Wednesday July 24, 2013
Editor-in-chief Tiago Azevedo
April 19, 2013
Faster border checks to boost city’s tourism image A
trial scheme allowing tourists from Guangdong province to use an electronic travel visa to enter Macau could cut the time it takes to cross the city’s borders and also boost the city’s image, the tourism industry says. Lao Ngai Leong, a Macau deputy in the National People’s Congress (NPC), told Chinese media on Monday travel visa permission for mainlanders would soon be stored on a newly-issued electronic card instead of in their passport. The scheme would start “by year-end,” he added. Mr Lao estimates mainlanders would then take only six to eight seconds to go through e-channel gates instead of half an hour for conventional immigration clearance. More on page 3
Jet Asia close to selling four planes
Gaming rev slows for 2nd straight week
Govt contests Reolian bus services lawsuit The government is standing up to Reolian Public Transport Co Ltd’s lawsuit about payments for bus services. Reolian asked the Administrative Court last month to order the government to pay the company an extra 36.6 million patacas (US$4.6 million) for operations conducted between July last year and April this year. Business Daily has learned the government has given the court a response to the suit. It’s not yet public. Page 3
Visitor arrival rebound extended Macau’s tourism industry seems to be expanding again, registering in June a fifth straight month of year-on-year growth. Starting in May 2012 the city saw the n u m b e r of tourists tumble for nine consecutive months, the biggest downward trend since the global financial crisis of 2008-09. In June visitor arrivals increased by 10.4 percent year-on-year to 2.3 million, the Statistics and Census Service announced yesterday. Page 4
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More small Macau investments in mainland Macau firms continue to make small investments on the mainland. The Chinese Ministry of Commerce announced on July 23 it had approved 29 new projects funded by Macau enterprises in May, rising by over 60 percent from the same month a year ago. The capital invested, however, only totalled about US$30 million (240 million patacas), about half of the US$70-million approved in the same period of 2012. Page 5
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July 24, 2013
Jet Asia close to selling four planes Private jet operator owned by Stanley Ho’s family reducing its fleet Vítor Quintã
rivate aviation operator Jet Asia Ltd is close to selling four airplanes, as the company cuts down on its fleet because it does not get enough charters. The company, owned by Stanley Ho Hung Sun’s Sociedade de Turismo e Diversões de Macau (STDM) SA, is “in the process” of selling four of its Hawker mid-sized jets, a source told Business Daily. The negotiations with a United States company “have been going for six months” and the sale is “95 percent done,” the source added. Once the disposal is completed, Jet Asia will be left with a fleet of six aircraft. The source said the downsized fleet would be enough to handle the existing demand. Jet Asia has been operating since 1995 and it provides transport mainly for the STDM chairman’s family. When the gaming market was liberalised, in 2002, the company saw what it thought was an opportunity to make money by offering services beyond the family circle, by shuttling high roller gamblers into and out of Macau. Those expectations have now been tempered. “There is no business, at
least not to the level at which it would be substantial enough” to make up for the high fixed costs, the source said. The overheads include: aircrew training; keeping a crew on standby; maintenance; insurance and licensing of the fleet, as well as keeping the aircraft parked at Macau International Airport. Despite reduced costs Jet Asia still has “a huge gap” between its revenue and its running costs, with STDM currently covering the deficit, the source said. Other casino operators have planes to fly their most valuable patrons to and from Macau but “they are doing it in a very small scale,” the source said. “Maybe 10 years from now there will be a big enough market” for private aviation, the source predicted. The cost of a charter ranges from US$20,000 (160,000 patacas) to US$120,000, depending on the destination, Jet Asia told our sister publication Macau Business two years ago. Outside of destinations in mainland China, the company most often flies to Vietnam, Cambodia, Taiwan, Malaysia, India and Japan. The city has three enterprises that
After the sell off, Jet Asia will be left with a fleet of six aircraft
offer travel by private jet: Jet Asia; Macau Legend Development Ltd, owned by David Chow Kam Fai; and Macau Jet International Co Ltd. A fourth enterprise, Sio Tak
Hong’s Fortuna Jet, has applied to the Civil Aviation Authority of Macau for permission to operate and maintain private jets, according to the company’s website.
Pan-democrats urge gaming contracts to be publicised A pan-democrat group wants the government to “extensively publicise” the contracts they signed with the city’s six gaming operators, citing a lack of transparency over the terms of Las Vegas Sands Corp’s sub-concession from Galaxy Entertainment Group Ltd. Jason Chao Teng Hei president of New Macau Association said – referring to Macau’s Secretary for Economy and Finance and also the city’s first post handover leader: “Officials like Tam Pak Yuen and the former chief executive [Edmund] Ho Hau Wah should be investigated for possible abuse of power.” Legislator Chan Wai Chi from the New Macau Association will “soon” table an oral inquiry to the government to ask about such possible abuses, said Mr Chao. Business Daily reported on May 16 that Mr Tam wrote a confidential letter in 2006 to Canada’s Bank of Nova Scotia – at the time a lead arranger of project debt for Las Vegas Sands Corp. Mr Tam quoted a memorandum dated December 2002 saying LVS’s sub-concession of Galaxy’s gaming concession would in fact allow LVS to operate “autonomously” from the concessionaire Galaxy Casino SA even after the demise of the latter. “Such [a] revelation showed there is actually no difference between the so-called concessionaires and sub-concessionaires and the public were in the dark for ten years,” said Mr Chao whose group held a press conference yesterday on the issue. The government should explain the difference between the two kinds
of concessions, he said. In liberalising the gaming market here, the administration originally invited applications for three casino gaming licences, to be granted as individual concessions. Sociedade de Jogos de Macau SA, founded by tycoon Stanley Ho Hung Sun, Wynn Resorts (Macau) SA created by Steve Wynn, and Hong Kong’s Galaxy Casino SA founded by building materials entrepreneur Lui Che Woo were the original winners. But in December of the same year, LVS – which had been due to operate casinos under a Galaxy concession – told the government it wanted to dissolve the partnership. The government, attracted by LVS’s success in developing non-gaming facilities in Las Vegas, asked the firm to stay in the running, sources told Business Daily. The government’s solution was to grant LVS a sub-concession of Galaxy’s concession. But the banks interested in lending to LVS for Macau construction worried that if Galaxy lost its licence then LVS – as a sub-concessionaire – would also lose its rights. For some years the government gave assurances to the contrary by word of mouth, but in 2006 Mr Tam was pressed by the Canadian bank to put the assurance in writing. SJM and Wynn were also later allowed to have sub-concessions, which they sold respectively to MGM Grand Paradise, SA for US$200 million (1.6 billion patacas) and Melco Crown Entertainment Ltd for US$900 million. T.L.
July April24, 19,2013 2013
Macau Govt makes no pledges on LRT launch, budget The Transportation Infrastructure Office declined to predict whether the Light Rapid Transit (LRT) railway would be completed by 2015, as previously scheduled. Technical adviser Chou Wai Tak admitted that a complex underground pipe network and the rainy weather affected the construction of the railway’s Taipa and Cotai section. There are, meanwhile, “uncertainties” over the Macau section after the Commission Against Corruption raised questions over the NAPE route, he added. Mr Chou said the office was “still evaluating” reports from the watchdog and the Commission of Audit and whether they would impact the railway’s
Govt contests Reolian bus services lawsuit The bus company says the government has made no effort to settle out of court Vítor Quintã
Cédric Rigaud, general manager, Reolian Public Transport
he government is standing up to Reolian Public Transport Co Ltd’s lawsuit over payment for running its bus services. Reolian asked the Administrative Court last month to order the government to pay the company an extra 36.6 million patacas (US$4.6 million) for running its bus services between July last year and April this year. Business Daily has learned that the government has now given the court its response to the suit. Monday’s Official Gazette says Secretary for Transport and Public Works Lau Si Io has authorised Transport Bureau director Wong Wan to engage lawyers to handle the suit. Unlike most public services, the Transport Bureau does not have the power to handle court matters, according to its statutes. The bureau was created in 2008. Business Daily asked the Transport Bureau to comment but we had received no reply by the time we went to press. At first, the court gave the
We are open to any negotiations, but at this point we have received no contact from the government
Reolian is claiming 36.6 million patacas that it says the government owes it
government just seven days to respond to Reolian’s suit. But the court later gave the government more time. This was because Reolian had not at first specified which organs of the government it was suing. Reolian asked the court to make
the government act on its undertaking in June last year to increase by 23.3 percent what it pays the company to run bus services. The government went back on this undertaking after the promise of an increase provoked a public outcry over the quality of bus services.
In April the government kept its promise to pay two of the bus operators more. But it refused to give Reolian the increase that it gave to Transportes Urbanos de Macau SARL (Transmac) and Sociedade de Transportes Colectivos de Macau SARL (TCM). Reolian general manager Cédric Rigaud said the government had made no effort to settle the dispute by negotiation. “We are open to any negotiations, but at this point we have received no contact from the government,” Mr Rigaud told Business Daily. Reolian said last month it might drop its suit if the government reviewed the terms of the company’s service contract. Reolian is a joint venture formed in 2009 by Macau’s HN Group Ltd and France’s Veolia Transport RATP. Reolian made a loss of about 58 million patacas last year. Mr Rigaud said in May that his company was losing more than 4 million patacas every month.
E-visas could increase city’s tourism appeal But electronic visas will not mean more visitors, the tourism industry says Tony Lai
lectronic visas for visitors from Guangdong, to be tried out this year, could cut the time it takes to enter Macau and make the city more attractive to tourists, people in the tourism industry say. A Macau deputy in the National People’s Congress, Lao Ngai Leong, told reporters on Monday that visitors from Guangdong would use electronic cards to enter Macau instead of passports. Mr Lao is also the Gongbei customs post supervisor. He said the trial would begin this year. He believes electronic visas will make it easier to cross the border, as
the holders will enter Macau through special e-channels. Mr Lao said last month that he estimated it would take a visitor only six to eight seconds to pass through an e-channel, but half an hour to go through a conventional immigration clearance channel. Macau Travel Industry Council president Andy Wu Keng Kuong welcomes the idea. “This could make it more convenient for mainland visitors, shortening the waiting time at the border,” Mr Wu told Business Daily. “This could give tourists a better first impression of Macau,” he said, “helping improve the city’s
tourism image.” But Mr Wu has a caveat. “This will not have any direct impact in the number of mainland tourists coming here as this shortened clearance time is not such a big incentive,” he said. Macau had over 7.44 million visitors from the mainland in the first five months of this year, 8 percent more than in the equivalent period of last year, official data show. Mainlanders made up 63 percent of all visitors. More than half the visitors from the mainland came from Guangdong. Chaos reigned at the Gongbei border crossing during the Lunar
Visitors from Guangdong could soon take just seconds to cross into Macau
New Year holidays in February, when what the Public Security Police called an “unexpected” influx of travellers crowded into the facility. Mr Lao said on Monday that the extension of the opening hours of the Gongbei crossing during the Golden Week holidays in October would depend on whether Zhuhai customs could staff the facilities.
July 24, 2013
Macau Brought to you by
British and Aus chambers welcome royal baby
The British Business Association of Macao has welcomed the birth – late on Monday Macau time – of the Duke and Duchess of Cambridge’s first child. The baby boy is automatically third in line to the British throne. As things stand he will also be head of state in 16 Commonwealth countries. “It’s something to celebrate for British and Commonwealth citizens residing in Macau and for many others around the world,” said the association. BBAM and Austcham – the Australian Chamber of Commerce in Hong Kong & Macau – will use a previously scheduled networking event at Sky 21, AIA Tower at 6pm tomorrow to mark the royal birth.
Extra travel Tourism is critical to Macau’s economic growth, and one that attracts the attention of all those observing the region’s development. Most of the attention is given to inbound tourism: how many visitors come, how they get here, how long they stay, how much they spend and what they spend it on. Much less attention is given to the behaviour of residents as travellers. Unfortunately, detailed figures on residents’ travelling habits are available since 2011 only, and they refer just to those using the services of travel agencies. They do not include those who make other arrangements, which may be difficult to monitor, especially the ones travelling to the neighbouring regions of Guangdong province and Hong Kong. When compared with tourist inflows the total numbers referred to here are small. In the period observed, almost two and a half years, the total of individual trips arranged by travel agencies for Macau residents amounted to slightly less than 2.8 million. For reference, that’s roughly on par with the figures for incoming visitors in any five-week period. The data on trips arranged by travel agents tell only part of the story, but give an idea of the travelling behaviour of Macau residents
Visitor arrivals extend rebound Macau more dependent on mainland Chinese tourists than ever before Vítor Quintã
In the first half of this year visitors from Guangdong increased by just 0.2 percent
The number of trips arranged by travel agents is now over twice what it was early in 2011, in another indication of the growing affluence of the region. The typical Macau resident travels independently. On average, almost 68 percent of outbound travellers travelled independently in the period under review. But the number of outbound travellers that belong to tour groups is growing faster. Their numbers went up by about 2.4 times in the period, much faster than independent trips that rose by less than 50 percent. The travelling peaks of summer and the end of the year (plus the Lunar New year) are clearly visible in the plots. J.I.D.
Outbound package tourists in February
acau’s tourism industry seems to be out of the woods, after visitor arrivals increased year-on-year for a fifth straight month in June, official data show. Starting in May 2012 the city saw the number of tourists tumble for nine consecutive months, the biggest downwards trend since the global financial crisis. But ever since February, the month when the Lunar New Year was celebrated this year, the tide has turned. In June visitor arrivals increased by 10.4 percent year-on-year to 2.3 million, the Statistics and Census Service announced yesterday. That growth was fuelled by mainland Chinese tourists, whose number increased by 20 percent yearon-year to 1.5 million. China has always been Macau’s biggest tourist market but that importance has grown significantly in
the last few years. In the first six months of 2013 the mainland accounted for about 63 percent of all visitors, a recordhigh figure. In addition one in two tourists did not stay in the territory overnight, spending just one day here. In fact the average length of stay of same-day visitors was just 0.2 day. Even those tourists that did stay overnight spent just 1.8 days in average here. The one redeeming trend is that Guangdong’s dominance is fading slightly, even though the province remains by far the most important tourist source. In the first half of this year visitors from Guangdong increased by just 0.2 percent from the same period of 2012 to 3.96 million. Growth was much faster for other provinces and cities, namely Hunan (up by 4.7 percent), Shanghai (up
by 14.7 percent) and Beijing (up by 10.7 percent). Flag carrier Air Macau Co Ltd launched a new route to Changsha, the capital of Hunan, in October last year. China’s importance grows even as the Macau Government Tourist Office announced plans to tap into alternative tourist markets, including South Korea, India and Russia. Official data says those efforts have been somewhat successful, with all three markets sending more tourists to the territory so far this year. Visitors from South Korea have increased by 5.3 percent year-on-year to 226,100 in the first half, while tourists from India have also grown by 2.3 percent to almost 84,000. Long-haul visitors from Russia have reached 16,200, up by 23.6 percent year-on-year. The Macau Government Tourist Office opened a representative office in the Russian capital Moscow in March.
July 24, 2013
Atomisation trend persists in investment in mainland More SMEs seem to be exploring the mainland market Tony Lai
Trade between Macau and the mainland slumped in May
acau investors continued putting small amounts of money into projects in the mainland in May, indicating that they are feeling more at home there. The Ministry of Commerce
announced yesterday that it had approved in May 29 new projects in the mainland funded by Macau enterprises, over 60 percent more than a year earlier. The total amount invested,
however, was only about US$30 million (240 million patacas), about half the sum invested a year earlier. In the first five months of this year the ministry gave Macau enterprises permission to invest in 114 new projects in the mainland, 14 percent more than in the equivalent period of last year. But the total amount invested fell by 8.9 percent to US$180 million. The trend toward putting less money into more projects began last year, when the number of investments approved by the ministry rose by 7.1 percent to 303, but the value of the investments fell by one-quarter to US$510 million. Macau Chamber of Commerce vice-president Vong Kok Seng said earlier this year that this was “not at all a bad scenario”. Mr Vong said: “It means more Macau SMEs are interested in entering the investment market in China.” He said he expected this trend to continue. The average value of each Macau-
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funded project in the mainland so far this year is US$1.58 million, slightly less than last year’s average of US$1.68 million. Since 1990 the Ministry of Commerce has approved 13,256 investments by Macau enterprises, together worth US$11.1 billion. The sluggishness of the mainland’s economy recently has pared its trade with Macau. Macau’s imports from the mainland were worth US$310 million in May, 9.6 percent less than a year earlier. The city’s exports to the mainland were worth US$20 million, half what they were worth a year earlier. Trade between Macau and the southwestern province of Sichuan was an exception. The official news agency, Xinhua, quoted the Sichuan Provincial Department of Commerce as saying the value of province’s trade with Macau in the first half of this year was US$130 million, 90.6 percent more than a year earlier and more than the total value of bilateral trade during the course of all of last year.
Macau companies invested in the mainland in May
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July 24, 2013 April 19, 2013
Macau Mass-market gaming share tipped to grow: So
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Mass-market gaming will make up a growing proportion of gaming revenue in future, according to SJM Holdings Ltd chief executive Ambrose So Shu Fai. Mr So told reporters yesterday that growth would be fuelled by greater diversity in tourism arrivals and in the city’s non-gaming attractions. But casinos would continue to depend on both VIP and mass-market players, he said. VIP gaming revenue made up 67.34 percent of all gaming revenue in the second quarter and 67.79 percent in the first.
Financial Monitor Telling times The demise of textile and clothing production provided exports of other types of products with a visibility they lacked before. The figures for exports of some products now in the limelight, such as jewellery, are somewhat misleading, because they are mainly re-exports, rather than the output of manufacturers here. Macau’s trade in watches, like its trade in jewellery, has increased in response to demand from tourists. The watch trade consists overwhelmingly of imports to satisfy demand from those tourists, principally tourists from the mainland. The value of watch exports is just over 7 percent of value of watch imports. But the watches exported are domestic exports. In their case, about 7.3 percent of all transactions made in the period shown here were confidential. Their volume has grown significantly in the current year, the total figures to May suggest.
Gaming revenue slows for second straight week Analysts adjusting downward their year-on-year expansion estimates for July Michael Grimes
Most exports of watches go to Hong Kong. Between 2010 and the end of May this year, 98.9 percent of watch exports not sheltered by confidentiality went to Hong Kong. Exports of watches to the mainland and Taiwan combined made up only 0.4 percent of watch exports. Exports of watches to the rest of the world made up under 0.7 percent. Because of the degree of predominance of Hong Kong as a market for Macau’s watches, the chart uses a logarithmic scale for clarity. Exports of watches to Taiwan stopped last year and have not resumed. J.I.D. The content of this column is the work of Business Daily’s journalists.
99.75 % Hong Kong’s share of Macau’s watch exports in the first five months
acau gaming revenue has slowed for the second consecutive week this month say analysts, causing them to downgrade the year-on-year growth potential for July. Kenneth Fong of J.P. Morgan in Hong Kong estimated the daily revenue take market-wide in the city’s casinos had slipped to 842 million patacas (US$105.4 million) for the week to July 21 inclusive. That was 16 percent down on the one billion patacas daily run rate achieved in the first seven days of the month. “If we assume daily revenue for the rest of the month of 930 million patacas, then July should end at around 28.7 billion patacas, for 17 percent year-on-year growth, lower than our previously estimated 21 percent yearon-year growth,” said Mr Fong. John Kempf of Canada’s RBC Royal Bank, said he wasn’t alarmed by the July slowing. “…while weekly gaming revenues can fluctuate greatly from abnormal hold rates and other seasonal factors, the decline may give some ammunition to the ‘China bears’,” wrote the analyst. But he added: “We take a longer view, and believe our 13.1 percent growth rate for 2013 is conservative and reachable.” Nomura’s Harry Curtis said most of the relative softness so far this month seemed to be from the VIP segment. “We estimate VIP revenues could be up 10-12 percent (versus prior implied trend of 16-17 percent) for the month,” said Mr Curtis, suggesting the mass market would achieve 30 percent year-on-year expansion in July. Some analysts have been telling Business Daily privately for several months that recent softness in the VIP segment relative to the still
Mass market – getting some help from defecting VIPs?
strong mass-market could be in part due to high rollers migrating to premium mass tables. That’s not necessarily because of credit tightening on the mainland, but in order for players to stay under the radar of the authorities at home. There is anecdotal evidence, say analysts, of increasing closeness between the Chinese government and the junket industry in monitoring gambling by so-called ‘politically exposed persons’. That’s usually a reference to senior managers of state-owned enterprises and public officials. It’s easier to keep tabs on players when they are relying on
credit to gamble – as happens in VIP junket rooms. But Cameron McKnight of Wells Fargo sees the more modest performance of VIP – which was coming from a very high base established during the record expansion of 2010 and 2011 – as a function of a lag between fresh liquidity moving into the mainland economy and that showing in the gambling numbers in Macau. “...strong first half 2013 liquidity growth likely hasn’t yet flowed through Macau – and could drive second half 2013 VIP growth,” he wrote.
July April24, 19,2013 2013
July 24, 2013 April 19, 2013
Greater China Glaxo in talks to set up JV on vaccines GlaxoSmithKline Plc, the world’s largest maker of vaccines, is in discussions to form a joint venture with a Chinese company to help with research and marketing. Talks with several potential partners haven’t been affected by an investigation on alleged “economic crimes” in China, said Christophe Weber, head of the company’s vaccines unit. “We are keen to find a partner in China,” Mr Weber said. Over the next 10 years, “the Chinese government will progressively upgrade its immunisation calendar, and we want to be there and to be a partner when that happens”.
Govt sees 7 pct as growth bottom-line China must deepen reforms to address economic challenges, says Xi
remier Li Keqiang’s government sees 7 percent growth as the bottom line for tolerance of an economic slowdown, Chinese news organisations reported, signalling the nation will act to support expansion if needed. Expansion below 7 percent won’t be tolerated because China needs to achieve a moderately prosperous society by 2020, according to a commentary published by the official Xinhua news agency and credited to reporter Wang Yuewei. Mr Li said at a recent meeting with economists that 7 percent is the “bottom line” and the nation can’t allow growth below that, the Beijing News reported yesterday. China must deepen reforms to address a slew of challenges confronting the economy, President Xi Jinping said in comments published yesterday. “To address the series of problems and challenges facing our country’s development, the key is to deepen reforms in all aspects,” Mr Xi was quoted as saying by Xinhua news agency. Chinese stocks rose the most in two weeks amid optimism that the government won’t let expansion slow too much after gross domestic product rose 7.5 percent in the second quarter from a year earlier, the same pace as China’s official target for this year. Mr Li previously said the government shouldn’t let growth and employment fall below lower limits that he didn’t specify. “The comments confirmed that
Economy grew by 7.5 percent in the second quarter
the government’s acceptable range for growth this year is between 7 percent and 7.5 percent,” said Chang Jian, a Hong Kong-based economist at Barclays Plc who formerly worked for the World Bank. “As economic growth is slowing to below 7.5 percent, the government policy’s focus is gradually shifting to stabilising growth.” Other parts of the reports may
add to confusion on the government’s tolerance for a slowdown. The Xinhua commentary said 7.5 percent is the “lower limit” for growth this year while the Beijing News reported Mr Li said the “lower limit” for China’s GDP expansion is 7.5 percent. The articles didn’t elaborate on the difference between a “lower limit” and a “bottom line”. Finance Minister Lou Jiwei said in
a press briefing in Washington on July 11 that growth as low as 6.5 percent may be tolerable in the future. While the government in March set a 2013 growth goal of 7.5 percent, Mr Lou said he’s confident 7 percent can be achieved this year. Xinhua later amended its Englishlanguage report on Mr Lou to say there’s no doubt that China can achieve this year’s growth target of
HK fears loans to mortgage firms may undermine Loans to finance companies not advised, says Monetary Authority Stephanie Tong and Rachel Evans
ong Kong banks’ support for mortgage lending by finance companies may reduce the effectiveness of home-lending controls and should be discouraged, the city’s watchdog said. “If banks provide loans to finance companies to support their mortgage business and these finance companies do not follow the Hong Kong Monetary Authority’s guidelines on property mortgage lending, this may undermine the effectiveness of the prudential measures,” the regulator said in an e-mailed reply to questions. The HKMA “does not encourage banks to provide loans to these finance companies,” it said. Hong Kong’s government is trying to curb property prices in the world’s
most expensive housing market after low mortgage costs, a shortage of real estate and an influx of buyers from mainland China prompted house prices to more than double since the beginning of 2009. The HKMA asked lenders for information on financing provided to companies that offer mortgages, the Oriental Daily newspaper reported on Monday, citing unidentified people. The Hang Seng Property Index rose 2.65 percent yesterday, as the Hang Seng Index closed up 2.3 percent at 21,915.4 points.
Stamp duty Hong Kong Chief Executive Leung Chun Ying in February
doubled stamp duty on all property transactions higher than HK$2 million (US$257,800) and the HKMA tightened mortgage terms for commercial properties and parking spaces. The regulator also required banks to lower the maximum mortgage loan-to-value ratio on commercial properties by 10 percentage points. It limited the maximum mortgage for parking spaces to 40 percent of the value, with a 15 year-cap on the length of the loan. Property transactions in the city plunged to a two-decade low in the second quarter as the measures took effect, prompting thousands of real estate agents and industry workers to march in a protest this month, calling
Hong Kong tightened mortgage terms in February
on the government to lift the controls. The regulator “requires banks to submit not only regular statutory returns, but also additional information as and when the
July April24, 19,2013 2013
Greater China ZTE surges after jump in earnings ZTE Corp, China’s second-largest maker of equipment for phone networks, rose the most in almost five years in Hong Kong trading after posting a surge in first- half earnings. The shares rose 19.52 percent to HK$13.84, the biggest gain since October 2008. Net income rose 23 percent to 302.3 million yuan (US$49 million) in the six months ended June, the Shenzhen-based company said in a filing on Monday. ZTE yesterday also announced an incentive plan for employees under which options may be granted for as many as 103.2 million A shares, or about 3 percent of total share capital.
7.5 percent. China’s benchmark stock index rose as investors speculated the government will lift spending on railroads and environmental gear to maintain economic growth of at least 7 percent.
Volatile Shibor unready as PBOC frees loan rates Economists expect central bank to find new benchmark
Shares up The Shanghai Composite Index gained 2 percent to 2,043.88 at the close, with trading volumes jumping 16 percent from the 30-day average. “Li’s comment about having a growth bottom line is reassuring to investors because this means they need not be especially worried about a severe economic downturn and the economy is still manageable,” said Qian Weihai, an analyst at Shanghai Securities Co Ltd. The CSI 300 Index advanced 2.9 percent yesterday. The Hang Seng China Enterprises Index of Chinese companies traded in Hong Kong surged 3.8 percent. CSR Corp and China Railway Construction Co rallied more than 7 percent after China Business News reported state-run China Railway Corp may increase investment for railway construction this year. Fujian Longking Co Ltd, which makes pollution-control equipment, climbed to a seven-week high after the publication said the government will invest 100 billion yuan (US$16 billion) annually over five years to curb dirty air. “Li recognises that growth is approaching the 7.5 percent floor at the moment, but he sees no room on monetary easing and he will use supply-side measures to bolster growth without worsening existing structural problems,” Ting Lu, China economist at Bank of America Corp, wrote in a note to clients. Bloomberg News
hina’s removal of interestrate restrictions on most loans increases the urgency of reducing volatility in moneymarket rates that can serve as new benchmarks to help the central bank manage the economy. While the overnight or sevenday Shanghai Interbank Offered Rate, or Shibor, is a potential new benchmark, its swings during a record cash squeeze last month show the need for better control by the central bank, JPMorgan Chase & Co said. A measure of 100-day historical volatility for seven-day Shibor jumped to 177 percent on July 4, compared to 10.6 percent that day for the similar U.S. dollar rate. China’s gauge was at 179 percent in February around the Chinese New Year holiday. Shifting to a monetary policy based on interbank rates, rather than central planning guidelines, would bring China in line with the U.S. and Japan. The People’s Bank of China removed the lending-rate floor while leaving the deposit-rate cap intact, highlighting the tension between boosting consumer spending during an economic slowdown and maintaining profits at state- owned banks. “It is very important for the
PBOC to find a new benchmark,” said Yao Wei, China economist at Societe Generale SA in Hong Kong. “Since last year the deposit rate has been the only effective rate for the financial system. That was why the PBOC didn’t touch it at this time.” The central bank currently sets the one-year lending rate at 6 percent, with a one-year deposit rate of 3 percent, following reductions in June and July of last year. The new policy ended a floor on borrowing costs previously set at 30 percent below the benchmark effective July 20. The limit on mortgage rates will stay to curb property speculation, the PBOC said. Also unchanged was a 10 percent limit on what banks can offer over PBOC-set deposit rates.
Bond pricing “After many years’ construction and development, Shibor has become an important benchmark for the pricing of corporate bonds, derivatives and other financial products and services,” the PBOC said in a statement accompanying the decision to remove the lending-rate floor. One possible outcome is a dualtrack transition period during which the PBOC says the repurchase rate
will be the future benchmark while retaining the cap on deposit rates, said Societe Generale’s Ms Yao. The process may take at least two to three years, she said. Becky Liu, a senior rate strategist at Standard Chartered Plc, said the rates on reverse-repurchase contracts and repurchase agreements in open-market operations will probably be used as benchmark rates to guide the secondary-market cost of funding. She also expects interest-rate liberalisation will drive up long-term rates more than short-term rates. “If you want to build a marketbased rate system, you need a new benchmark rate, preferably shortterm, to guide banks to price their own cost of funding across all tenors in markets,” said Ms Liu in Hong Kong. Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong, said the central bank needs to build up a track record of stability in a rate such as Shibor so it can be seen as a “proper reflection of the monetary stance”. The PBOC “wants people to forget about the episode that we had a month ago,” said Mr Kuijs, a former World Bank economist. Bloomberg News
Shipyards hurt by low down payments A third of the companies may close in five years as they fail to win orders
situation warrants, so as to enable the HKMA to accurately assess the risks associated with banks’ different lines of businesses,” it said in the e-mail. Bloomberg News
uring the 2007 shipping boom, China’s shipyards charged down payments of as much as 60 percent of a vessel’s value. Now, shipbuilders are cutting those payments to as little as 2 percent, giving an advantage to stateowned companies that can tap the government’s cash. With flagging demand pushing shipyards to compete by cutting down payments and China taking measures to rein in lending, the nation’s privately owned yards are getting squeezed by state-owned rivals that enjoy greater access to financing. China Rongsheng Heavy Industries Group Holdings Ltd, the largest shipbuilder outside state control by order book, said this month it’s seeking government support after failing to win any new vessel orders this year. “The payment terms mean shipyards have to burn their own money to build ships, which brings them extraordinary cash-flow pressure,” said Lawrence Li, a Shanghai-based analyst at UOB-Kay
Hian Holdings Ltd. “Only stateowned yards that are able to secure funding can offer such aggressive down-payment terms.” State-backed companies grabbed 74 percent of new vessel orders in China, the world’s biggest shipbuilding nation, in the first half of this year, according to data compiled by UOB-Kay Hian. That compares with 52 percent in all of 2012. Dalian Shipbuilding Industry Co, a unit of state-owned China Shipbuilding Industry Corp, won an order this month to build seven ships that can carry 8,800 containers each. The buyer, a unit of state-run China International Marine Containers (Group) Co, agreed to pay 2 percent of the total amount of US$595 million as a first instalment and the rest upon delivery. New orders for commercial vessels at Dalian’s parent, which also built the nation’s first aircraft carrier, surged more than fivefold in the first half in terms of contract value, the company said in a statement
posted last week on the website of China Association of the National Shipbuilding Industry. The ability to get financing has become one of the most critical issues for yards to win orders, said Bao Zhangjing, deputy director of the China Shipbuilding Industry Economy Research Centre. “The market is going to be more dominated by fewer players given the current situation,” Mr Bao said. “Those with competitiveness will have opportunities. State-owned companies and some local firms are doing relatively better.” Of about 1,591 shipyards in China in 2011, 70 were state-owned, according to the latest available data from the shipbuilders group. A third of the shipyards in China, the world’s biggest shipbuilding nation, may be shut in about five years as they failed to win orders “for a very long period of time,” the shipbuilders group said July 4. Bloomberg News
July 24, 2013 April 19, 2013
Singapore warns of household debt risks
Rupiah falls most in 13 months Indonesia’s rupiah plunged the most in 13 months in onshore trading as Bank Indonesia allows a more rapid slide toward levels quoted in the offshore market. The yield on 10-year government bonds fell the most since 2008. The rupiah slid 1.6 percent to 10,225 per dollar in Jakarta, according to prices from local banks. The currency reached 10,258 earlier, the weakest level since July 14, 2009. “Bank Indonesia has stepped back to allow real supply and demand in the market to play out,” said Suriyanto Chang, head of treasury at PT Bank QNB Kesawan in Jakarta. “The rupiah could strengthen from now, as exporters sell dollars and investors start to look at picking up the nation’s debt.” The central bank has allowed the rupiah to gradually depreciate, especially this month, deputy governor Perry Warjiyo said on July 12. The nation recorded trade deficits in seven out of the past eight months, while its current account has been in shortfall for the six quarters through March, official data show. The rupiah has weakened 2.9 percent in July and 5.8 percent this year, the worst performance among Asia’s 11 most-traded currencies after Japan’s yen and India’s rupee.
Monetary authority cuts inflation outlook, warns of excessive risks Kevin Lim
Singapore should fill start-ups’ cash gaps: Vertex
Economic growth to ‘comfortably’ meet official forecast
ingapore’s central bank lowered its inflation outlook for the year yesterday but said it was concerned about household debt levels as interest rates looked set to rise. The Monetary Authority of Singapore (MAS) revised downwards its inflation forecast for 2013 to 2 percent to 3 percent from an earlier 3 percent to 4 percent, citing the sharp fall in car prices earlier this year as well as a slower rise in accommodation costs. Economic growth this year will “comfortably” meet the official forecast of 1 percent to 3 percent, the central bank added, citing the strengthening U.S. economy and Japan’s expansionary policies that will likely offset headwinds from a slowdown in China and easing public spending in some Southeast Asian countries. “For the first time in three years, CPI inflation has come down closer to historical trends and within MAS’s comfort range,” the Monetary Authority managing director Ravi Menon said during a press briefing for the release of the central bank’s annual report. But MAS warned that core inflation – which excludes cars and accommodation since these were more influenced by government policies – could rise “moderately” to 2 percent or slightly higher in the latter half of 2013 due to continuing tightness in the labour market. Headline inflation averaged 2.8 percent for the first half of 2013, data showed. MAS was committed to ensuring that the recent improvements in inflation were sustained and the “current policy stance of modest appreciation of the Singapore
dollar is appropriate in containing re-emergence of strong cost and price pressures in a restructuring economy,” Mr Menon said. Singapore’s economy grew by just 1.3 percent in 2012 while headline inflation was 4.6 percent.
Household debt The central bank, however, expressed concerns about rising household debt in the city-state and said an estimated 5-10 percent of borrowers had “probably over-leveraged on their property purchases” based on their total debt service payment ratio of more than 60 percent of monthly income. “If mortgage rates were to rise by 3 percentage points, the proportion of borrowers at risk could reach 10-15 percent,” Mr Menon said. Mr Menon said household balance sheets in Singapore were resilient at an aggregate level, with cash and deposits exceeding debt, but the healthy balance sheets were not uniform across households. Banks in Singapore now offer housing loans at around 1.1 percent to 1.2 percent per annum, well below the 3.5 percent level that financial institutions must use when calculating debt servicing ratios of potential borrowers based on the latest central bank requirements. Singapore’s Monetary Authority yesterday also posted a net loss of S$10.61 billion (US$8.39 billion) for its last fiscal year ended March 2013 as the local dollar’s gains against the yen and euro diminished the value of its foreign currency holdings. The loss, its second in three years, was just slightly below the record S$10.9 billion deficit incurred in
financial year 2010/11 when the Singapore dollar also soared. MAS made a net profit of S$2.77 billion in the fiscal year ended March 2012. “We made good investment returns, but when measured in Singapore dollars these gains were more than offset by the strength of the currency,” Mr Menon said. The Singapore dollar gained 13.8 percent against the yen and 6.2 percent against the euro in the 12 months to March, the MAS said. During the same period, the Singapore dollar rose 5.1 percent versus the British pound and 1.3 percent against the dollar. The central bank had total assets of S$340.4 billion as at end-March 2013, up from S$319.2 billion at the end of the previous financial year. Reuters
KEY POINTS MAS inflation outlook revised lower to 2-3 pct for 2013 Singapore inflation now within ‘comfort range’ Growth to meet 1-3 pct forecast MAS posted S$10.6 bln net loss in last fiscal year
Singapore’s government should set aside more money for start-up firms as global venturecapital investors allocate most of their funds to China and India, overlooking Southeast Asia, according to Vertex Venture Holdings Ltd, a Temasek Holdings Pte unit. While the government funds young entrepreneurs in their early stages, it relies on their ability to attract foreign capital in later financing rounds, Chua Kee Lock, chief executive of Vertex, said. North America, Europe, China and India accounted for about 90 percent of all venturecapital investments in the second quarter of this year, with the bulk being allocated to later-stage financing, according to a study by London-based research firm Preqin Ltd published this month. “Singapore has solved the problem of seedstage incubation,” Mr Chua told Bloomberg. “However, they need to be prepared to give the big money. When the business idea looks interesting, somebody needs to give the big money, and that’s the issue here.” Venture capital is typically provided to start-up companies with new business ideas, which are unable to issue debt or get funding from banks as they lack a track record.
Fortescue sees costs dropping Fortescue Metals Group Ltd is forecasting stronger operating margins in the months ahead as iron ore prices hold up on robust buying from Chinese steel mills. Australia’s third-biggest iron ore miner also said it remains in talks to sell part of its coveted port and rail operations in Australia, but maintained the sales process would be scrapped if it does not get a high enough price. “We will only proceed with that sale provided we can get full market value at terms and conditions that allow us to continue to operate our supply chain efficiently and freely,” chief executive Neville Power (pictured) told reporters. The comments come as the company’s June quarter data show Fortescue is ramping up iron ore production faster than expected and lowering costs and capital spending, suggesting it may no longer be under pressure to sell a stake to pay down debt. “We are already in a very strong position globally from a cost perspective and our focus on cost savings and cost effectiveness continue to push us down that curve,” Mr Power said.
July April24, 19,2013 2013
Japan upgrades economic view Mongolia
to take over Savings Bank
Government says deflation easing and growth picking up Kaori Kaneko
apan’s government upgraded its view on the economy for a third straight month in July, saying deflation was easing and growth was picking up due to its policies of aggressive monetary stimulus and generous state spending. That outlook, which is in line with the Bank of Japan’s view, is a boost for Prime Minister Shinzo Abe, who vowed to stay focused on reviving the economy after his coalition won a strong victory in Sunday’s upper house election. “The economy is steadily picking up and it shows some movement towards a self-sustainable recovery,” the Cabinet Office said in its monthly economic report yesterday. “Recent price developments indicate that deflation is easing,” the report said. A separate government report said the nation needed long-term fiscal reform to support the recovery and beat deflation, which has strangled the economy for 15 years. The government upgraded its assessments on capital spending, factory output and business sentiment as confidence recovered and a softer yen helped to boost corporate earnings, which it said should feed through to incomes and investment.
“We need further recovery in firms’ capital spending and the income situation” before the recent bright signs in the economy can be termed a clear recovery, a Cabinet Office official said.
Fiscal reform Capital spending was “levelling off and shows some movement towards picking up”, the report said, while industrial production was “increasing at a moderate pace” and business sentiment was improving. The economy grew at an annualised 4.1 percent rate in January-March. The report on long-term public finances said fiscal discipline was needed to maintain market confidence and prevent a sudden spike in interest rates. Japan’s public debt is already more than twice the size of its 500 trillion yen (US$5 trillion) economy, the largest among major industrialised nations after years of fiscal spending to try to jump-start the stagnant economy, and a planned sales tax hike is considered a test of the appetite for fiscal reform. The government will decide later
this year on whether to go ahead with a scheduled increase in the sales tax rate to 8 percent next April from 5 percent, the first step in a planned a planned doubling of the levy buy October 2015. Mr Abe has concerns that raising the tax rate could damage the economy. The government report, however, said the experience in Europe was that raising consumption taxes did not necessarily damage growth. Reuters
KEY POINTS Govt sees movement toward self-sustainable recovery Price developments show deflation abating Raises views on capex, factory output Separate report says Japan needs to work on fiscal reform
Aquino seeks approval for US$52 bln budget President wants Congress backing to cement Philippine overhaul
hilippine President Benigno Aquino asked lawmakers to pass measures that will improve governance and bring lasting peace to the nation’s south, while touting economic growth that’s become the fastest in Asia in the first half of his six-year rule. Mr Aquino said Congress should amend laws on tax breaks for investors and transportation costs in a bid to increase business competitiveness, without giving details of the changes he’s seeking. He vowed to continue his anti-corruption drive and right injustices in a system of administration that he said has long blighted the country. “Let us not allow this transformation to be temporary,” the president said in his annual state of the nation address that lasted almost two hours. “Let us seize this opportunity to make the change permanent.” Mr Aquino, 53, has overseen an economic resurgence with first- quarter growth outpacing China, even as he faces pressure to boost job creation and curb corruption before his term ends in 2016. He was this year rewarded with two investment-grade ratings from Standard & Poor’s and Fitch Ratings. Mr Aquino said yesterday that a third “will soon follow”. The president is “on top of his game,” Ramon Casiple, executive director of the Institute for Political and Electoral Reform in Manila, said by
phone after the speech. “At this point, if he wants a bill passed, nobody will object unless it’s really unpopular.” “From the prudent expenditure of funds to the effective collection of taxes; from infrastructure development to the transparent conduct of business that generates jobs, our message to the world could not be clearer: the Philippines is ready to ride the tides of progress,” Mr Aquino said.
Increasing budget The president, who polls show has the support of more than 70 percent of voters, has used his popularity to pass laws for higher taxes on tobacco and liquor and provide free contraceptives to the poor. Rising tax collection will permit a boost to spending on education and social services, he said. Mr Aquino said he would ask Congress to approve a 2.27 trillionpeso (US$52.5 billion) budget for 2014 – 13 percent higher than this year, according Budget Secretary Butch Abad – so he can continue reforms and quicken the momentum toward “inclusive progress”. The president asked Congress – where he has a majority – to reform the pension system for the police, military and other government employees. The state-owned Social Security System has 1.1 trillion
Benigno Aquino calls for amendments on tax breaks for investors
pesos (US$25.4 billion) in unfunded liabilities, and funds will dry up in 28 years if the system isn’t changed soon, he said. He also asked lawmakers to pass a bill creating a new political entity of Bangsamoro in the south next year so his government will have time to set up the new autonomous Muslim region by 2016. Mr Aquino criticised the customs and immigration bureaus for lapses that lower government revenue and aid the smuggling of contraband, including drugs. Customs Commissioner Ruffy Biazon told reporters he offered to quit after hearing the president’s speech. “My confidence in you remains the same,” Mr Biazon, who belongs to the administration’s Liberal Party, quoted Mr Aquino as telling him via a mobile-phone message. Mr Biazon, who was appointed by Aquino in September 2011, said the bureau would probably fall short of its collection target this year. The agency, which accounts for a fifth of government revenue, missed its 2011 and 2012 targets by more than 50 billion pesos each time, according to Treasury data. Bloomberg News
Fifth-largest lender declared insolvent Michael Kohn
avings Bank, Mongolia’s fifth-largest lender, has been declared insolvent after affiliated companies defaulted on loans, and will be taken over by a state-owned competitor, the central bank said. State Bank will take over Savings Bank’s 503 branches starting yesterday, Danjilaa Ganbat, director of the banking supervision department at Mongol Bank, said at a press conference in Ulaanbaatar. Savings Bank was owned by Just Group, a holding company based in the capital, whose other assets include Just Oil LLC. The takeover is the first by the government since 2009. With 1.7 million customers in a nation of 2.9 million, Savings Bank accounts for about 8 percent of active banking assets and 55 percent of government financial services, such as disbursement of pensions and payment of utility bills, according to the central bank. Other lenders are healthier, said Dambadarjaa Jargalsaikhan, an economist. “The central bank now has things in control,” Mr Jargalsaikhan said. “I don’t think all the banks are like this but we should draw certain lessons. There was too much risk on one individual and there was a problem with poor corporate governance and conflicts of interest.” Sharavlamdan Batkhuu, Just Group’s controlling shareholder, and other companies in the group have defaulted on loans since 2011, Mr Ganbat said. Batkhuu didn’t reply to an e-mail seeking comment. Savings Bank didn’t answer a phone call or comment when a reporter visited the lender’s office yesterday. Mongolia’s resource-based economy has been hit by a decline in coal exports, which plunged to US$542.4 million in the first six month of the year from US$1 billion a year earlier. Total first-half exports fell 10 percent from a year earlier. The World Bank in April cut its forecast for Mongolia’s 2013 economic growth to 13 percent from 16 percent, citing declines in exports and foreign investment. FDI in the first five months of the year reached US$1.21 billion, down from US$1.47 billion during the same period last year. Savings Bank is the third lender to be taken over by the government, following Anod Bank JSC in 2008 and Zoos Bank JSC in 2009. The lender has losses of 180 billion tugrik (US$122 million) and its working capital is 94 billion tugrik lower than its assets, the central bank said. All 503 Savings Bank branches were closed on Monday as the assets moved to State Bank, Mr Ganbat said. Bloomberg News
April 19, 2013
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0.5212 0.2087 0.1922 0.0607 0.4019 0.0025 0.0013 0.0635 0.1026 0 -0.1582 0.0267 0.0926 -0.2943 -0.1129 0.1408 0.1526 -0.2285 -0.0598 0.3504 0
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1.0625 1.6381 0.9972 1.3711 103.74 8.0111 7.7664 6.3964 61.2125 31.82 1.286 30.228 44.181 10255 105.433 1.265 0.88151 8.4957 10.9254 133.8 1.032
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July April24, 19,2013 2013
Trouble in emerging wires market paradise Business
Leading reports from Asia’s best business newspapers
Chairman of Roubini Global Economics and Professor of Economics at the Stern School of Business, NYU
Japan’s government is set to accelerate its efforts to realise a growth strategy aimed at overcoming deflation, following a sweeping victory in Sunday’s House of Councillors election. The government will submit to an extraordinary Diet session in autumn a bill for strengthening the nation’s industrial competitiveness by accelerating capital investment and business restructuring through tax cuts and deregulation. In keeping with Abe’s growth strategy, which was compiled in June, the LDP’s Research Commission on the Tax System, for example, is expected to begin discussions on the concrete details regarding the tax cuts as early as this month.
Times of India India’s finance ministry said on Monday all options are on the table for issuing sovereign bonds and denied reports that the proposal is off for now. Faced with a sliding rupee, the government and the central bank have taken several measures to restore calm in the foreign exchange market. “All options are on the table and are examined from time to time. Steps are taken by the government at the appropriate time,” the finance ministry said in a statement.
Korea Herald South Korea’s financial regulators said they had mapped out a plan under which gold would be publicly traded on a dedicated exchange from the first half of 2014. As part of economic policymakers’ efforts to bring gold prices into the open, a state-controlled spot gold exchange will be set up next year as a sub-entity of the Korea Exchange, the nation’s main securities trading bourse. “For gold transactions, the Korea Exchange will be in charge of the operation and settlement of electronic transactions. The Korea Securities Depository will take on the storage and deposition,” said the FSC.
Thanh Nien Daily Vietnam’s state firms, who have been ordered to pull out of the banking industry by 2015 but without losing on the stake sale, are finding it is a tough task to achieve. Economist Nguyen Tri Hieu said the government needs a change in mindset and should accept losses if it wants firms to completely withdraw from non-core areas as critics have demanded. “We should see this as the cost of restructuring of state-owned companies,” he said. At the end of 2011 state-owned firms’ investment in non-core areas had stood at 23.74 trillion dong (US$1.12 billion), half of it in banking.
uring the last few years, a lot of hype has been heaped on the BRICS (Brazil, Russia, India, China, and South Africa). With their large populations and rapid growth, these countries, so the argument goes, will soon become some of the largest economies in the world – and, in the case of China, the largest of all by as early as 2020. But the BRICS, as well as many other emergingmarket economies – have recently experienced a sharp economic slowdown. So, is the honeymoon over? Brazil’s GDP grew by only 1 percent last year, and may not grow by more than 2 percent this year, with its potential growth barely above 3 percent. Russia’s economy may grow by barely 2 percent this year, with potential growth also at around 3 percent, despite oil prices being around US$100 a barrel. India had a couple of years of strong growth recently (11.2 percent in 2010 and 7.7 percent in 2011) but slowed to 4 percent in 2012. China’s economy grew by 10 percent per year for the last three decades, but slowed to 7.8 percent last year and risks a hard landing. And South Africa grew by only 2.5 percent last year and may not grow faster than 2 percent this year. Many other previously fast-growing emergingmarket economies – for example, Turkey, Argentina, Poland, Hungary, and many in Central and Eastern Europe – are experiencing a similar slowdown. So, what is ailing the BRICS and other emerging markets? First, most emergingmarket economies were overheating in 2010-2011, with growth above potential and inflation rising and exceeding targets. Many of them thus tightened monetary policy in 2011, with
consequences for growth in 2012 that have carried over into this year. Second, the idea that emerging-market economies could fully decouple from economic weakness in advanced economies was far-fetched: recession in the euro zone, near-recession in the United Kingdom and Japan in 2011-2012, and slow economic growth in the United States were always likely to affect emergingmarket performance negatively – via trade, financial links, and investor confidence. For example, the ongoing euro zone downturn has hurt Turkey and emerging-market economies in Central and Eastern Europe, owing to trade links. Third, most BRICS and a few other emerging markets have moved toward a variant of state capitalism. This implies a slowdown in reforms that increase the private sector’s productivity
Many of the BRICS, along with some other emerging economies, may hit a thick wall, with growth and financial markets taking a serious beating
and economic share, together with a greater economic role for state-owned enterprises (and for state-owned banks in the allocation of credit and savings), as well as resource nationalism, trade protectionism, importsubstitution industrialisation policies, and imposition of capital controls. This approach may have worked at earlier stages of development and when the global financial crisis caused private spending to fall; but it is now distorting economic activity and depressing potential growth. Indeed, China’s slowdown reflects an economic model that is, as former Premier Wen Jiabao put it, “unstable, unbalanced, uncoordinated, and unsustainable,” and that now is adversely affecting growth in emerging Asia and in commodity-exporting emerging markets from Asia to Latin America and Africa. The risk that China will experience a hard landing in the next two years may further hurt many emerging economies. Fourth, the commodity super-cycle that helped Brazil, Russia, South Africa, and many other commodityexporting emerging markets may be over. Indeed, a boom would be difficult to sustain, given China’s slowdown, higher investment in energysaving technologies, less emphasis on capital- and resource-oriented growth models around the world, and the delayed increase in supply that high prices induced. The fifth, and most recent, factor is the U.S. Federal Reserve’s signals that it might end its policy of quantitative easing earlier than expected, and its hints of an eventual exit from zero interest rates, both of which have caused turbulence in emerging economies’ financial markets. Even before the Fed’s signals, emerging-market
equities and commodities had underperformed this year, owing to China’s slowdown. Since then, emerging-market currencies and fixed-income securities (government and corporate bonds) have taken a hit. The era of cheap or zerointerest money that led to a wall of liquidity chasing high yields and assets – equities, bonds, currencies, and commodities – in emerging markets is drawing to a close. Finally, while many emerging-market economies tend to run current-account surpluses, a growing number of them – including Turkey, South Africa, Brazil, and India – are running deficits. And these deficits are now being financed in riskier ways: more debt than equity; more shortterm debt than long-term debt; more foreign-currency debt than local-currency debt; and more financing from fickle cross-border interbank flows. These countries share other weaknesses as well: excessive fiscal deficits, above-target inflation, and stability risk (reflected not only in the recent political turmoil in Brazil and Turkey, but also in South Africa’s labour strife and India’s political and electoral uncertainties). The need to finance the external deficit and to avoid excessive depreciation (and even higher inflation) calls for raising policy rates or keeping them on hold at high levels. But monetary tightening would weaken already-slow growth. Thus, emerging economies with large twin deficits and other macroeconomic fragilities may experience further downward pressure on their financial markets and growth rates. These factors explain why growth in most BRICS and many other emerging markets has slowed sharply. Some factors are cyclical, but others – state capitalism, the risk of a hard landing in China, the end of the commodity super-cycle – are more structural. Thus, many emerging markets’ growth rates in the next decade may be lower than in the last – as may the outsize returns that investors realised from these economies’ financial assets (currencies, equities, bonds, and commodities). Of course, some of the better-managed emergingmarket economies will continue to experience rapid growth and asset outperformance. But many of the BRICS, along with some other emerging economies, may hit a thick wall, with growth and financial markets taking a serious beating. © Project Syndicate
July 24, 2013
Closing PBOC denies loans halted to industries
E-Plus deal tests Europe antitrust stance
China’s central bank said yesterday it is following instructions by the cabinet to adopt tailored policies towards industries plagued by overcapacity, denying media reports that it had asked banks to stop lending to such industries. “Currently, we haven’t issued any internal circular on loans and financial problems of industries plagued by overcapacity,” the People’s Bank of China said in an emailed statement. The statement came in response to domestic media reports that the central bank had issued a circular asking banks to stop extending new loans to such industries.
Telefonica SA agreed to buy the E-Plus German wireless unit of KPN NV in a cash-and-stock deal valuing the unit at 8.1 billion euros (US$10.7 billion) to become the country’s biggest mobile-phone operator by customers. The purchase would let Telefonica’s O2 surpass Deutsche Telekom AG and Vodafone Group Plc as stiffening competition in the German wireless market forces carriers to cut prices and seek mergers. Still, the elimination of a carrier by combining the third- and fourth-largest operators will face scrutiny from European Union antitrust regulators.
BRIC bust seen in emerging discontent Civil unrest looms and slowing growth not enough to mitigate social tensions Joshua Goodman and Matthew Malinowski
tretched budgets and sluggish growth are putting emerging-market governments on a collision course with rising pressures from recently empowered middle classes for more spending and better services. In the eight weeks through July 17, investors pulled US$40.3 billion from emerging-market bond and equity funds amid signs the Federal Reserve may begin reducing stimulus later this year. In 2012, US$111 billion poured into these asset classes, according to EPFR Global in Cambridge, Massachusetts, which tracks money flows. Developing nations are punished more during downturns because they depend on growth to mitigate social tensions, said Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development. Nomura International Plc, citing the “surprise” outbreak recently of protests in Brazil and Turkey, said 11 other countries face the risk of market-moving civil unrest in the short to medium term. Frustration with corruption by a middle class that swelled during the past decade is partly fueling the angst, according to a June report. “If you lift your people out of
extreme poverty, it’s not like they’re going to say ‘Great, now we’re all set, we don’t want anything else,’” said Jim Yong Kim, president of the World Bank, in a June interview in Lima, Peru. One country already feeling the squeeze is Indonesia, where president Susilo Bambang Yudhoyono last month stared down demonstrations and ordered cuts to fuel subsidies. The move, which raised gasoline prices by 44 percent, recalled austerity pledges that fueled protests and led to the collapse in 1998 of Suharto’s three-decade regime. Fifteen years later, under democratic rule and with an economy still forecast to grow about 6 percent this year, reaction has been more muted.
Street revolt Indonesia and Brazil are raising interest rates to fight inflation, which could damp growth even further. President Dilma Rousseff, in the aftermath of Brazil’s biggest street revolt in more than 20 years, vowed to keep a lid on spending even as she addresses protesters’ demands for better schools, hospitals and public transportation. She’s also begun unwinding
Brazil has experienced the biggest street revolt in more than 20 years
capital controls put in place during the past five years. The expansion of the middle class is reshaping politics around the globe, according to South African Finance minister Pravin Gordhan. “It creates anger that some people are getting away with a lot of the growth process and others not so,” he said in a Friday interview from Moscow. About 50 million people in Latin America alone rose out of poverty
during the past decade, the World Bank said last year. That’s small comfort to governments struggling to stay ahead of the rising expectations, said George Friedman, chief executive officer of policy-risk consultant Stratfor. “There’s a number of regimes who’ve built their legitimacy on fast growth,” Mr Friedman said. “When they can no longer deliver, they’re setting themselves up for a huge fall.” Bloomberg News
French industry morale strongest in over a year
French president François Hollande said the country is out of the recession
rench business confidence rose to the highest in 15 months in July, indicating that improving demand is helping to support an economy that is stagnated for the past two years. Sentiment among industrial executives increased to 95 in from 93 in June, national statistics office Insee in Paris said yesterday. That’s above the reading of 94 that was the median forecast of 21 economists in a Bloomberg News survey. A broader index including the services, wholesale and construction industries climbed to 87 from 86. The improvement suggests the euro area’s second-largest economy may be starting to stabilise after it
slipped back into a recession this year. With the indexes below their long-term average, the recovery that president François Hollande trumpeted in his Bastille Day address last week remains elusive. Finance minister Pierre Moscovici repeated that assertion yesterday. “We’re out of the recession,” Mr Moscovici said on Europe 1 radio. “Now what needs to be done is that the recovery needs to gain traction.” “Before talking about a rebound we need to see the tandem of investment and employment improving,” said Michel Martinez, an economist at Societe Generale SA in Paris. Bloomberg News