Year I - Number 74 Thursday July 12, 2012 Editor-in-chief: Tiago Azevedo Deputy editor-in-chief: José I. Duarte MOP 6.00
Gaming slowdown speeding up Page 4
Fun in sun curtailed for legislators
999 problems for overworked police
Bus subsidy hike at temporary stop P
ublic bus companies will get an increase in the subsidy they receive from the government – though only if they improve their services. But the parameters used by the authorities to measure ‘improvement’ haven’t been revealed.
The three operators officially asked in April for an increase in the amount they receive from the government per passenger kilometre travelled. They say they need it because since their contracts were first negotiated the
city has seen inflation rise and the local labour supply squeezed to such an extent that they have been forced to pay much higher wages to drivers and support staff than they ever envisaged. Referring to plans for a 23 percent
hike in the subsidy, Transport Bureau director Wong Wan said yesterday: “Operators must improve the services they provide and only then will we resume those procedures.” More on page 3
Seat of learning curves public spending upward
HANG SENG INDEX 19450
The ongoing development of the University of Macau campus on Hengqin Island is the main reason for last month’s boom in infrastructure spending official data reveal. The government invested a staggering 1.5 billion patacas (US$187 million) in public projects, outstripping the amount spent in the first five months of this year and more than doubling the city’s investment in public projects year to date.
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REITs give city a wide berth
Real estate investment trusts, or REITs, are unlikely at present to invest in Macau, says a University of Macau academic. Professor William Cheung Ming Yan says two key problems are low transparency in the market and a lack of local institutional investors. But he adds that even Taiwan – a much bigger property market – only has five REITs
Airline pays passengers
What should have been short hops by ‘plane from Taiwan to Macau turned into two cases of passenger stranding that cost Air Macau NT$220,000 (58,695 patacas) in customer compenIf first alone. impressions matter, then Macau must work on its ‘worldsation class’Air image. Visitors arriving the city’s cramped Outer Harbour Two Macau flights from at Taoyuan Ferry Terminal can queue as long as one hour to get their passports in Taiwan to Macau were delayed stamped. And it can take as much time on Saturday – one for six hours be-for luggage to be unloaded from thethe ferry arriving International Airport as it did cause airline didfrom notHong haveKong pilots to sail from Hong Kong to Macau. to fly the plane.
Downtown ferry terminal ‘overburdened’: official
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business daily July 12, 2012
Hengqin campus construction causes capital spending spike New University of Macau campus at Hengqin Island and underwater tunnel boost public investment Vítor Quintã
patacas to 2 billion patacas. The main buildings on the campus will be completed by the end of October, while the underwater tunnel will be ready in August, the Infrastructure Development Office said in April. The campus will have five faculty buildings, four residential colleges, sports facilities and a customs building. It will have the capacity for 10,000 students, with accommodation for about 6,000 students in dormitories.
The public investment plan also includes reclamation works for an offshore artificial island that will host the start of the Hong Kong-Zhuhai-Macau Bridge, the construction of several public housing projects and work on the Light Rapid Transit rail network. Public investment so far this year has grown six-fold compared to the same time last year but year-todate spending still accounts for just 14.9 percent of the total budget. Public spending tends to rise in the second half of the year but in
MOP 7.8 billion
Budget for the University of Macau’s Hengqin campus The main buildings at the new campus of the University of Macau should be ready by end of October.
Over 1,350 cameras to monitor Macau The police have approval to operate 1,353 surveillance cameras to monitor public places, with only 400 being new Vítor Quintã
Photo by Manuel Cardoso
217 Surveillance cameras to cover Gongbei
ecretary for Security Cheong Kuoc Vá has authorised the police to operate 1,353 surveillance cameras in the city’s public places, according to notices published in yesterday’s Official Gazette, but stressed only 400 are yet to be installed. The new cameras will be installed in three phases, starting with more than 200 at the border crossings, Mr Cheong’s cabinet said in a written reply to Business Daily yesterday.
order to reach the 19.8 billionpataca budget, authorities would have to spend more than 16.8 billion patacas. Asked if the Financial Services Bureau could spend the remainder of its budget this year, it said the government would “continue to carry out the investment projects as planned in the second half of the year”. Most experts stress that public investment projects have a longer lasting effect on the health of the economy than paying for running expenses, which include salaries and benefits for public servants. Phot o by Manuel Cardoso
onstruction works at the University of Macau campus on Hengqin Island are the main reason for last month’s boom in infrastructure spending that has more than doubled the government’s investment in public projects this year. The government invested a staggering 1.5 billion patacas (US$187 million) in public projects, outstripping the amount spent in the first five months of this year, official data show. Provisional data released by the Financial Services Bureau on Monday indicates that between January and May, the government had spent just 1.43 billion patacas as part of the 19.8 billion-pataca public investment plan for this year. “The rise in the execution rate is mainly attributable to the payment for the construction works related to the new campus of the University of Macau in Hengqin Island, including the building of the riverbed tunnel,” a spokesman for the Financial Services Bureau told Business Daily. The latest budget for the new campus rose to 7.8 billion patacas, a 30-percent increase from the original estimate of 6 billion patacas. In addition, the cost of a tunnel that will link the enclave to Macau has risen from 500 million
The next step would be to install cameras on the roads for traffic control and in “critical crime areas,” the secretary said in November. “After an in-depth study,” authorities have decided to install about 75 percent of the new cameras in the Macau peninsula, which has “the biggest flow of people and traffic, as well as more schools and business activities”. The remaining cameras will be introduced in Taipa, Cotai and
Coloane, Mr Cheong’s cabinet said. The Unitary Police Service will maintain “a close link with the services responsible for the works and the other relevant services, so that the installation works can be launched as soon as possible,” the reply adds. The Office for Personal Data Protection, which has approved the position of each camera, told Business Daily that it “does not have any pending requests for opinions”
regarding surveillance camera systems in public spaces. More than 760 cameras will be located at the border crossings alone, including 217 at Gongbei, mainland China’s busiest border crossing, with a daily average of 260,000 users. Macau International Airport and the two main ferry terminals, the Outer Harbour Ferry Terminal and Taipa Ferry Terminal, will have 192 cameras. Another 74 will be set up at the Zhuhai-Macau Cross-border Industrial Park. The Lotus Bridge border crossing in Cotai, the Inner Harbour Ferry Terminal and the Ka-Ho deepwater cargo port on Coloane will be monitored by almost 300 cameras. There will be 578 cameras to cover police facilities, including 162 at the Macau Immigration Services headquarters in Pac On and 156 at Public Security Police stations. The deputy coordinator of the Office for Personal Data Protection, Ken Yang Chong Wei, said last month that new cameras would be set up at police stations first to ensure their security. The law says that after a surveillance camera has been in position for two years the government should reassess whether it is necessary. The law forbids the recording of sound except in “high-risk situations, namely disasters or natural catastrophes, or a situation that threatens the MSAR or state security”. Wherever surveillance cameras are installed, signs indicating their presence must be displayed, including in English.
July 12, 2012 business daily | 3
Bus firms told extra money depends on better services
The government postpones any increase in the money it pays the bus operators until they improve their services Vítor Quintã email@example.com
he bus companies will get more money from the government to run the city’s bus network only when they improve their services, the government announced yesterday. The government announced two weeks ago an increase of 23 percent in the subsidies it pays the bus operators, all three having asked for more money in April. But Transport Bureau director Wong Wan said yesterday: “We will postpone the administrative procedures for the service charge increase.” “Operators must improve the services they provide and only then will we resume those procedures.” The government has asked the three bus operators for their plans to improve services. It has accepted proposals by
Sociedade de Transportes Colectivos de Macau SARL (TCM) and Transportes Urbanos de Macau SARL. (Transmac), but rejected the plan from Reolian Public Transport Co Ltd. “They [Reolian] didn’t have any information on the equipment they needed to upgrade or how many training courses it would provide to its drivers,” Mr Wong said. “There was not enough information for us to make an assessment. They need to correct this and give us a new plan.” Reolian has until 10am today to deliver a new plan. Reolian’s general manager, Cedric Rigaud, told Business Daily that his company put forward “a oneyear forecast plan” last week. The Transport Bureau had yesterday asked it to provide more information by today. There was no doubt the company would be able to satisfy the bureau’s demands, he said. “We have an internal improvement
plan and we will release that information,” he said. Mr Rigaud declined to comment on the suspension of the increase in the subsidies the government pays bus operators. Mr Wong said operators might get the increase at different times, depending on how each performs. He gave no strict deadline for improvements in their services but said the government would like services to have improved by September 1, when the school year begins. The Transport Bureau sought to justify the increase in the amount it pays bus operators by saying the average salaries of their employees, fuel prices and consumer prices generally had all increased. The New Macau Association has accused the government of keeping the public in the dark about its dealings with the bus companies, and has said the increase should take into account the quality of their services.
We have an internal improvement plan Cedric Rigaud, Reolian general manager
Two insurers make losses as life business falters Fidelidade’s results and Luen Fung Hang’s have similarities José I. Duarte
he annual results of two insurance companies suggest the business of life insurance is tough. Companhia de Seguros Fidelidade Mundial SA of Portugal and the mainland’s Luen Fung Hang Insurance Co Ltd both made losses in the past fiscal year, and in both cases it was life insurance that dragged them into the red, according to notices in the Official Gazette on Monday. Neither loss was big, but the losses both made on life insurance contrast with the comfortable profits they made from non-life insurance. In the non-life insurance business Fidelidade made a net profit of 8.74 million patacas (US$1.1 million) and Luen Fung Hang a net profit of 32.76 million patacas. Fidelidade’s premium income was 80.1 million patacas and its net profit relative to the premium income was 10.9 percent.
Luen Fung Hang’s premium income was 279 million patacas and that margin reached 11.7 percent. But in the life insurance business Fidelidade made a loss of 643,000 patacas, the equivalent of 1.1 percent of its premium income, and Luen Fung Hang made a loss of 3.3 million, the equivalent of 3.4 percent of its premium income. Generally, insurers are doing well and the industry, usually out of the spotlight, is expanding fast. After suffering a blow from the global financial crisis, rates of growth in premium income are back in double digits.
Larger print In the first three months of this year the industry’s combined gross premium income was 20 percent higher than a year before, data from the Monetary Authority of Macau show. The authority is the regulator of the insurance sector. The industry’s combined gross premium income was P4.35 billion (US$544 million) last year, 15.4
percent more than in 2010. The city had more than 3,200 authorised insurance intermediaries at the end of last year, including individual agents, salesmen and brokers. The insurance industry employed nearly 450 people. As the industry has grown, so has the number of complaints about it. The Monetary Authority received 95 complaints last year, four more than the year before. Most were about employees’ compensation insurance and motor insurance. The Monetary Authority has told insurers to give prospective
policyholders a better idea of what they may be about to buy. From this month the regulator will approve new life insurance policies only if the insurance company explains clearly to the policyholder how much he or she has to pay and only if it tells the policyholder about the past performance of its policies. Insurers have until the end of October to ensure that policies it has already written meet these requirements. You can read more about the insurance business in Macau in this month’s edition of Macau Business magazine.
Insurance industry combined gross premium income 109 mop 2009
4.35 * Provisional figures
Source: Monetary Authority of Macau
business daily July 12, 2012
Single-digit growth for July: analysts Associate Editor
nalyst consensus suggests Macau’s gross gaming revenue will grow in the low single digits of percent year-onyear in July. That would be a big drop on the year-on-year expansion of 12.2 percent seen in June, and even the 7.3 percent progression recorded in May. The analysts’ estimates on run rates– the amount of gambling revenue generated per day – vary for the first eight days of July. But they agree that if current daily levels are maintained then total July GGR is likely to be only two percent to three percent up on the equivalent period last year. With an uncertain global economic outlook and China’s economy slowing, they say it may be some time before the recent volatility seen in Macau gaming stocks ends and a sustained rally is seen. “We believe we need to see a few months of stabilised growth to break the downward momentum before a sustainable rally can happen,” said Kenneth Fong of J.P.
Morgan in Hong Kong in a note to investors. He added that July gaming revenue was likely to amount to 25 billion patacas (US$3.1 billion). He suggested July and August are typically two of the most difficult months to analyse for year-onyear comparisons. Variables such as typhoons can shut ferry links to Macau for a day or more at a time during this season, affecting overall revenue for a particular month. Cameron McKnight of Wells Fargo in New York said in another note: “We believe that Chinese macro indicators continue to weaken, with very weak underlying loan growth and slowing price indicators – indicative of slowing aggregate demand, potential deflation, and the possibility of sub-eight percent GDP growth this year. All of these are likely negative for both VIP and mass-market gaming.” Macquarie Equities Research said last week that as Macau growth expectations undergo an adjustment phase, then currently “we see little reason to own Macau stocks.”
Volatile – Macau gaming stocks dipped June 25 on rumours of visa tightening
Cantor Fitzgerald investor in Taiwan casino plan Bank’s unit Cantor Gaming already runs sports books in Las Vegas Associate Editor
Looking up – Bill Weidner has investors aboard his Taiwan casino project
antor Fitzgerald – a New York City-based investment bank and brokerage with operations in Hong Kong and Singapore – has been identified as an investor in former Las Vegas Sands’ executive William Weidner’s bid for a Taiwan casino licence. According to GamblingCompliance. com, Cantor Fitzgerald has helped to put together a NT$60 billion (US$2 billion) funding package for Weidner Resorts. The latter is aiming for a major gaming resort on the Matsu islands off the Chinese mainland province of Fujian. Cantor Gaming, a unit of Cantor Fitzgerald, operates race and sports books at Las Vegas Sands Corp.’s Venetian and Palazzo casinos in Las Vegas. Mr Weidner – who helped to push through the construction of Sands Macao and The Venetian Macao in fewer than four years between 2003 and August 2007 – made it clear during a press conference in Taipei
that he and his backers couldn’t wait indefinitely for Taiwan government approval. Taiwan has been mulling the possibility of legalising and building casinos since 1993. “It [the funding] is ready to be invested, so we would expect a reasonable period of time for it to be invested,” GamblingCompliance.com quoted Mr Weidner as saying. “If it’s unreasonable, there may be issues. But right now, we’ve put it together and we’re ready to proceed,” added Mr Weidner. He declined requests by Business Daily to give more information on what he considered a “reasonable period” for approval or to give more details on the timetable for construction.
after a referendum among residents approved casino development in the Matsu archipelago. But the government has not yet opted for a singular regulatory agency under the ministry, despite strong support for a “gaming control bureau” from the department’s minister Mao Chikuo, said GamblingCompliance.com. Taiwan currently has around 3,000
Regulatory powers Taiwan’s cabinet awarded regulatory powers for future casinos to the Ministry of Transportation and Communications this week, days
Howard W. Lutnick, Cantor Fitgerald chairman and CEO
electronic game arcades offering quasi-gaming, in a similar fashion to Japan’s pachinko industry. The arcades are estimated to generate over US$5 billion (39.9 billion patacas) annually according to Taiwan analysts’ estimates. A gaming tax rate of 13 percent has been mentioned for any Taiwan casinos that may be built, although the provisions of the draft casino bill have not yet been released publicly, and still need to be approved by the country’s parliament. Cantor Fitzgerald was in the headlines locally a month ago when the bank’s chairman Howard W. Lutnick said the company was “in the process of getting licensed in Macau,” for sports betting with a Macau casino partner. Only days later the city’s Official Gazette confirmed that SJMcontrolled Macauslot’s exclusive right to run online and parlour betting on soccer and basketball within the borders of Macau was being renewed for a further five years.
July 12, 2012 business daily | 5
Real estate investment trusts lacking institutional investors Macau lags behind Singapore in attracting real estate investment trusts Xi Chen
ew real estate investment trusts, or REITs, invest here because the property market lacks transparency and institutional investors, according to University of Macau professor William Cheung Ming Yan. “REITs are a major investment vehicle in the United States. There are a lot of institutional investors in this space. However, in Asia people like to own homes on their own and there are also very few institutional investors, particularly for the Hong Kong and Macau market,” Mr Cheung told Business Daily. He said REITs were popular in Singapore, where there was a large base of institutional investors. There are 20 funds listed at the stock exchange in Singapore which invest at home and abroad. Taiwan has just five REITs, despite having a bigger property market, because of the limited number of institutional investors. Hong Kong has seven public REITs. “Investments should come from somewhere close from those who understand the local property market,” Mr Cheung said. He said Macau did not have a stock exchange regulating REITs and that its property market was opaque, which prevented investments. REITs are closed-end investment companies that focus on real estate and mortgages. They are tax-efficient corporate vehicles that can provide a real estate investment structure that accommodates a wide variety of investors. The benefit for retail investors is gaining exposure to real estate for a small outlay. REITs are usually required to
distribute more than 90 percent of their taxable income to investors. In Hong Kong the figure is 90 percent and in Singapore it is 100 percent.
Poor performers Mr Cheung said it was common for publicly listed REITs to be traded at a discount to their net asset values (NAVs), which limited the scope of investor participation when trading liquidity was low. He offered a few explanations for this phenomenon. “The underlying real estate assets could lack liquidity. There could be
a jump risk in property prices and investor sentiment can significantly influence the direction of the property market,” he said. At least seven public REITs in Singapore trade at discounts to their NAVs of more than 30 percent. Publicly listed REITs in Hong Kong have also performed poorly at the stock exchange. Macau Property Opportunities Fund, listed in London, is a wellknown closed-end fund which invests heavily here. Similar in structure to a REIT, its experience at the stock market is similar to a REIT’s, too. It trades at
a discount to its NAV of more than 40 percent, its price per share being about 1.04 pounds (12.93 patacas), while its NAV per share was around 1.83 pounds last year. Most of its main investors are in the United States or Europe. Mr Cheung said one big difference between a REIT and a property fund was the payout. The Macau Property Opportunity Fund paid out around 8 percent in dividends last year, a high figure for an Asian REIT, but this was less than 90 percent of its net income. REITs in Asia pay out dividends ranging from 2 percent to 9 percent.
Assembly may do overtime for reform The Legislative Assembly may sit for an extra two weeks this summer to pass pending legislation, including the political reform bills Tony Lai
he Legislative Assembly will discuss next Monday extending its current session for two weeks. The assembly usually takes a break in mid-August and resumes work by mid-October. But the Chinese-language Macao Daily News reported yesterday that some members had proposed to work for two more weeks until end of next month to try to pass as many bills as possible. The assembly is now dealing with 13 bills. The newspaper said the chairmen of the three standing committees supported the proposal but that it would require the approval of other members at Monday’s meeting. The assembly has shortened its summer break before. It last did so in 2009. Chan Chak Mo, who chairs the Second Standing Committee, said an extension would not affect its members as the standing committees had to keep working anyway.
Fellow legislator Cheang Chi Keong said one of the purposes of an extension would be to allow the assembly to pass the political reform bills by next month. Mr Cheang said the passage of the two reform bills should be completed “as soon as possible” because the reforms would need to be in place for the Legislative Assembly elections next year. If the assembly could pass the bills in a first reading on Monday, they could receive their second reading before next month. That depended on the number of amendments his colleagues proposed. The Executive Council approved the bills last Monday. As they stand, the changes would add two directly elected and two indirectly seats to the assembly and increase the number of members of the committee that elects the chief executive by 100 to 400.
If the assembly passes the bills, the chief executive must give his assent to enact them. Kwan Tsui Hang, who chairs the First Standing Committee, said for the bills to meet the deadline depended on the government accepting any proposed amendments in good time. The Macao Daily News reported that the bills on the real estate business, the central provident fund framework and
age limits to admission to casinos were likely to receive their second reading before the break. He said the chance of progress towards the passage of the bills on the rehabilitation of old districts, the sale of unfinished housing and food safety were much lower. The assembly will discuss cultural heritage protection for the first time next Monday.
business daily July 12, 2012
Police not tough enough InBrief to tackle casino crimes
Macau, centre for Portuguese learning
Macau should integrate its Portuguese-language teaching resources, strengthen exchange and cooperation among institutions and turn the city into an Asian learning centre, Yao Jing Ming said. Quoted by Chinese-language Macau Daily News, the University of Macau professor said the 26th edition of the Portuguese-language summer course saw 350 students participating. There are also now over 10 higher education institutions offering Portugueselanguage courses in mainland China.
CGD offshore profit rises The offshore Macau branch of Portuguese bank Caixa Geral de Depósitos (CGD) has posted profits of 23.9 million patacas (US$3 million) in 2011, up by 55 percent year-onyear. The company’s annual report highlights a three percent drop to 6.6 million patacas in operational costs. But fierce competition and the negative sentiment from the European market led to a 2 percent decrease to 8.9 billion patacas in deposits, CGD said.
JPMorgan cuts Sands forecast JPMorgan analyst Joseph Greff has cut its forecast for Sands China’s second quarter earnings by 12 percent to US$442 million (3.5 billion patacas) due to greater cannibalisation from Sands Cotai Central and overall slowing VIP growth for the market. The company also lowered its estimates for Sands China’s 2012 and 2013 earnings by 9 percent. It was the second time JPMorgan cut its Sands China’s forecast since May 30.
Judiciary Police director says officers are not “psychologically” prepared for full-time casino assignments Vítor Quintã firstname.lastname@example.org
Macau’s criminal investigation agency “faces difficulties in ensuring an effective and active intervention in the sphere of gambling-related crimes,” Judiciary Police director Wong Sio Chak said yesterday. With more casinos in the pipeline, Mr Wong said it was proving difficult to “improve the efficiency of our intervention” and maintain a traditional model of patrolling and law enforcement.
50 extortion cases were investigated in the past 12 months He said police assigned to casinos had “not been given psychological or practical preparation” ahead of their postings to the casinos and the additional workload of the casino beat “is certainly not healthy” for police officers. The police force created a special operations group earlier this year that would patrol casinos 24 hours a day, with a focus on crime prevention. Gambling-related crimes have dropped by almost 20 percent so far this year, he said. Secretary for Security Cheong Kuoc Va said in May that the number of crimes usually related to the gaming industry, such as extortion and usury, had dropped in the first quarter. However, in the past month, the Public Prosecutions Office admitted that the development of the gambling sector tends to
A 24-hour casino patrol was established early this year, according to Judiciary Police Director Wong Sio Chak.
create instability and can lead to corruption and crime. Speaking at an awards ceremony on Judiciary Police Day 2012, Mr Wong said drug trafficking was becoming a “worrying” phenomenon. “Throughout last year, even though the number of drug-related crimes has decreased, the value of drugs apprehended has increased once again. This type of crime is committed in an ever more covert manner,” he said. He said Macau would continue to face a “worrying situation in regards to criminality and security” next year, with an increased crime rate. Criminals will be “better organised” making better use of the technology and operating effectively across borders. From June last year to May, the police handled almost 10,200 cases and more than 9,800 were closed, an increase of 5.3 percent in year-
on-year terms. The number of extortion cases more than doubled during that time period to 50 cases while there were an additional 37 computerrelated crimes. The police will establish a computer forensic laboratory at the new Judiciary Police headquarters, which is scheduled for renovation during the first half of next year. Mr Wong also revealed that the police plan to create a DNA database “as soon as possible”. He said legislation would be needed to protect “human dignity and fundamental rights, such as the right to privacy”. In April, the police began drafting a proposal regarding the collection and processing of genetic material, hoping that a draft bill could be sent to the government as soon as possible. There is no public timeline for the legislation to be introduced.
Weather Beijing 32/23o C Changchun 24/17o C
Harbin 25/19o C
Xian 35/25o C Shanghai 34/27o C Chengdu 29/23o C Kunming 26/19o C Haikou 34/26o C Sanya 31/25o C
Guangzhou 35/26o C
MACAU (9 July-14 July) Day
Shenzhen 33/26o C
Hong Kong 33/27o C
Macau 33/27o C
July 12, 2012 business daily | 7
‘Dated’ ferry terminal overflowing, say tourists Passengers want renovations at city’s busiest harbour but overhaul delayed until year end Tony Lai
he development of the gaming and tourism industry has drawn more tourists to Macau than ever before but it has placed great pressure on facilities at the Outer Harbour Ferry Terminal. Latest statistics say the ferry terminal, which has been in use since 1993, received more than 2.85 million travellers in the first five months of this year – a slight drop of 0.3 percent from last year. Compared to the same period in 1999, the number of visitors has increased by more than 55 percent from 1.83 million. Though the Taipa Temporary Ferry Terminal has reduced the burden of additional passengers, the new Taipa terminal will not be ready in 2014, as planned, because of delays in construction. The temporary terminal handled more than 1.49 million visitors in the first five months of the year. Susana Wong Soi Man, director of the Maritime Administration, told journalists earlier this year that the Macau terminal was “overburdened”. It is a view not only shared by the authorities but also by the city’s residents and tourists. “It is a small area, crowded with so many tourists,” Macau resident Carolina da Silva said. “It is even worse during holidays that you feel
like there is not enough air here.” Patrick Wright, an Australian working in Hong Kong, told Business Daily: “The immigration counters are packed with queues. Sometimes it’s frustrating. You have to wait like half an hour, or near an hour, to get through.” He said the wait in immigration queues depended on the number of visitors and counters available, adding that it took about 20 minutes to clear immigration yesterday. Tour group traveller Lu Meijuan from Fujian province did not wait long in a queue but said the waiting area could be bigger to accommodate tourists.
Baggage problems Expansion or relocation of the terminal is unlikely to happen soon. In January, Ms Wong said relocation of the Outer Harbour Ferry Terminal would not be considered until at least 2017. According to a report released last month by a governmentadministered task force for the Planning of the New Reclaimed Lands, most residents do not want to see the location changed. The report did not recommend expansion of the pier as the facility is surrounded by existing buildings and infrastructure.
Maritime Administration spokesperson Ng Chan Teng said the government would not comment on either relocation or expansion, but stressed that “the Outer Harbour Ferry Terminal will continue to be very important in the coming years”. Aside from the maritime hub’s capacity, some users are not satisfied with its facilities. Chu Wai In, a frequent traveller between Macau and Britain, complained about baggage facilities. “I have to wait at least 20 minutes to reclaim my luggage every time because they do everything here manually,” Ms Chu told Business Daily. “They should build a luggage belt like the one in the Hong Kong airport.” She also said sanitary conditions at the building, particularly the washrooms, could be improved. Sichuan tourist Mr Chen, who did not offer his first name, said he was satisfied with the standard of facilities and services but that the interior looked “more dated” than he expected.
Renovation delays The Maritime Administration promised last year to start renovations to improve facilities and operations by the third quarter
of this year. In a written response to Business Daily, the Maritime Administration said any renovation would be delayed until the end of the year. The statement said changes in the project’s design had resulted in construction being postponed. Works are expected to last for one year and be divided in to five stages. Baggage carousels will be built on the first and second floors in the first phase. Additional ticket counters are also planned on the second floor. The government has not evaluated the impact the works will have on operations but said the construction timetable would minimise the influence on daily operations. The revamp will provide more restaurants and retail space on the third floor to improve the city’s standing as a “global leisure centre”, the statement said. Improvements on the third floor of the building will certainly appeal to some visitors. Ms Lu said there are fewer restaurants and stores at the Macau terminal compared to the pier in Sheung Wan, Hong Kong, which is located in a nine-storey commercial mall of the Shun Tak Centre. One restaurant and a café are housed on the second and third floor of the Macau terminal.
business daily July 12, 2012
Greater china Sun Hung Kai climbs in Hong Kong
un Hung Kai Properties Ltd had its biggest gain since the arrest of its co-chairmen by the city’s anti-graft body in March, after JPMorgan & Chase Co raised the rating on Hong Kong’s biggest developer by value. The developer climbed 3.6 percent to HK$96.15 (US$12.4) at the close of trading in Hong Kong, the biggest gain since March 27. JPMorgan analysts led by Lucia Kwong raised the stock to “overweight” from “underweight,” citing that investors’ concern over the impact of an increased land supply on developers’ profitability may be overblown. Hong Kong’s anti-corruption commission arrested Thomas and Raymond Kwok, the billionaire co-chairmen of Sun Hung Kai, and Rafael Hui, formerly the city’s No. 2 official, in March in one of the highest-level investigation conducted in the body’s 38-year history. The probe has increased public concerns about real estate policies implemented by the government as property price gains made Hong Kong the world’s most expensive place to own a home. As of yesterday, no charges have been made by the Independent Commission Against Corruption. “We think land supply may remain low for at least another 18 months,” the JP Morgan analysts wrote in a report dated Tuesday. “The government emphasised that they would not target to push down housing prices.” Hong Kong’s Chief Executive Leung Chun Ying, who took office this month, has pledged to increase land supply to curb home prices that have risen more than 80 percent since early 2009. Sun Hung Kai last month had it’s A-plus long-term corporate rating affirmed by Standard & Poor’s, which said the company’s daily operation remains “intact” even as its directors are being probed by the city’s anti-graft body. Hong Kong stocks rose yesterday, with the benchmark index advancing for the first time in four days. The Hang Seng Index rose 0.1 percent to 19,419.87 at the close after earlier falling as much as 0.8 percent. Three shares gained for every two that fell on the 49-member gauge. The Hang Seng China Enterprise Index of mainland companies dropped 0.1 percent, paring losses of as much as 1.3 percent.
China’s stocks rally fro Speculation on new incentives minimise corporate earnings concerns
hina’s stocks rallied from a six-month low as speculation the government will boost investments to bolster the economy overshadowed signs slowing growth is damping corporate earnings. China Railway Erju Co and Anhui Conch Cement Co led advances among infrastructure-related stocks after Premier Wen Jiabao said promoting “reasonable” growth in investment is important. Health-care and consumer-staples stocks gained the most among the CSI 300 Index’s industry groups as investors bought shares of companies least tied to economic growth. China Southern Airlines Co lost 2.2 percent after saying first-half profit may have dropped more than 50 percent. “The earnings outlook is pretty bleak and it looks like there’s more room to further cut estimates,” Dai Ming, fund manager at Shanghai Kingsun Investment Management & Consulting Co, said. “But we shouldn’t be too pessimistic at this level as
the government may release pro-growth measures.” The Shanghai Composite Index advanced 0.5 percent to 2,175.38 at the close, snapping a two-day, 2.7 percent drop. Seven stocks gained for every two that fell in the gauge, which turned between gains and losses at least 11 times. The CSI 300 Index climbed 0.8 percent to 2,425.57. Thirty-day volatility in
the Shanghai index was at 15.8 yesterday, compared with this year’s average of 18.1. About 5.9 billion shares changed hands in the gauge yesterday, 31 percent lower than the daily average this year.
Lower valuation The Shanghai Composite has fallen 1.1 percent this year, reversing a gain of as
Beijing wants sea spat off Asean agenda Countries seek to draft an ‘effective’ code of conduct
hina warned nations to avoid mentioning territorial disputes with the Philippines and Vietnam at a security meeting this week, rebuffing U.S. Secretary of State Hillary Clinton’s call for talks on the issue. Ms Clinton indicated on Tuesday the U.S. would raise concerns over the South China Sea during meetings in Phnom Penh, Cambodia, where envoys from 26 Asia-Pacific countries and the European Union meet today. Speaking at a press conference in Hanoi with Vietnam’s Foreign Minister Pham Binh Minh, Ms Clinton called competing claims in the waters a “critical issue”. The Asean meetings are “not an appropriate venue for discussing the South China Sea,” Foreign Ministry spokesman Liu Weimin told reporters in Beijing yesterday, in response to a
question over U.S. concerns about a code of conduct in the waters. “Intentional stirring up of the issue is ignoring the nations striving for development, intentionally kidnapping the relationship between China and Asean.” Beijing told Japan yesterday it should respect its “indisputable sovereignty” over islands claimed by both countries in the East China Sea which are again the cause of fresh tension. Chinese Foreign Minister Yang Jiechi met with Japanese counterpart Koichiro Gemba in Phnom Penh where he “reaffirmed China’s principled position” on the islands known as Senkaku in Japanese and Diaoyu in Chinese. “He stressed that Diaoyu Islands and their affiliated islets have always been China’s territory since ancient times, over which China has indisputable
sovereignty,” said a statement from the Chinese delegation. Mr Yang “urged Japan to adhere to relevant agreements and understanding between the two sides in good faith, return to the right path of managing differences through dialogue and consultation with the Chinese side and take concrete actions to uphold the overall interests of the bilateral ties.” Japan summoned the Chinese ambassador in Tokyo yesterday as three Chinese patrol boats approached the chain of islands. The diplomatic sparring reflects concern over China’s move last month to develop disputed areas of the South China Sea with oil and gas reserves that Hanoi’s leaders already awarded to companies including Exxon Mobil Corp. and OAO Gazprom.
Vietnam role “U.S.-China relations will likely be the elephant in the room,”
Ernest Bower and Prashanth Parameswaran of the Centre for Strategic and International Studies in Washington wrote in a report two days ago. “Asean states continue to be concerned that tensions between a United States ‘rebalancing’ to Asia and a rising China will disrupt regional peace and stability and drag them into disputes.” “The United States appreciates Vietnam’s contributions to a collaborative diplomatic resolution of disputes and a reduction of tensions in the South China Sea,” Ms Clinton said in Hanoi. The U.S. looks “to Asean to make rapid progress with China towards an effective Code of Conduct.” Asean countries, including four with claims in the South China Sea, reached an agreement on rules for operating in the waters and will seek talks with China. The Philippines called for an enforceable code of conduct during a meeting of envoys from Asean, China, Japan and South Korea, according to a statement citing Foreign Affairs Secretary Albert del Rosario. “This expression of hope is not alien to us, nor should it come as a surprise,” he told the meeting, according to the statement. Asean has achieved a “milestone” because all countries are now committed to agree to a legally binding code of conduct, according to Secretary-General Surin Pitsuwan. Last year, Asean and China agreed on guidelines to implement a non-binding agreement signed in 2002. Bloomberg/AFP
July 12, 2012 business daily | 9
om six-month low Co, the heavy machinery unit of China’s largest conglomerate, surged 6 percent to 4.44 yuan, the biggest advance since its listing on the Shanghai Stock Exchange on July 6.
for private investments in railway, public utilities, energy and telecommunication companies, health care and education. China’s policy is likely to focus on investment, Deutsche Bank AG said in a note yesterday. The downside risk to the nation’s economy is a sharp deceleration in
Data on Tuesday showed Chinese imports in June grew 6.3 percent, below the 11 percent median estimate in a Bloomberg News survey of 32 economists. Export growth also slowed from May, putting the government further at risk of missing its goal of 10 percent growth in trade this year. The
Investment boost Premier Wen said the country needs to maintain “a certain amount” of economic growth, according to a State Council statement posted on the central government’s website yesterday. He called
SUN HUNG KAI Properties (16 HK) share price HKD 96.5
11-Jul China Southern fell to 4.54 yuan yesterday after saying first-half profit probably halved from a year earlier
much as 12 percent, and closed yesterday at the lowest level since January 6 amid concern the government isn’t doing enough to stem an economic slowdown. It trades at 9.6 times estimated profit, compared with the 17.6 average since Bloomberg began compiling the data in 2006. The index’s 14-day relative strength index, which measures how rapidly prices
have advanced or dropped during a specified time period, was at 30.3 yesterday. Readings below 30 indicate it may be poised to rise. China Railway Erju, a rail construction company, jumped 5.9 percent to 6.50 yuan (US$1.02), its biggest gain since May 28. Anhui Conch, China’s biggest cement maker, climbed 2.8 percent to 14.53 yuan. Citic Heavy Industries
The earnings outlook is pretty bleak and it looks like there’s more room to further cut estimates Dai Ming, Shanghai Kingsun Investment Management & Consulting Co
infrastructure fixed-asset investment rather than export growth, Jun Ma, chief economist Deutsche Bank, wrote in the note. But a statistics bureau report tomorrow is expected to show China’s economy expanded 7.7 percent in the second quarter, the slowest pace in three years, according to the median estimate of 35 economists surveyed by Bloomberg.
government said on July 9 the annual inflation rate fell to 2.2 percent in June, the slowest pace in more than two years. Net incomes for consumergoods companies in the CSI 300 rose 26 percent from a year earlier in the first quarter, compared with a 6.7 percent gain in earnings for the all 300 companies in the CSI 300 in the period. Bloomberg
Car sales rise 9 percent in June Honda and Toyota lead sales gains s dealerships try to meet sales targets
hina’s passenger-vehicle sales rose in June, exceeding analysts’ estimates for a fourth consecutive month after automakers increased shipments ahead of scheduled shutdowns for the summer. Wholesale deliveries, including multipurpose and sport utility vehicles, gained 16 percent to 1.28 million units last month, the China Association of Automobile Manufacturers said in a statement yesterday. Honda Motor Co and Toyota Motor Corp led sales gains in China as Japanese carmakers rebounded from last year’s earthquake disruptions. Auto manufacturers may have delivered more vehicles to dealerships to meet sales targets for the half-year period, according to UBS AG. Last month’s growth may also reflect increased shipments before traditional factory closures in July and August for maintenance,
CSC International Holdings said. “Carmakers typically shut factories for a period in summer for routine maintenance and are boosting dealership stockpiles before it,” said Han Weiqi, a Shanghai-based analyst at CSC International Holdings Ltd. “This comes at the cost of bigger inventory pressure at dealerships.” In the first six months, passengervehicle deliveries gained 7.1 percent to 7.61 million units, the association said. Total vehicle sales, including trucks and buses, increased 9.9 percent to 1.58 million units in June. Sportutility vehicle deliveries gained 52 percent, the best-performing segment. Growth may slow in Guangzhou, the capital of Guangdong province that borders Hong Kong, after the southern Chinese city of imposed a quota on new vehicle registrations this month to control vehicle emissions and
64,652 Units sold by Honda in the first half, 84 percent more than a year earlier
ease traffic congestion. Guangzhou – which followed Beijing, Shanghai and Guiyang in implementing curbs on vehicles – may not be last. Morgan Stanley said in a July 2 report that 11 other cities, accounting for 15 percent of total industry sales in 2010, are candidates to also implement limits on cars. The slowing economy may also be undermining the outlook. In the first five months, passengercar sales increased 5.5 percent to 6.33 million units after growth of 6.1 percent a year earlier. Figures for April, May and June last year were hurt by disruption from the Japan earthquake. Honda increased deliveries 84 percent to 64,652 units, with sales and production a year earlier disrupted by the earthquake and tsunami in Japan. Toyota sold 70,500 units in June, 19 percent more than a year earlier. Bloomberg
business daily July 12, 2012
Japan ramps up threat of FX action Government expects BOJ to keep ultra-easy policy Kaori Kaneko
apan’s government warned yesterday it would act decisively in foreign exchange markets if strong gains in the yen threatened the country’s fragile economy, as it rolled out a long-term growth plan for the next eight years. The growth strategy, which the government hopes to finalise in July or August, also aimed to create a US$628 billion green energy market by 2020 and called on the Bank of Japan to maintain its ultra-easy monetary policy until the country makes a sustained exit from deflation. In a draft obtained by Reuters on Tuesday, the government said it would “act appropriately” against any rapid yen rises that would hurt the export-reliant economy. But that language was toughened up in an official plan released yesterday, in which the government said it would take “decisive action when necessary”. The change follows calls from a ruling party lawmaker that it should stress its readiness to intervene in the currency market if the yen shoots up.
The long-term strategy, which is part of the government’s effort to boost Japan’s growth potential and nurture new industries, said Japan will aim to achieve average annual nominal growth of 3 percent and real growth of 2 percent by 2020. The government did not set a deadline for beating deflation but said it will start conducting a review of the economy and prices twice a year. That process could add to political pressure on the central bank to take more action to spur stronger economic activity and beat deflation. The plan released yesterday is the government’s proposed version and will be further scrutinised by a panel of academics and in a meeting of ruling party lawmakers before being finalised. The BOJ set a 1 percent inflation target and eased policy in February, and followed up with more monetary stimulus in April to show its determination to beat deflation. But most economists agree it will be some time before the BOJ’s target is met. Japan’s economy is expected to outperform most of its G7 peers
this year with growth of around 2 percent, helped by reconstruction spending after a devastating earthquake and tsunami last year. But the stubbornly strong yen, Europe’s continuing debt woes and slowing growth in emerging economies are clouding the outlook for the economy. Reuters
US$628 billion Expected green energy market by 2020
Australia to tighten takeover rules Stopping investors taking over companies without paying a premium
ustralia’s corporate regulator is considering changing takeover laws to prevent investors from building significant stakes in a company without making a full offer. Under the current laws, investors who have reached the 20 percent maximum shareholding allowed before launching a takeover offer can then increase their shareholding by 3 percent every six months. David Medcraft, the chairman of the Australian Securities and Investments Commission, told
ABC Radio yesterday the laws allowed predator investors to use what he called “creep” tactics to take over a company without paying a premium. His comments follow controversial moves by billionaires Gina Rinehart and James Packer to increase their shareholdings and gain board representation in Fairfax Media Ltd and Echo Entertainment Group Ltd respectively. An aborted US$1.65 billion takeover offer for David Jones by little-known British-based company EB Private Equity that
played havoc with the Australian retailer’s share price has added to questions about current legislation. “I think that the current creep provisions are an anachronism, it’s basically allowing takeover by stealth which I think is inconsistent with takeover law,” Mr Medcraft said. Mr Medcraft said he was looking at Britain’s “put up or shut up” provision, which allows targeted companies to ask the U.K. Takeover Panel to impose a deadline for a firm offer from a predator. If the potential bidder
fails to meet the deadline, it must walk away for at least six months. “The situation in the U.K. is that if you make an offer it has to be clear and it has to be committed. It can’t be ambiguous or highly conditional,” he said. “If it’s not and you don’t deliver on it there will be consequences.” The Australian Securities and Investments Commission must receive a formal request from the federal government to recommend changes to the laws, but its public comments put the issue firmly on the agenda. Reuters
Consumer sentiment jumps
The takeover offer for David Jones by a little-known British company added to questions about the current legislation
A measure of Australian consumer confidence jumped in July as households became more optimistic about the economic outlook and their finances following recent interest rate cuts, a survey showed yesterday. The poll of 1,200 people by Westpac Bank and the Melbourne Institute showed its index of consumer sentiment climbed 3.7 percent in July to 99.1, adding to June’s slight 0.3 percent increase. “Finally we have some evidence that the Reserve Bank’s policy of cutting the official cash rate by 125bps between November last year and June this year is starting to gain more positive traction with households,” said Westpac chief economist Bill Evans. “However, this result is far from convincing and should not be interpreted that we can expect confidence to steadily return to more normal levels over the months ahead,” Mr Evans warned.
July 12, 2012 business daily | 11
President Lee’s brother arrested
Government ready to intervene if strong gains in the yen threaten economic development
S.Korea jobless rate steady But labour market conditions show little sign of improvement
outh Korea’s unemployment rate remained low in June but a loss of high-paying manufacturing jobs suggests weak consumer spending could weigh on Asia’s fourth-largest economy and pressure the government for fiscal steps to help create jobs. Analysts said the latest figures were unlikely to have a major near-term impact on monetary policy, however, including today’s central bank meeting, as worries about household debt and inflation expectations would keep policy-makers cautious. Annual consumer spending growth has slowed in each of the past six quarters on a one-year rolling average basis and the latest set of data provided no sign of a quick turnaround in spending by South Korea’s highly leveraged households, economists said. The seasonally adjusted unemployment rate in June held steady from May at 3.2 percent, Statistics Korea data showed, the second-lowest rate since early 2008 and among the lowest for a developed economy. Finance Minister Bahk Jae-wan hailed the robust labour market data at the start of a weekly economic policy meeting but economists said the country’s labour market conditions showed little sign of improvement. “If you look closely at the job numbers, what you are seeing is not the younger people getting quality jobs in sectors like manufacturing and finance,” said Lee Chul-hee, chief economist at Tong Yang Securities. “Instead, there has been a spike in people in their 50s and 60s taking on low-income jobs to pay
for their living costs or to pay for their kids’ education.”
Low-income jobs The country added 365,000 jobs in June compared with a year earlier but the manufacturing sector shed jobs for a 12th consecutive month. The new jobs being created are largely in the lower-income service sectors, Statistics Korea said. An increasing number of people sent out of manufacturing plants are opening small restaurants or street shops but many of them, classified as self-employed, earn little income, especially during their first few years in business, analysts said. “Older self-employed people are vulnerable to bumpy economic conditions. This is of particular concern because an increasing share of household debt is born by an older
cohort with weak income-generating capacity,” said Ronald Man, economist at HSBC in Hong Kong. The number of self-employed people rose by 120,000 in the year to June on a rolling average basis, the highest in nine-and-a-half years, while the manufacturing sector shed the most jobs in two years, Reuters calculations show. Consumer spending in South Korea, which accounts for a little more than half of the economy, is also in slump as heavily indebted households struggle to service debts while the government moves to curb fresh lending to them. Central bank data released yesterday showed banks boosted lending to households by a net 1.3 trillion won (US$1.14 billion) in June, bringing the monthly average for this year to 0.35 trillion won, far below last year’s 2 trillion won.
Weak consumer spending could weigh on Asia’s fourth-largest economy
South Korean President Lee Myung Bak’s older brother was arrested and detained over a savings bank bribery scandal, prosecutors said yesterday. Lee Sang Deuk, 76, who served six terms in parliament, was taken into detention early yesterday morning, said Choi Woon Sik, head of the team investigating wrongdoing at savings banks. Prosecutors can detain a suspect up to 20 days before making an indictment, Mr Choi said. The arrest is a blow to President Lee and his New Frontier Party as the campaign to elect his successor later this year intensifies. The NFP narrowly held power in an April 11 parliamentary election after a former speaker in the National Assembly and long-time mentor to President Lee resigned over alleged vote-buying. The allegations against Mr Lee’s brother relate to receiving illegal political donations, said Cho Won Kyoung, a judge and spokeswoman at the Seoul Central District Court. The elder Mr Lee said on July 3 he would “faithfully participate” in questioning by prosecutors. He declined to comment further to reporters that day. President Lee’s office had no comment yesterday on the arrest, spokeswoman Lee Mi Yon said. Prosecutors have indicted nearly 200 people and ordered at least two jail sentences after uncovering illegal lending and lax oversight among bankers, regulators, politicians and lobbyists. The Financial Services Commission has closed 20 savings banks since January 2011 and more than 88,000 depositors and bond holders have lost more than 1 trillion won (US$878 million).
East Timor seeks unpaid taxes’ East Timor is seeking “possibly billions” of dollars from foreign oil companies, including US-owned ConocoPhillips, in unpaid taxes, the government said in a statement yesterday. The government has begun an auditing process, hoping “to recover substantial monies it believes are rightfully owed... under legal obligations”, the statement said. The companies under audit operate in the Joint Petroleum Development Area in the Timor Sea, whose resources are 90 percent owned by East Timor and 10 percent owned by neighbouring Australia. The statement did not explain the timeframe or how many companies would be audited, but it said the government had so far made 28 assessments against several companies. The only named company, ConocoPhillips, could not be immediately contacted. “It is a David and Goliath fight,” said Secretary of State for Natural Resources Alfredo Pires, adding that “hundreds of millions, possibly billions” is owed. The cause is backed by lawyer Pierre-Richard Prosper, a former US-Ambassador-at-large for war crimes, who will represent the state. Prosper said that during the auditing process, authorities “are discovering that there are large areas where there were discrepancies”. East Timor is one of the world’s youngest nations, winning formal independence just a decade ago. It is one of Asia’s poorest countries and its economy relies heavily on energy reserves, which make up 90 percent of its GDP. The International Monetary Fund has described East Timor as the world’s most oil-dependent nation.
business daily July 12, 2012
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AIA GROUP LTD
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52W (H) 22808.33
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52W (H) 3137.922 (L) 2254.567
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ASIA CEMENT CORP
PRICE DAY %
PRICE DAY %
TAIWAN MOBILE CO
TPK HOLDING CO L
HON HAI PRECISIO
AU OPTRONICS COR
HOTAI MOTOR CO
HUA NAN FINANCIA
CHANG HWA BANK
YULON MOTOR CO
CHENG SHIN RUBBE
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52W (H) 5960.61 (L) 4643.05
July 12, 2012 business daily | 13
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MGM cHINA HolDINGS 27.6
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22.9 22.7 22.5 22.3 22.1 Average 22.766
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CHOW TAI FOOK JE
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Shanghai Shenzhen Composite index is listing the biggest companies by market capitalization. All data supplied by Bloomberg unless otherwise indicated.
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business daily July 12, 2012
Living cells show how to fix the financial system Mark Buchanan
Former editor of Nature and now a columnist for Nature Physics
ver the past three decades, the global financial system has become more dynamic and interconnected, more concentrated and complicated than ever before. Financial engineering seems to know no limits to creating new instruments that link institutions in new ways. Is that a good thing? Or could the resulting financial network be too complex? Or, perhaps, complex in the wrong way? A look at biology – which has been tinkering with network designs for billions of years – suggests that the answer to the last question is most likely yes. In “The Architecture of Complexity,” an extraordinarily original paper published 50 years ago, the economist, psychologist and artificial-intelligence pioneer Herbert Simon asked the question, Why does nature so consistently organise itself into hierarchies? Why, that is, are so many of its creations designed as systems of systems? In biology, for example, cells organise into tissues, tissues into organs, organs into larger systems. The cell itself contains a nucleus and a cell membrane, ribosomes and mitochondria. Our human organisations obviously also follow hierarchies, as do our buildings, technological devices, even our writing – words make sentences, which build paragraphs, which then make up essays or chapters. Scientists and philosophers since Aristotle have noted as much, but Simon, one of the most creative minds of the 20th century (he died in 2001), was perhaps the first to ask why. He also proposed an answer.
Hierarchical design For one thing, he pointed out, structures like this are easier to make and also more amenable to beneficial alteration. We might, in principle, build computers as enormously complex assemblies of billions of individual transistors, linked in some exquisite design. Then, however, every device would have to be built as a whole. We simplify construction by designing computers as assemblies of subunits that can be linked – a memory chip, central processor and keyboard, for example. The units can be built and tested separately, and they can be linked in different ways to make different kinds of computers. We can reach in and alter one component – changing the memory – without worrying that we have wrecked the keyboard. As a result, computers become easier to improve. Hierarchy, in other words, is a way of limiting complexity in the interest of both stability and evolvability. Simon argued that systems structured in this way possess a basic, competitive simplicity. We are only beginning to appreciate how much, as living beings, we rely
on this architecture. Take ordinary bone, for example, which is remarkably tough, yet lightweight, with properties that our technology still cannot match. The secret is hierarchy. Within bone, small molecules bind together into proteins, which then link into filaments, which in turn organise into larger structures. When a bone suffers a blow, the hierarchy provides a variety of mechanisms by which it can pass along the excess energy it absorbs, without creating lasting damage. Bone, like most other structures in biology, is not just complex, but complex in a highly organised way. What about structures in economics and finance? The growth of modern finance seems to have violated the principle of hierarchical structures, and with gusto. Two trends in the past 30 years – the merging of banks into huge institutions and the explosion of derivatives that link them around the globe – have made the network much less modular. We have created a vast web of interconnections with extreme complexity but little organisation. And this does appear to have made the system less resilient.
Failures cascade For example, in a study last year, economists from the University of Auckland, New Zealand and the Bank of England used computer simulations to explore how failures might cascade through the interbank network, the system that banks use to manage their day-to-day financing demands by making loans to one another. This network normally functions fairly well, with funds flowing easily, but it can
experience sharp liquidity crises – as it did following the collapse of Lehman Brothers Holdings Inc. in 2008. For short-term cash, banks rely heavily on “repos” – overnight sales of stocks or other assets, which they agree to repurchase later. How much cash
High concentration and high interconnectedness contribute to an ‘everything is linked to everything’ outcome, a likely recipe for instability
a bank can get for a specific asset depends on the “haircut” – a reduction in the cash lent against it, which lenders demand to protect themselves against risks, or losses they may face if, in the case of default, they have to sell the asset themselves. Haircuts fluctuate with time and perceptions, and the simulations show that the interbank network’s resilience to such fluctuations depends on its architecture. The more the network is concentrated in and dominated by big banks and the higher the overall density
of links among banks, the less modular the system is, and the less stable. That is, both these trends make it more likely for financial distress to cascade through the network. Specifically, huge banks that account for a disproportionate share of all links act as potential epicentres for trouble. This is a way of describing “too big to fail,” although it would be more accurate to say “too central to fail.” Meanwhile, a high density of interconnections in the network creates ever more channels along which contagion can move. This problem encourages banks to “hoard” funds in times of stress – the least desirable behaviour in a network of banks trying to share resources to meet their momentary funding demands. Unlike organisms, of course, financial systems haven’t undergone evolutionary competition from which only the fit have emerged. We have little reason to expect that what exists would be anything like optimal, or even reasonable. To counter these developments, we could try to manage the way lending occurs – control the amount of leverage used and the haircuts involved – so as to prevent dangerous contagion. More boldly, we might try to set up constraints on the very concentration of our networks, on who is linked with whom and how strongly. Both high concentration and high interconnectedness contribute to an “everything is linked to everything” outcome that is the very opposite of modularity, and a likely recipe for instability. Financial engineering should learn to avoid this architecture, just as surely as biology has. Bloomberg View
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July 12, 2012 business daily | 15
Europe’s divided visionaries wires Business Leading reports from Asia’s best business newspapers
Professor of Economics and Political Science at the University of California, Berkeley
Business Life States may be for majority foreign direct investment in multi-brand retail but are not willing to commit in writing. The Department of Industrial Policy and Promotion is yet to get any response to its letter seeking their views on this move. In November the Cabinet decided to allow 51 per cent FDI in multi-brand retail. However, the political uproar that followed forced the government to put the decision on hold. Since then, it has been trying to build a consensus on the issue.
Jakarta Post State-owned airport operator Angkasa Pura I (API) plans to construct a new international class airport in Bali’s northern coastal area of Buleleng next year, in anticipation of the growing number of tourists to the resort island. API did not disclose the total investment required, but it plans to build an airport with an ultimate capacity of 25 million passengers annually. “Bali should be able to accommodate at least 50 million air passengers annually. We are ready to provide important,” the company said.
Korea Herald Unionised workers at local automotive companies are gearing up for a massive general strike in the coming weeks, with the largest Hyundai Motor Union expected to join the plan, the first in four years. The Korean Metal Workers Union, which includes the car industry, started a two-day vote on Tuesday to ask the approval of their 150,000 members on a four-hour walkout plan on July 13 and 20. The 45,000-member Hyundai Motor Union, also carried out its own vote on the day.
Business Recorder Pakistani workers’ remittances have crossed the US$13 billion for the first time in country’s history during the last fiscal year (2011-12). They remitted a record amount of US$13.2 billion during the last fiscal year that ended on June 30, 2012, showing an impressive growth of 17.73 percent when compared with US$11.2 billion received during the preceding fiscal year (2010-11). Remittances received from all countries of the world showed substantial growth during the last fiscal year and almost all of this growth was through banking channels.
urope’s leaders, unlike former US President George H. W. Bush, have never had trouble with the “vision thing”. They have always known what they want their continent to be. But having a vision is not the same as implementing it. And, when it comes to putting their ideas into practice, the European Union’s leaders have fallen short repeatedly. This tension between Europeans’ goals and their ability to achieve them is playing out again in the wake of the recent EU summit. Europe’s leaders now agree on a vision of what the EU should become: an economic and monetary union complemented by a banking union, a fiscal union, and a political union. The trouble starts as soon as the discussion moves on to how – and especially when – the last three should be established. Banking union, Europe’s leaders agreed, means creating a single supervisory authority. It means establishing a common deposit-insurance scheme and a mechanism for closing down insolvent financial institutions. It means giving the EU’s rescue facilities the power to inject funds directly into undercapitalised banks. Likewise, fiscal union means giving the European Commission (or, alternatively, a European Treasury) the authority to veto national budgets. It means that some portion of members’ debts will be mutualised: individual governments’ debts would become Eurobonds, and thus a joint obligation of all members. The Commission (or Treasury) would then decide how many additional Eurobonds to issue and on whose behalf. Finally, political union means transferring the prerogatives of national legislatures to the European Parliament, which would then decide how to structure Europe’s fiscal, banking, and monetary union. Those responsible for the EU’s day-to-day operations, including the Board of the
European Central Bank, would be accountable to the Parliament, which could dismiss them for failing to carry out their mandates.
Dejá vu Vision aplenty. The problem is that there are two diametrically opposed approaches to implementing it. One strategy assumes that Europe desperately needs the policies of this deeper union now. It cannot wait to inject capital into the banks. It must take immediate steps toward debt mutualisation. It needs either the ECB or an expanded European Stability Mechanism to purchase distressed governments’ bonds today. Over time, according to this view, Europe could build the institutions needed to complement these policies. It could create a single bank supervisor, enhance the European Commission’s powers, or create a European Treasury. Likewise, it could strengthen the European Parliament. But building institutions takes time, which is in dangerously short supply, given the risk of bank runs, sovereign-debt crises, and the collapse of the single currency. That is why the new policies must come first. The other view is that to proceed with the new policies before the new institutions are in place would be reckless. Mutualising debts before European institutions have a veto over fiscal policies would only encourage more reckless behaviour by national governments. Proceeding with capital injections before the single supervisor is in place would only encourage more risk taking. And allowing the ECB to supervise the banks before the European Parliament acquires the power to hold it accountable would only deepen the EU’s democratic deficit and provoke a backlash. Europe has been here before – in the 1990’s, when
the decision was taken to establish the euro. At that time, there were two schools of thought. One camp argued that it would be reckless to create a monetary union before economic policies had converged and institutional reforms were complete. The other school, by contrast, worried that the existing monetary system was rigid, brittle, and prone to crisis. Europe could not wait to complete the institution-building process. It was better to create the euro sooner rather than
Vision aplenty. The problem is that there are two diametrically opposed approaches to implementing it
later, with the relevant reforms and institutions to follow. At the slight risk of overgeneralisation, one can say that the first camp was made up mainly of northern Europeans, while the second was dominated by the south. The 1992 exchange-rate crisis then tipped the balance. Once Europe’s exchangerate system blew up, the southerners’ argument that Europe could not afford to postpone creating the euro carried the day. The consequences have not been happy. Monetary union without banking, fiscal, and political union has been a disaster. But not proceeding would also have been a disaster. The 1992 crisis proved that the existing system was unstable. Not moving forward to the euro would have set up Europe for even more disruptive crises. That is why European leaders took the ambitious steps that they did. Not proceeding now with bank recapitalisation and government bond purchases would similarly lead to disaster. Europe thus finds itself in a familiar bind. The only way out is to accelerate the institutionbuilding process significantly. Doing so will not be easy. But disaster does not wait. © Project Syndicate
business daily July 12, 2012
CLOSING Emerging markets slowing down
U.S. trade deficit down
Economic growth across emerging markets eased in the second quarter of 2012, dragged down by lacklustre manufacturing sector activity, especially in China and Brazil, a survey showed on Wednesday. HSBC’s emerging markets index based on 21 service and manufacturing sector surveys in 16 emerging economies, slipped to 53.0 in the second quarter of the year. It stood at 53.6 in the first three months of 2012. While the indicator remains in expansion territory above the 50-mark, HSBC said growth was well below pre-crisis averages, weighed down by stuttering growth in the developed world.
The U.S. trade deficit narrowed slightly in May as a rise in exports, including those bound for Europe and China, eased the pain of a slowdown in the broader economy, a government report showed yesterday. The gap shrank 3.8 percent to US$48.7 billion, the U.S. Commerce Department said. Cheaper oil from abroad also helped shrink the trade deficit. The reading was in line with expectations so it probably won’t change analysts’ views that economic growth slowed in the second quarter. American companies reduced hiring in the second quarter, a warning sign the recovery from the recession is faltering.
Ozawa quits and forms new opposition party New parliamentary group is a direct challenge to Noda plans
ormer Japanese ruling party leader Ichiro Ozawa formed a new political group today, challenging Prime Minister Yoshihiko Noda’s stances on increasing the sales tax and restarting nuclear reactors. “I will devote all my efforts to this,” Mr Ozawa said in Tokyo in announcing the name of his party, which can be translated as “The People’s Lives Come First,” and has 49 legislators. Last week he lead an exodus of about 50 lawmakers from the Democratic Party of Japan after the lower house of parliament approved Mr Noda’s bill to double the five percent tax. While the split left Mr Noda with a reduced majority, the bill will probably pass through the opposition-dominated upper chamber thanks to a deal between the DPJ and the Liberal Democratic Party. Mr Ozawa is likely to reach out to other disaffected DPJ members to try and halt or delay the legislation, analyst Koichi Nakano said. “The question isn’t so much how many people Mr Ozawa has as how many more DPJ lawmakers may leave,” said Mr Nakano, a professor of political science at Sophia University in Tokyo. “The consumption tax could still be
in jeopardy. Mr Ozawa can’t be dismissed too lightly.” Under the legislation, the tax would rise to 8 percent in 2014 and 10 percent in 2015. While Mr Noda has insisted the measure is essential to confronting record debt and rising social welfare costs, opponents argue it would discourage consumption and fail to raise government revenue. Mr Noda’s decision to authorise this month’s reactivation of two atomic reactors after all 50 were taken offline following last year’s Fukushima nuclear disaster has been met with weekly protests in Tokyo. Polls show as many as three-fourths of Japanese voters oppose the restarts. While Mr Ozawa today reiterated that the tax increase bill must be stopped, he said on July 8 he isn’t targeting a no-confidence motion against Mr Noda, something that could trigger the government’s downfall. His new group will have 37 members in the lower house and 12 in the upper house. “Realistically we can’t pass a noconfidence vote just by ourselves,” Mr Ozawa said on public broadcaster NHK’s “Sunday Debate” program.
Sales tax and nuclear reactors heating political landscape
He also said he is interested in exploring an alliance with Osaka Mayor Toru Hashimoto, whose One Osaka party aims to get 200 of the 480 seats in the next lower house election. Polls show Mr Hashimoto has become the country’s most popular politician by calling for less central government control
and spending cuts. Given that Mr Ozawa has criticised the DPJ’s decision to reduce child support payments, his overture to Mr Hashimoto “is a non-starter,” Mr Nakano said. “He has nothing in common with” the Osaka mayor. Bloomberg
Former Saints soccer player was betting sinner English Premier League star earned ‘thousands’ by fiddling in-play events Associate Editor
former English Premier League soccer player claims he was part of an alleged betting scam that defrauded bookmakers and other gamblers. Ex-Southampton F.C. captain Claus Lundekvam, now aged 39, said in a series of media interviews in his native Norway that during his playing days he had put huge bets on minor incidents in games – such as who would win the first throwin or corner. As a result of conspiring with opposition players, he ensured the predicted ‘events’ happened at the correct time. Gambling on certain inplay events – sometimes known as ‘spot betting’ – is particularly popular with Asian consumers. In November 2011 three Pakistani cricketers were
jailed in the United Kingdom for exactly the kind of ‘spot fixing’ described by Mr Lundekvam – but in that case it was during international cricket matches against England. Soccer’s English Premier League – founded in 1992 – is favoured by Asian gamblers because it is perceived as a relatively fair league, with teams at the bottom doing their best to win against the top sides, and because it is thought to have relatively little corruption.
Tarnished name That’s not the reputation carried by some of Europe’s other top leagues. Italy’s Serie A has been tarnished by frequent scandals. In May on the eve of the Euro 2012 championships in Poland and Ukraine, 14 people –
including Lazio captain Stefano Mauri, were arrested by Italian authorities in connection with a wideranging investigation into match fixing in soccer. In May 2006, Juventus one of Italy’s oldest and most famous sides, became one of five clubs linked to a Serie A match fixing scandal. As a result the club was relegated to Serie B for the first time in its history. Mr Lundekvam claims he and fellow players raked in thousands of pounds betting on their own games, and for while did it “almost every week”. The defender, who played for Southampton – nicknamed The Saints – between 1996 and 2008, said: “It’s not something I’m proud of. For a while we did this almost every week. We made a fair bit of money.”
Published on Jul 11, 2012