pace in a quarter of a century. But many China watchers suspect real growth is already weaker than official data suggest.

Policy support seen

Analysts also expect annual inflation to average 2 per cent in 2016 and 2017, underscoring the sluggish growth outlook. Inflation was 1.9 per cent in September and 2 per cent in the first nine months of 2016. Economists have pushed back expectations of fresh monetary easing amid perceptions that it could aggravate rising debt levels and speculative activities. Some analysts also believe flooding the system with more liquidity would do little to boost growth as companies may already be hoarding cash rather than making new investments. As such, the government has been leaning more on fiscal stimulus to spur growth more directly. The People’s Bank of China has cut lending rates six times since November 2014 to 4.35 per cent, but has not moved since October 2015. It also has lowered the amount of cash that banks are required to hold as reserves to 17 per cent, with its last move in February this year. The PBOC is expected to cut banks’ reserve requirement ratios (RRR) by another 50 basis points (bps) in the first quarter of 2017, and cut the benchmark lending rate by 25 bps in the fourth quarter of the year, according to the poll. Economists polled in July had expected a 75 bps cut in RRR - the amount of cash that banks must hold as reserves - by the end of 2016, and a 25 bps cut in benchmark interest rates by the first quarter of 2017. Reuters

Markets

Risk clamp down hits commodity trades The slump in trade is a blow for the likes of the Shanghai Futures Exchange and the Dalian Commodity Exchange Ruby Lian and Engen Tham

New rules in China aimed at curbing risk and speculation have triggered an exodus of institutional cash from the country’s commodities futures markets and hobbled a thriving niche business for brokers. Before the ban, futures brokers were launching hundreds of structured products a month offering guaranteed returns, which attracted institutional cash and fed billions of dollars into the commodity futures markets. Now, fresh launches are just a trickle

as the brokers comply with new rules that include a ban on guaranteed returns. With no promise of big returns, the 100 brokers or so that run asset management businesses offering these products are struggling to keep clients. “The new rules made the launch of structured products nearly impossible,” said Ni Chengqun, a senior manager with the asset management arm of Hicend Futures in Shanghai. The slump in trade is a blow for the likes of the Shanghai Futures Exchange and the Dalian Commodity Exchange, which run China’s biggest commodity

futures contracts. Average daily volume in steel rebar futures, for example, dropped to 5.3 million in September from 13.5 million in April, while iron ore turnover dropped to 1.5 million from 4.7 million. The rule changes by the Asset Management Association of China (AMAC) prohibit asset managers at futures brokers from guaranteeing returns, restrict leverage and include stricter standards for funds acting as advisors. AMAC was taking aim at highly-leveraged products that were offering the promise in many cases of returns of 8-9 per cent.

Key Points China asset management regulator tightens rules on risk Aimed at asset managers of financial firms, futures brokers Prompts slump in structured product sales by brokers In turn, sales slump hits commodities futures volumes In one popular type of product, brokers pooled funds from investors and deployed the capital in equities, fixed income and commodity futures markets for a specified period. An outside fund acted as an advisor to devise the trading strategy. Futures were central to many of the products because they offer the ability to leverage, one asset manager said,

citing the need to deposit as little as 10 per cent of the contract value on margin. So an investor pool of US$10 million can wield a notional position of up to US$100 million in the market. As a result, a relatively modest price gain in that market can produce outsized profits on the initial deposit. Such juicy returns attracted institutional fund managers. Banks such as China Merchants Bank and some of the big-five lenders flocked to the products, asset managers said.

Big promises, bumper leverage

In the first half of 2015, the hottest structured products were tied to equity indexes like the Shanghai/Shenzhen CSI 300 Index, which surged roughly 50 per cent from January to June amid a retail investor buying frenzy. Futures on the CSI 300 rallied by the same degree, and volumes more than doubled from the year before to average over 1.2 million contracts a day for the first half of 2015. Alarmed by the prospect of a bubble, regulators then stepped in to restrict trade, triggering an exodus from stocks and effectively barring retail investors from trading stock futures. CSI 300 futures volumes collapsed. Average trade in the first half of 2016 was 80 times less than a year earlier. That’s when futures brokers steered investors into fixed income, equities and commodities, sparking a surge in commodities trading in early 2016. Iron ore and steel futures prices jumped more than 60 per cent by mid-April.

Lower fees, more competition

For brokers, the latest rules come just as a proliferation of new rivals has

Business Daily Tuesday, October 18 2016 9

Greater China In Brief Luring talent

“We believe we may keep a certain level of about 900-1,000 tonnes of annual consumption (in 2017)” Roland Wang, managing director for China at the World Gold Council

World Gold Council

Mainland gold demand to stay firm Strong investment demand has countered a drop in jewellery purchases Manolo Serapio Jr

Demand for gold from top consumer China will remain strong at around 900-1,000 tonnes next year, near 2015 levels, although a weaker appetite for jewellery and slowing economy could curb purchases, an official of the World Gold Council said. Continued firm demand from China should help underpin global benchmark gold prices that have come off two-year highs as expectations of a U.S. interest rate hike by year-end strengthened the dollar. But the precious metal remains up 18 per cent for 2016, following a three-year decline. “We believe we may keep a certain level of about 900-1,000 tonnes of annual consumption (in 2017), but it may face some challenges especially on the jewellery side and also it depends on the price and China’s own economic situation,” Roland Wang,

intensified competition in their core business of hedging risk. An estimated 80 per cent of brokers’ asset management business focused on leveraged structured products, people working in the sector said. Now, brokers like Huatai Futures, which manages more than RMB10 billion (US$1.5 billion) in assets, and Hicend Futures, are finding only tepid interest from investors in products that comply with the new rules. “Since banks can’t be guaranteed high returns, most of them have lost interest, while a few are only willing to work with big asset management firms,” Hicend’s Ni added. Kang Lan, a senior asset manager at Huatai in the southern province of Guangzhou, said her firm has only managed to launch one fund under the new rules. In the month before the change, the firm had set up as many as 10.

Early stumble

Of China’s 150 futures brokers, more than 100, including the nation’s top names Founder CIFCO Futures, Guosen Futures and Hongyuan Futures, have asset management units, AMAC says. Their assets under management more than doubled to RMB227.3 billion (US$34 billion) in the first six months of 2016 from the end of 2015. “With strengthening supervision from regulators, (brokers’ asset management) business will definitely slow down,” Liang Lijin, a finance lawyer with Hiways Law Firm in Shanghai said. “They will launch new products based on the new rules, but they will be slow and business will not grow.” Reuters

managing director for China at the World Gold Council, told Reuters on the fringes of an industry conference in Singapore. He also expects demand in 2016 to be at around 900-1,000 tonnes. China’s gold demand reached 984.5 tonnes in 2015. This year, strong investment demand has countered a drop in jewellery purchases, particularly among leading consumers China and India, taking global gold demand to the second highest on record in the first half, at 2,335 tonnes.

Wang said jewellery traders were seeing “more demand for gold bars since late September” with investors seeking alternate investment options amid China’s housing market curbs. China is restricting home purchases to temper surging prices. A wave of restrictions imposed on housing markets in major cities has unnerved some buyers and developers, cutting the area of new homes sold in places such as Beijing and Shenzhen by more than half during the week-long National Day holiday in early October. A weaker yuan is also pushing investors to gold, Wang said. But some jewellery manufacturers are looking at producing more innovative and “more colourful” products in a bid to draw in younger buyers and boost sales, said Wang. “That’s becoming a new trend in the market,” he added. Reuters

Diversification

Aluminium makers to target auto, aerospace China’s giant aluminium makers are pushing into the global automotive and aerospace markets, with industry sources expecting their presence to heat up competition and possibly spark a buying spree for Western metals companies. China’s top aluminium companies are venturing into the more lucrative parts of the global value chain, on course to seize market share from the likes of Alcoa and Constellium, as they look to buy into foreign firms to boost their technical know-how and expand their reach. The chief executive of Novelis Inc, the world’s largest maker of rolled aluminium products, said last week he expected competition with Chinese producers to be “very fierce” over the next five to 10 years in the highvalue-added sectors of aerospace and engineering - which so far have been dominated by European and U.S. manufacturers. Zhongwang USA LLC, backed by Chinese aluminium magnate Liu Zhongtian, said in late August it would buy high precision aluminium product maker Aleris Corp in a deal worth US$2.3 billion, marking the biggest entry by a Chinese company into the U.S. aluminium industry. The deal for Aleris, a supplier to the U.S. defence industry, has yet to be

approved by U.S. regulators. Alcoa is spinning out its precision manufacturing business into a company to be named Arconic, which industry sources said could be another potential target. Arconic expects to grow its automotive sheet revenue around six fold, to US$1.3 billion in 2018 from US$229 million in 2013. It has already signed US$10 billion with customers including Boeing and Airbus. An Alcoa spokesperson declined to comment. “Zhongwang have been openly pursuing a downstream focus for years, but they aren’t the only ones with capital, a healthy balance sheet and an appetite to expand downstream,” said Paul Adkins, managing director of Beijing-based consultancy AZ China. Adkins pointed to China’s Hongqaio Group and Shandong Nanshan Aluminium as potential bidders. H o n g q ai o G r o u p d ec l i n e d t o comment. Nanshan’s board secretary said the company hasn’t received any information about possible mergers from the board. Shandong Nanshan said in July it aims to tap growth in new energy vehicles to become a top automotive and a major aerospace materials supplier as it strives to meet international certification standards. Reuters

Wanda to unveil production subsidy Dalian Wanda Group plans to announce a 40 per cent production subsidy to attract Hollywood filmmakers to its new multibillion-dollar studio in the eastern Chinese city of Qingdao, a person with direct knowledge of Wanda’s involvement said. The production rebate will be jointly funded by Wanda and the local Qingdao government, said the person, who asked not to be identified. The subsidy will apply to feature films and TV shows. Costs eligible for the rebate include stage and equipment rentals, set construction and local accommodations. Markets

Vanguard cuts ETF fees in Hong Kong Vanguard, the world’s second-biggest asset manager, cut the total expense ratio on all its Hong Kong-listed exchange traded funds, effective yesterday, as competition heats up in the passive asset management space. The move follows similar steps taken by companies such as Charles Schwab Corp and Blackrock in the United States that have cut fees recently ahead of a new Labour Department rule governing retirement products. While the cuts on Vanguard’s stable of exchange-traded funds offered in the Hong Kong market is a sliver of the overall market, the move points to an increasing focus on costs by asset management companies. M&A

AVIC, CITIC, others inject to fund Supercell purchase Tencent Holdings Ltd said a consortium formed to buy game developer Supercell has raised US$850 million by selling new shares to investors including Chinese stateowned investment firms AVIC Capital and CITIC Capital. Tencent, China’s biggest gaming group agreed in June to buy the ‘Clash of the Clans’ mobile game maker from Japan’s Softbank Group Corp for about US$8.6 billion but had flagged it would form a consortium with co-investors. After the share sale, co-investors, which also include China CITIC Bank Corp and bad debt manager China Cinda Asset Management, will own 50 per cent of the consortium. Investment

Envision joins investors in German battery firm A German battery maker which allows people to store and pool electricity said it has secured 76 million euros (US$85 million) from venture capital investors, including Chinese wind turbine and energy management group Envision, to develop its systems. Start-up sonnen, formerly Sonnenbatterie, said in a statement on Sunday it plans to use the money to expand in Italy, Australia, the United States and Britain. Its technology allows renewable power to be stored and then used when weather conditions prevent sufficient generation. Such storage is moving into a price range which makes it more affordable for German householders.

10 Business Daily Tuesday, October 18 2016

Greater China

(L-R) Brazilian President Michel Temer, Russian President Vladimir Putin, Indian Prime Minister Narendra Modi, Chinese President Xi Jinping and South African President Jacob Zuma attend a ceremony of signing joint documents during the 8th BRICS summit in Benaulim in the state of Goa, India, 16 October 2016 Annual summit

India’s Modi urges BRICS to double trade BRICS nations have agreed to hasten the creation of a new rating agency

he w o r l d’ s l a r g e s t emerging markets must double trade between their countries in the next four years and unite to fight terrorist threats that hurt economic prosperity, Indian Prime Minister Narendra Modi said. Noting intra-BRICS trade was US$250 billion, Modi said: “We should set ourselves a target to double this number to US$500 billion by 2020”. The eighth annual summit, which brought leaders from Brazil, Russia, China, India and South Africa to the tropical Indian state of Goa, took place amid heightened tensions between India and its nuclear-armed neighbour Pakistan. Terrorism, security issues and defence ties – particularly between India and Russia – dominated the weekend’s discussions. Modi said the group must take a common approach towards tackling terrorism and terrorist organizations and urged member nations to deepen cooperation among their national security advisers. “Terrorism casts a long shadow on our development and economic

prosperity,” Modi told BRICS leaders. “Its reach is now global. It has grown more lethal and adept at the use of technology. Our response to terrorism must, therefore, be nothing less than comprehensive.”

Obvious tensions

But tensions between the diverse BRICS member states were at times obvious. In a reference to China blocking India’s move at the United Nations to ban Pakistan-based leader of Jaish-e-Mohammed, Maulana Masood Azhar, Modi said individual approaches will be futile and counter productive. “There must be no distinction based on artificial and self-serving grounds,” Modi said. “Criminality should be the only basis for punitive action against the individuals and organizations responsible for carrying out terrorist acts.” The BRICS grouping, which o r i g i n a l l y a i m e d t o r e sh a p e global governance by giving an international voice to countries e xc l u d e d f r o m e s t a b l i s h e d multilateral organizations, has set up a new development bank and tried to take unified stances on global

issues. But the grouping has long suffered from a lack of cohesion and unity among its members. China and India, despite a US$74.9 billion trading relationship, are also geopolitical rivals: Beijing has blocked India’s attempt to join the Nuclear Suppliers Group, sought closer ties with Pakistan and has concerned New Delhi with investments in neighbouring South Asian countries. Resource-rich South Africa and Brazil, meanwhile, are geographically distant from each other and many of the other BRICS nations, and have both also faced political turmoil back home.

Rating agency

Modi said BRICS leaders should continue to push for changing governance architectures in line with the economic heft of the emerging economies. The bloc has been at the forefront of voicing the lack of say in running global institutions like the World Bank and the International Monetary Fund. BRICS nations have agreed to hasten the creation of a new rating agency, Modi said, which had been floated as a way to liberate the relatively volatile emerging markets from the requirements of established western rating companies. On Saturday, Modi pledged to

deepen valuable defence ties with Russia at a bilateral meeting ahead of the BRICS summit, as India continues to purchase advanced weaponry to modernize its military as tensions rise in South Asia. In his meeting with Putin, both leaders decided to accelerate the process to draw up a free trade agreement between India and the Eurasian region.

Goa declaration

At the conclusion of the BRICS summit, leaders issued the so-called Goa Declaration, a lengthy document with 109 separate points on matters ranging from space cooperation to agriculture and sport.

‘China will host the ninth BRICS summit in 2017’ The broad, sweeping agreement said BRICS countries stood united on fighting terrorism and reforming the global financial structure, among other things. The declaration expressed concern about growing terrorist attacks in Afghanistan, and said member states pledged to help fight corruption around the world - including aiding in asset recovery and returning financial fugitives. The agreement reiterated member states’ desire to set up a BRICS credit ratings agency and said that advanced European economies needed to cede to two chairs on the executive board of the International Monetary Fund. Bloomberg News

Going public

ZTO Express eyes largest IPO since Alibaba The company delivered roughly 14 per cent of all parcels in China last year Logistics company ZTO Express has set terms for what could be the largest U.S. initial public offering this year and also the biggest by a Chinese company after the US$25 billion IPO of e-commerce giant Alibaba Group Holding Ltd in 2014. ZTO’s IPO later this month, which could raise as much as US$1.5 billion, is the latest example of a Chinese company seeking to capitalize on its growth prospects to lure Western investors, while also avoiding the red tape associated with launching IPOs in mainland China. China is the world’s largest express delivery market, with 21 billion parcels delivered in 2015, according to market research firm iResearch, cited in the IPO prospectus of ZTO. This is approximately 1.5 times the total parcel volume of the United States. ZTO said in a regulatory filing on Friday that it expected to sell 72.1 million American depositary shares in the range of US$16.50 to US$18.50.

Sources close to ZTO told Thomson Reuters publication IFR earlier this year the company was eying a U.S. listing for a faster completion and to make it easier for existing shareholders to monetizes their stakes.

A consortium of investors including Hillhouse Capital Management Ltd of Hong Kong and private equity firm Warburg Pincus LLC invested in the company in 2015. Founded in 2002, ZTO is a major player in China’s quickly expanding e-commerce market. It delivers parcels for Alibaba and JD.com Inc, among others.

ZTO delivered roughly 14 per cent of all parcels in China last year, according to its IPO prospectus. Sales of ZTO jumped to RMB 6.1 billion (US$915.8 million) in 2015, up from RMB 3.9 billion in 2014. Its net income was RMB 1.3 billion (US$200.4 million). It has roughly 7,700 network partners and 74 sorting hubs.

‘ZTO will use the proceeds from its offering to buy more trucks and expand capacity’ ZTO will use the proceeds from its offering to buy more trucks, expand capacity through the purchase of land, facilities and equipment and for other general corporate purposes. ZTO intends to list on the New York Stock Exchange (NYSE) under the ticker ZTO. Morgan Stanley and Goldman Sachs Group Inc are the lead IPO underwriters. Reuters

Business Daily Tuesday, October 18 2016 11

Asia Trade

Singapore exports fall less than forecast Exports to China fell 2.2 per cent in September from a year earlier Jongwoo Cheon

ingapore’s exports in September slid less than expected as shipments to top customer China declined at a slower pace and sales to Europe rebounded, but the outlook for the trade-dependent economy remained grim. Shipments to the United States recoiled sharply from gains the previous month, while sales of electronics continued to slump despite heading into peak year-end shopping season. Non-oil domestic exports (NODX) fell 4.8 per cent last month from a year earlier, the trade agency International Enterprise Singapore said in a statement yesterday. That was slightly better than the median forecast of a 6.0 per cent slump in a Reuters poll. In August, the city-state’s overseas shipments stalled. On a month-on-month, seasonally adjusted basis, exports grew 2.4 per cent in September, beating a forecast of a 1.5 per cent rise in the survey. “We expect Singapore NODX to stabilize in the coming months on a year-on-year basis. But the recovery is expected to be modest given still weak external demand,” said Trinh Nguyen, senior economist for Natixis in Hong Kong. “Given the spillover of the trade

sector into services lately, the MAS does not want to cause significant depreciation expectations of the Singapore dollar, which will cause domestic interest rates to rise too fast,” Nguyen said, referring to the Monetary Authority of Singapore. The central bank on Friday held policy steady despite a surprisingly sharp economic contraction in the third quarter, but analysts say the weak outlook for inflation and growth will likely force policymakers to ease further.

Exports to China fell 2.2 per cent in September from a year earlier, compared with a 5.4 per cent slump in August. China’s exports in September fell more than forecast while imports unexpectedly shrank, indicating signs of stabilisation in the world’s second-largest economy may be short-lived. “The bigger picture remains that particularly given that China’s export falls were very unexpectedly weaker, the sense is that this is going to set the stage for a rather wobbly and fragile coming months,” said Vishnu Varathan, senior economist for Mizuho Bank in Singapore.

Sales to the European Union expanded 9.9 per cent last month from a year earlier, compared with a 15.6 per cent decline in August. But shipments to the United States shrank 7.2 per cent in September on-year, after rising 4.8 per cent in August. Declining U.S. demand for aircraft parts, integrated circuits (ICs) and non-electric engines and motors all dragged on exports to the world’s top economy. By product, volatile pharmaceutical exports increased 16.2 per cent, compared to a 17.9 per cent decline in the previous month. Total electronics exports in September shrank 6.6 per cent from a year earlier after falling 6.0 per cent in August. Activity at the local factories expanded in September for the first time in 15 months as new orders rose, a survey showed earlier this month. Reuters

Private poll

Japan manufacturers’ mood up, service-sector’s down Exporters of cars and electronics complained that the yen’s gains have weighed on profits Tetsushi Kajimoto and Izumi Nakagawa

Japanese manufacturers’ confidence rose for a second straight month to a half-year high in October, a Reuters poll showed, while sentiment in the services sector hit a 3 1/2-year low - highlighting the uneven nature of economic recovery. The Reuters Tankan, which strongly correlates with the Bank of Japan’s (BOJ) quarterly tankan survey, also found manufacturers’ sentiment is expected to tumble to zero over the next three months, although non-manufacturers are seen rebounding. The monthly poll of 532 large and mid-sized firms, of which 265 responded, was conducted Sept. 28Oct. 12. It follows this month’s BOJ tankan showing big Japanese manufacturers’ mood held steady in the third quarter although service-sector sentiment worsened to its lowest in nearly two years. The sentiment index for manufacturers rose to 10 from 5 in September, driven by materials industries and food-processing firms, which

benefited from lower import costs stemming from gains in the yen and declines in commodity prices. It was expected to worsen to zero in January. “We have managed to secure a profit margin by maintaining product prices while costs of fuel and raw materials have declined since the year before last,” a manager at a chemicals firm said in the survey, which companies answer anonymously. Exporters of cars and electronics, on the other hand, complained that

the yen’s gains over levels seen last year have weighed on profits. Their sentiment report remained flat. A transport equipment maker said business conditions were “not so good” because of the yen’s gains, softening demand in North America, and slowdown in China. The service-sector index fell for a second straight month to 9 from 14 in September, in a worrying sign for private consumption that constitutes about 60 per cent of the economy. The service-sector index stood at its lowest level since February 2013, just two months before the central bank launched an aggressive but so far ineffective stimulus campaign

to spur economic activity and get inflation up to 2 per cent. The service-sector index was seen bouncing to 22 in January.

Key Points Oct manufacturers’ sentiment index +10 vs +5 in Sept Service-sector index +9 in Oct vs +14 in Sept Manufacturers’ mood seen down, service-sector up ahead Reuters Tankan strongly correlates with BOJ tankan

Bad weather undermined retailers’ sentiment which worsened to minus 16, the lowest reading since February 2015, when they were reeling from the effects of a sales tax hike. “Sales have been stagnant due to the typhoons that hit in August and September and a prolonged period of rainy days,” a manager of a retailing business said in the survey. Sentiment indexes subtract the per centage of companies saying conditions are poor from those saying conditions are good. A positive number means optimists outnumber pessimists. Reuters

12 Business Daily Tuesday, October 18 2016

Asia In Brief Currencies

S. Korea FX bank deposits fall South Korea’s foreign exchange bank deposits declined in September after rising for three straight months, central bank data showed yesterday, on a fall in dollar-denominated deposits. The Bank of Korea said the total foreign exchange deposits fell to US$66.50 billion in September, from US$67.34 billion in August, which was a 16-month high. Dollar deposits in September slipped to US$56.52 billion from US$56.92 billion as conglomerates withdrew cash to pay back debt, the statement said. Foreign deposits held by corporates fell to US$55.30 billion last month from US$56.99 billion in August, while those held by individuals rose to US$11.20 billion from US$10.35 billion over the same period.

Quarterly report

Bank of Japan keeps upbeat economic view Six of the nine central bank regional branch managers said their areas’ economies continued to recover moderately Leika Kihara

he Bank of Japan (BOJ) maintained its optimistic economic view on most of the country’s nine regions in a quarterly report out yesterday, signalling its confidence a tightening job market will gradually push up wages and underpin a steady economic recovery. But some regions warned of weakness in private consumption including the Tokai central Japan region,

home to auto giant Toyota Motor Corp, where a strong yen hurt corporate profits and dampened consumer sentiment. BOJ Governor Haruhiko Kuroda maintained his upbeat view of the economy and reiterated the central bank’s resolve to maintain ultra-loose monetary policy for as long as needed to hit its ambitious 2 per cent inflation target. “Japan’s economy continues to recover moderately as a trend, although some weaknesses are seen in exports

Stock exchange

Vietnam’s carrier to become joint-stock company The national flag air carrier of Vietnam, Vietnam Airlines, has completed procedures to become a joint stock company. The airline is preparing to list its shares on the stock exchange in the coming time, reported Vietnam’s state-run news agency VNA yesterday. Vietnam Airlines was established as a state-owned single member limited company and was equitized in 2014. The corporation had estimated revenue of more than 52.5 trillion Vietnamese dong (US$2.34 billion) in the first nine months of 2016, up 6 per cent year-onyear. Its pre-tax profit during nine-month period reached 2.6 trillion Vietnamese dong (US$116 million), Vietnam Airlines said. Economic links

New Zealand PM looks to boost partnership with India New Zealand Prime Minister John Key (pictured) is aiming to strengthen political and economic links with India during talks with Indian leaders next week. Key, who is leading a business and education delegation to India from Oct. 24 to 28, will hold talks in New Delhi with Prime Minister Narendra Modi and President Pranab Mukherjee, who visited New Zealand earlier this year. “Along with further strengthening New Zealand’s political, security, and economic connections with India, my meeting with Prime Minister Modi will be an opportunity to discuss his efforts to reform India’s economy and how New Zealand can be part of India’s growth,” Key said.

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BOJ Governor Haruhiko Kuroda

and output due to the effect of slowing growth in emerging economies,” Kuroda told a quarterly meeting of the BOJ’s regional branch managers. Six of the nine BOJ regional branch managers said their areas’ economies continued to recover moderately. The BOJ revised down its assessment for the Tokai area, the first time it had done so since January 2013, saying its economic expansion was moderating. In its July report, the BOJ said the area’s economy was expanding moderately as a trend. “Exporters make up a big portion of the Tokai region’s economy, so the strong yen may have heightened households’ uncertainty over the income outlook,” a BOJ official told a news conference. The BOJ revised up its assessment for the two remaining regions, which had seen an increase in industrial output. Yesterday’s report will be among factors the BOJ’s board will scrutinise at its rate review on Oct. 31-Nov. 1, when it will issue fresh quarterly growth and inflation forecasts. The BOJ is likely to cut next fiscal year’s inflation forecast slightly in the new projections, sources familiar with its thinking say, but is seen holding off on expanding stimulus after having revamped its policy framework last month. The central bank switched its policy target to interest rates from the pace of money printing in September, after years of massive asset purchases failed to jolt the economy out of stagnation and accelerate inflation to its 2 per cent target. Reuters

GDP

Australia seen grabbing uninterrupted growth record The worst seems to be over for a long slump in mining investment Wayne Cole

Australia is forecast to enjoy at least another two years of solid economic growth, extending a quarter of a century without recession and dodging the deflation that dogs so many of its rich world peers. The latest Reuters poll found analysts expect Australia’s A$1.6 trillion (US$1.2 trillion) of gross domestic product (GDP) to expand by 2.9 per cent this year, unchanged from the July poll.

Key Points

A recent revival in the value of commodity exports also promises to boost company profits, national income and tax receipts in coming months. Surging prices for coal alone could eradicate the country’s trade deficit and add 2 percentage points to nominal GDP. The worst also seems to be over for a long slump in mining investment, which subtracted a huge 1.6 percentage points from GDP growth in the year to June. Policymakers at the Reserve Bank of Australia (RBA) believe three quarters of the mining downturn has now passed and its drag on growth will greatly diminish for here on. “The Australian economy’s output performance, in aggregate, has been resilient in what remains a challenging environment,” said Westpac senior economist Andrew Hanlan. He is tipping economic growth of 3 per

cent for both 2016 and 2017. “That said, downside risks persist. World growth is sluggish, and global financial sector vulnerabilities remain.” At home, jobs growth has turned sluggish and heavily weighted to part time work, restraining wage growth and adding to downward pressure on inflation. Indeed, underlying inflation slowed to a record low of 1.5 per cent in the year to June and looks likely to have remained very subdued in the third quarter. Analysts forecast consumer price inflation would run at just 1.2 per cent for 2016 as whole, well under the RBA’s target of 2 to 3 per cent. Yet they also expected it to pick up to 2.1 per cent next year and 2.4 per cent for 2018, a welcome outcome that would eliminate the need for more rate cuts. Reuters

Economy to grow 2.9 pct in 2016, 2.8 pct 2017, 2.9 pct 2018 CPI inflation seen 1.2 pct this year, 2.1 pct next, 2.4 pct 2018 Growth was seen at 2.8 per cent next year and 2.9 per cent in 2018, a result that would see Australia capture the Netherlands’ crown for the longest run without a recession. Surging export volumes, record low interest rates and an historic boom in home building have already underpinned growth of 3.3 per cent in the year to June.

Policymakers at the Reserve Bank of Australia believe three quarters of the mining downturn has now passed and its drag on growth will greatly diminish for here on

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Business Daily Tuesday, October 18 2016 13

Asia Benchmark

Singapore makes another bid for Asia to help set gold price China launched a yuan-denominated gold benchmark in April this year in a bid to exert more control over pricing of the metal Manolo Serapio Jr

Singapore will study the possibility of bringing the gold benchmark pricing in London to users in Asia, in a move that would also allow market participants in the world’s top consuming region to help set the price of bullion. Home to the world’s biggest buyers China and India, Asia’s importance has been on the rise as the key source of demand for gold, but bullion traders in the region are often exposed to intraday price volatility and overnight foreign exchange risks with benchmark prices currently being set out of London. The Singapore Bullion Market Ass o ci ati o n , L o n d o n B u l l i o n M a r k e t As s o c i a t i o n ( L B M A ) and Intercontinental Exchange Benchmark Administration (IBA) will launch a joint feasibility study on the development of “LBMA pre-AM gold price at 2 pm Singapore time”, Lim Hng Kiang, minister for trade and industry and deputy chairman of the Monetary Authority of Singapore, told an industry conference yesterday. The study “is an important first step towards establishing a U.S. dollar price discovery mechanism for gold during Asian business hours,” said Lim. “When in place, it will facilitate the timely tracking of Asian demand and allow participants in Asia to settle their trades within the same business day.”

Singapore in January 2014 dropped plans to set a daily reference price for gold shortly after European regulators investigated manipulation of precious metals prices by banks. In October that year, the Singapore Exchange launched a 25-kg wholesale gold contract targeting to create a regional benchmark, but the contract has failed to attract volumes, with zero activity in some months. “We hope to make a reputable gold benchmark mechanism in London available to Asian users,” the Singapore Bullion Market Association’s chief

executive, Albert Cheng, told Reuters. Cheng said the feasibility study will be done until year end. “If there’s enough interest, the IBA will consider launching it early next year,” he said. China launched a yuandenominated gold benchmark in April this year in a bid to exert more control over pricing of the metal, but use of the benchmark even in China has yet to gain traction, traders say, many of whom still follow the dollardenominated London pricing. The London gold fix, previously set via a teleconference among banks and facing allegations of manipulation, was replaced in 2015 by electronic auctions, which take place twice daily. The LBMA last week named

Cinnober subsidiary Boat as the service provider for its new trade reporting platform, as it moves to boost transparency in the US$5trillion-a-year London gold market.

Key Points LBMA, SBMA, ICE to study extending LBMA gold pricing in Asia When in place, will allow timely tracking of Asian demand Transparency in the fixing process has come under scrutiny since a scandal broke in 2012 over the rigging of the London interbank offered rate, or Libor. Reuters

14 Business Daily Tuesday, October 18 2016

International In Brief Syria conflict

EU not considering Russia sanctions The EU is not considering sanctions against Russia for its role in Syria but further measures against its ally Damascus are possible, the bloc’s foreign affairs head Federica Mogherini said yesterday. Foreign ministers meeting in Luxembourg showed little appetite for adding to existing sanctions against Moscow over the Ukraine crisis, despite a call from the United States and Britain for new measures over the carnage in Aleppo. “This has not been proposed by any member state,” Mogherini said as she arrived for the meeting of 28 European Union ministers dominated by the Syrian crisis when asked about steps against Moscow. Results

Bank of America profit rises Bank of America Corp, the second-largest U.S. bank by assets, reported its first rise in profit in three quarters yesterday, boosted by strong results from bond trading. Net income attributable to shareholders rose 6.6 per cent to US$4.45 billion in the third quarter ended September 30, from US$4.18 billion a year earlier. Earnings per share rose to 41 cents from 38 cents in the same period of 2015. Analysts on average had expected earnings of 34 cents per share, according to Thomson Reuters I/B/E/S. It was not immediately clear if the figures were comparable.

Monetary policy

Draghi seen embracing more before less QE Few analysts expect action when the 25-member Governing Council meets in Frankfurt on Thursday to set policy

ario Draghi will have to go the extra mile on quantitative easing before he can think of slowing down, econo-

mists say. With consumer prices barely rising and the recovery still fragile, the majority of respondents in a Bloomberg survey predict the European Central Bank president will prolong bond-buying. That decision is more likely to be taken in December than at this week’s policy meeting, and most analysts say the program won’t start to be wound down until the second half of 2017. Even then, the ECB is only expected to act if euro-area inflation is holding above 1.5 per cent. Officials are under pressure to reveal their strategy for QE, which is soaking up 80 billion euros (US$88 billion) a month of debt and is currently scheduled to run through March 2017. While questions have surfaced about how the ECB will ultimately reduce the stimulus, for now the focus is on how to ensure purchases can proceed amid increased

scarcity in some markets. “Central bankers have to think about how long the QE program should and can last, and it’s very important for Draghi to sound flexible,” said Maxime Sbaihi, an economist at Bloomberg Intelligence in London. “There are still more doves than hawks in the Governing Council, meaning that the balance of power is consistent with more easing. Any tapering decision would only come after a time extension.” Seventy-eight per cent of the 50 economists surveyed by Bloomberg from October 7-14 forecast the ECB will announce fresh stimulus, and nine in ten of those say it will happen in December at the earliest. The share of those predicting an extension of asset purchases has increased since the central bank’s last policy meeting in September. At the same time, fewer see more rate cuts on the horizon as concerns mount that negative rates are squeezing profitability for the region’s lenders. “Given negative side effects on banks, the ECB will probably not cut

Oil industry

Iran to boost output as OPEC plans cut Iran, OPEC’s third-biggest member, plans to boost its oil output to a level of 4 million barrels a day this year, potentially complicating the producer group’s plan to cut supply in an effort to prop up prices. The Persian Gulf nation will raise production from 3.89 million barrels a day currently, Ali Kardor, managing director of National Iranian Oil Co., said yesterday at a conference in Tehran. Amir Hossein Zamaninia, deputy oil minister for international affairs, told reporters the country pumped 4.085 million barrels a day before sanctions were imposed on its economy.

Mario Draghi, European Central Bank president

Auctions

Christie’s seeks more ‘realistic’ prices Around 150 watches go up for auction on Wednesday, with estimated prices reaching US$250,000

Brexit aftermath

Britain looks at paying into EU budget to get market access Britain might continue to pay billions of pounds into the European Union’s budget after Brexit to maintain single-market access for the City of London and other sectors under plans being discussed by government, the Financial Times reported. Prime Minister Theresa May’s recent rhetoric has perturbed some investors who fear Britain could give up trying to remain in the EU’s single market in order to impose controls on immigration from the other 27 EU member states. But the Financial Times said yesterday May had not ruled out making future payments to the EU to secure privileged access to the single market.

rates further,” said Philippe Gudin, chief European economist at Barclays Plc in Paris. On the other hand, a extension of QE “is very likely.” That decision would probably require a change in the program’s rules. The Governing Council tasked the ECB’s committees last month with examining potential options, after Executive Board member Benoit Coeure told officials that purchases were leaving an increasing “footprint” in financial markets and some bonds were getting scarce. Seventy-three per cent of survey respondents said the ECB will change its QE parameters. Draghi has stressed that the program has enough flexibility to achieve its purpose of contributing to a sustained adjustment in the path of inflation toward just under 2 per cent - a level the ECB hasn’t reached since early 2013. He said on Oct. 8 that price growth will be in line with the central bank’s target by early 2019 at the latest. Economists in the survey were less optimistic. Only two thirds predict inflation will be in line with the ECB’s goal before Draghi’s term expires in October 2019. That’s unchanged from last month, and down from 85 per cent at the end of last year. Even though the pickup in price growth is gradual, policy makers have started to think about how to slow stimulus when the time comes. While the Governing Council hasn’t formally discussed the topic, an informal consensus has built among officials that QE will eventually be tapered, Bloomberg reported this month. The majority of economists surveyed predicts that a phase-out of asset purchases will start in the second half of 2017 or later. They also said the ECB would probably want to see inflation above 1.5 per cent for three consecutive months before signalling any tapering. That will be a close call. Economists in a separate Bloomberg survey see euro-area inflation at 1.3 per cent at the end of each of the third and fourth quarters of next year, accelerating to 1.5 per cent by March of 2018. Bloomberg News

The global economic slowdown combined with “selective demand” are pushing Christie’s to seek more realistic prices on their collections, directors of the auction house said. “This year the market is not at the same level as it was one year or two years ago. We are facing a more challenging market,” Guillaume Cerruti, Christie’s president for Europe, the Middle East, Russia and India, told journalists in Dubai. “To face this situation, the key word for us is selectivity,” he said, announcing two auctions this week in the glitzy Gulf emirate, one on Modern and Contemporary Art and another showcasing “Important Watches”. “We want to have sales that are well curated, sales with maybe less objects but of high quality at... realistic estimates,” he said. While he did not provide specific figures on the fall in overall sales,

he said that online-only sales “have been a real success”. “For the first six months of the year, we have sold through our online-only sales of 20 million pounds (US$24.4 million) around the world,” a 100-per cent over the same period of 2015, he added. “We’re making sure that we find good quality of works that are well priced to ride through this more challenging period,” said Christie’s Middle East managing director, Michael Jeha. In an auction on last Tuesday of 113 artworks, the highest estimated price has been set at US$180,000, far lower than the US$400,000 price tag on paintings sold in March this year. Around 150 watches go up for auction on Wednesday, with estimated prices reaching US$250,000. Among them are two Patek Philippe 18K white gold automatic wristwatches with the Iraqi coat of arms and the name “Saddam”, after

executed Iraqi president Saddam Hussein who ordered the watches in 1974 and 1980 as gifts. Their prices are estimated at US$10,000 and US$18,000 each.

“We’re making sure that we find good quality of works that are well priced to ride through this more challenging period” Michael Jeha, Christie’s Middle East managing director

London-based Christie’s, which celebrates its 250th anniversary on December 5, says its sales at Dubai auctions have exceeded US$300 million since it opened a branch in the emirate 10 years ago. AFP

Business Daily Tuesday, October 18 2016 15

Opinion Business Wires

The Phnom Penh Post Cambodia’s domestic electricity production grew significantly in 2015, helping to reduce the Kingdom’s reliance on imported energy, the national electricity regulator said in its newly released annual report. According to the Electricity Authority of Cambodia, the Kingdom’s energy generation increased by 46.79 per cent in 2015 compared to the previous year, with local energy production accounting for nearly 75 per cent of the country’s total supply. Energy imports from Vietnam decreased by 5 per cent, reducing its contribution to the Kingdom’s electricity supply to just under 20 per cent, compared to 26 per cent in 2014, the EAC report’s figures showed.

Taipei Times Taiwan Cement Corp, the nation’s largest cement maker, said that by the end of the year it would raise prices of its cement products in China by as much as 7 per cent, on the back of recovering demand. The company’s latest price adjustments for its Chinese customers are scheduled to be announced early this week. “We are planning to increase cement prices in southern China by 20 yuan [US$2.97] per tonne,” company senior vice president Edward Huang said. The 70-year-old company said it is seeing a gradual recovery this year, supported by improving demand from China’s infrastructure and residential property sectors.

China’s deleveraging will likely fall short

T Jakarta Globe The Indonesian Motorcycle Industry Association, or AISI, expects sales of two-wheelers in the archipelago to rebound next year on the back of a better economic outlook that would support customers' purchasing power. AISI chairman Gunadi Sindhuwinata told reporters he expects motorcycle sales to reach at least 6.6 million units in 2017, up 10 per cent from this year. “Some main factors that would boost the growth are stable economy and strengthening purchasing power,” Gunadi said. The government expects Indonesia’s gross domestic product to expand 5.3 per cent next year, up from 5.2 per cent expansion estimated this year.

The Japan News Japanese and foreign semiconductor makers have started developing a framework of cooperation to ensure early recovery of plant operations after disasters, industry sources have said. The companies will discuss the idea of mutually providing materials, equipment and product parts necessary to resume the operations of plants damaged by a disaster or affected by disaster-induced parts shortages. The industry moves are based on lessons from a series of powerful earthquakes that hit Kumamoto Prefecture and nearby areas in April, causing local semiconductor plants to stop operations.

here is good news when it comes to China’s scary and still-growing pile of debt: At least the government recognizes the problem. Its attempts to mitigate those risks, however, seem doomed to fall short. The government’s recent decision to create a market for credit default swaps is a case in point. The idea, as elsewhere, is to give banks and investors a means of pricing and trading the risk of Chinese companies defaulting on their debts. The need is obvious: Official measures of non-performing loans are worsening, while unofficial estimates say their share may have reached anywhere from 8 per cent to 20 per cent. Anything that spreads that risk should improve financial stability. Yet, as envisioned, this new CDS market is unlikely to do much to improve the situation. For one thing, all but the largest companies already have to purchase credit insurance when taking out loans from giant state banks. There’s no pricing differential on this insurance, of course. But for the new system to function effectively, the government would have to let markets freely set the price of credit risk. China doesn’t exactly have a stellar record of allowing markets to set prices in any field, whether in stocks, real estate or currencies. If credit default swaps started to indicate a rising risk of default at a major state-owned company, it’s hard to imagine officials wouldn’t intervene to reverse that impression. This is dangerous on multiple levels. Already, several Chinese credit insurance firms have collapsed because they underestimated credit risk, forcing government bailouts. Continuing to underprice risk will only encourage the overallocation of credit that’s gotten China into trouble thus far. There’s also little reason to think that creating a CDS market would shift risk away from the most vulnerable banks. In a heavily concentrated banking and lending market such as China, where major financial institutions all trade with each other, swaps are likely to produce no net change to risk levels. Think of a simple example. Assume that Bank A has loans totalling RMB100 billion but wants to protect itself against the risk of default by buying a CDS from Bank B that covers these companies. Now assume that Bank B does the same to cover its RMB100 billion in loans, with A as the counterparty. If we assume these are similar baskets of loans - a reasonable assumption for major banks within a single country - then there’s been no net change in credit risk for either bank. All

“

Christopher Balding a Bloomberg View columnist

they’ve done is swap credit risk, convinced that as outsiders, they can assess the health of loans better than the loan officers involved. Finally, unless major outside investors enter the market to relieve the burden on China’s banks, risks will remain concentrated. The likelihood of such an influx is slim; foreign investors are the ones most concerned about the explosion in Chinese credit. Even the Bank for International Settlements and International Monetary Fund, neither of which can be described as anti-China scaremongers, have raised major concerns about the blistering pace of credit growth. Given outsiders’ inability to invest at truly market-dictated prices or to repatriate earnings at will or, at least, in sufficient quantity to fundamentally alter their risk calculations - there’s little reason to believe they’re going to assume the liability for China’s credit bubble. If China wants to avoid symbolic gestures, there are better ways to address credit worries. Despite the unveiling of its much anticipated debt for equity program last week, neither banks nor firms seem anxious to participate. As one banker noted, “If you’re a good company, you wouldn’t want to give banks any of your shares. And if you’re a bad company, we wouldn’t want any of your shares.” Shifting risks between the same group of banks and related financial institutions isn’t going to solve this problem. Banking regulators need to press actual deleveraging and what are expected to be significant recapitalizations. China should also introduce stricter rules on financial transparency, to produce higher-quality information for listed firms. Even though official data for major banks indicates non-performing loans are only about 1.5 per cent of the total, bank stocks are being priced as if all their equity will be required to cover loan losses. Since investors have no faith in the data, they latch onto worstcase scenarios, which itself creates greater risk. None of this is to say that China is wrong to introduce credit default swaps. But, given the way the government has interfered in other markets, not to mention other existing hurdles, the new system is unlikely to improve credit allocation as dramatically as is needed. At some point, China will have to learn that simply creating an asset to trade doesn’t make a market. Bloomberg View

Shifting risks between the same group of banks and related financial institutions isn’t going to solve this problem

”

16 Business Daily Tuesday, October 18 2016

Closing Trade convention

Canton Fair exporters upbeat as China moves up value chain Nearly half of those polled in Canton said exports would be helped by the depreciation of the yuan Lindsy Long and Clare Jim

ore than 80 per cent of companies at China’s largest trade fair expect to export more next year, helped by innovation and currency movements, according to a Reuters poll, raising hopes of a turnaround after more than a year of weak export data. Despite concerns at rising costs and feeble global growth, the mood was mostly upbeat at the Canton Fair in Guangzhou on southern China’s Pearl River, where tens of thousands of mainland exporters and foreign buyers gather for what is regarded as a barometer of the country’s foreign trade. Chinese exports have been falling almost continuously since the second quarter of 2015, and showed an unexpectedly large drop of 10 per cent in September, despite heading into what is usually the peak year-end shopping season. A third of the 103 companies polled said they expected a rebound in the country’s exports soon, and 46 per cent expect the slowdown to persist for between six and 12 months. “The overarching environment is not that great, but we innovate so we remain competitive,” said Hill Xing, sales manager at Kemage Power Machinery, which makes small power generators for household and agricultural purposes and employs 600-700 people. Andy Zhang, sales manager at Owatch, a virtual reality start-up, echoed that theme. “Traditional industries are lagging, but new innovative industries like us will do very well,” he said. Struggling heavy industry helped pull Chinese growth to a 25-year low in 2015, and the country’s foreign reserves fell by US$513 billion as the currency weakened and investors pulled out capital. Nearly half of those polled in Canton said exports would be helped by the depreciation of the yuan, which has fallen 8.4 per cent since August 2015, with another third expecting no impact. The fair, established in 1957, runs until Nov. 4. Phase one, ending on

Wednesday, features exhibitors covering electronics and household appliances, along with heavy machinery and building materials. Phase 2, from Oct. 23-27, covers consumer goods, gifts and home decorations, and the final phase includes textiles and apparel, office supplies, healthcare and foods. Forty-five per cent of companies said they were upbeat on their order prospects, while 51 per cent were neutral and 5 per cent pessimistic.

Footfall down

On a list of eight issues polled, production costs were the biggest headache for most exporters at the bi-annual fair, which is attended by 24,553 exhibitors occupying more than 60,250 booths. This was followed by concerns over global economic growth, while rent was their least concern. Nearly 70 per cent of exporters said hiring costs had climbed by up to 10 per cent this year, though close to 60 per cent said it was easy to get a loan for their business. More than 65 per cent of companies expect to increase investment spending by up to 20 per cent next year, while 16.5 per cent expect to raise

Fine impact

spending by over 20 per cent. Fixed asset investment in China grew just 8.1 per cent in the first eight months of this year, the slowest pace since December 1999. Increasing labour and overall operating costs have hurt the competitiveness of China’s exporters in recent years, with many switching to cheaper destinations in Southeast Asia, while others increase automation.

Key Points Canton Fair, barometer of China’s export health, runs to Nov 4 The bi-annual fair is attended by 24,553 exhibitors 80+ pct of companies expect to export more next year -poll Production costs biggest concern for exporters at the fair “We just installed a new production line from Korea to enhance automation. It will help to ease labour costs,” said Juney Wang, manager at PVC floor manufacturer Rentier, based in Jiangsu province. Exporters said foot traffic at the fair, held in the provincial capital of Guangdong, nicknamed the workshop of the world for its manufacturing prowess, had dropped

Battle corruption

significantly from three years ago, while the buyer mix had also changed. “I’m seeing more buyers from emerging markets such as South America and Southeast Asia,” said Jason Green, marketing director at Anhui Guofeng Wood-Plastic Composite Co. Traditional markets such as Europe and the United States have been hurt by an economic downturn, and many buyers from these countries were increasingly buying over the Internet, he added. Jason Shen, general manager at KarrDiS, an armoured door manufacturer from Zhejiang province in eastern China who has attended the fair since 2007, said footfall had dropped around 30 per cent from two or three years ago. “Most of our exports were to Africa in the past, but the portion has declined as their oil and commodity prices dropped,” Shen said. Domestic sales currently account for 20 per cent of his company’s revenues, but it plans to raise this to 50-60 per cent next year, he added. Many buyers said prices at the fair had risen, with some seeing increases of up to 40 per cent. “If China keeps increasing prices and producing copycat products with little improvement, it’ll lose out in the game,” said Demi Stefanovski from Macedonia. Reuters

Growth

Deutsche Bank said to explore Beijing touts reforms in shrinking U.S. operations organ donation system

South Korea says economy will hit forecast

Deutsche Bank AG, Germany’s biggest bank, is exploring shrinking its U.S. operations as mounting legal expenses threaten to eat into the firm’s capital, according to two people with knowledge of the matter. Such an option is being considered as part of the bank’s broader strategy review, which evaluates businesses in the context of regulatory and capital requirements, said the people, who asked not to be identified because the talks are private. The supervisory board of the Frankfurt-based bank discussed the U.S. business at a recent meeting and the topic has come up in talks with U.S. authorities, said one of the people. Deutsche Bank said last month that the U.S. Justice Department requested US$14 billion to settle a probe tied to residential mortgage-backed securities, a figure that triggered a selloff in the shares and fuelled investor concerns about the bank’s financial strength. The bank had put aside 5.5 billion euros (US$6 billion) for litigation at the end of June. Chief Executive Officer John Cryan, who’s been cutting jobs to lower costs, has said he doesn’t plan to raise capital and expects U.S. authorities to lower their initial demand. Bloomberg News

South Korea’s economic growth is still expected to meet the government’s expectations this year, although recent strikes at Hyundai Motor Co and the discontinuation of Samsung Electronics Co Ltd’s Note 7 sales pose risks, the deputy finance minister said yesterday. Lee Chan-woo told a news briefing on the economy that Samsung Electronics’ troubles could have a negative impact on the country’s growth, particularly in the second half of the year. “It could have negative effects on the economy. Especially in Samsung’s case, this minus effect may be reflected in the third and fourth quarters,” Lee said, referring to Samsung’s comments last week that it expects to take a roughly $3 billion hit to its operating profit over the next two quarters. Lee said recent strikes at Hyundai, the country’s largest carmaker, were a bigger risk. He attributed half of the decline in the country’s August industrial output to the strikes which started in the summer and have since ended. The deputy minister said growth this year would comfortably meet the government’s forecast of 2.8 per cent, and exceed that level next year. Reuters

China has zero tolerance for non-voluntary organ transplants and is fighting corruption in its fledgling donor system, an official who has led reform said yesterday, as Beijing seeks to leave behind an era of controversial organ harvesting. Last year, China officially ended systematic use of organs from executed prisoners in transplant procedures, a practice long condemned by international human rights groups and medical ethicists. Authorities keen to promote an image of a donor system more in keeping with China’s growing prominence have cracked down on a black market in organ trafficking and stepped up public donor rates to help meet a huge demand for transplants. Despite challenges with the corruption underlying illicit organ trade, China is working hard to improve the system and increase transparency, said Huang Jiefu, the director of the China Organ Donation and Transplantation Committee. “Since 2015, I can guarantee that in our system 100 per cent are voluntary citizen donors,” Huang told reporters at a conference on organ donation attended by international experts, including some from the World Heath Organization (WHO). Reuters