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August gambling rev up 5.5 pct August gaming revenues reached 26.14 billion patacas (US$3.27 billion) – up 5.5 percent year-on-year according to data released by the Macau government yesterday. The August tally was the highest for a single month this year and compared to 24.78 billion patacas in August last year. The highest revenue intake was recorded in October 2011 when Macau took in 26.85 billion patacas. PAGE 3
Time bomb faced by government T
Kong Ltd, a professional services company. The firm was hired by the government to assess the financial commitments and funding needs of the social security net, including old age pensions. Its report might make uncomfortable reading. Towers Watson says if monthly
hree out of ten Macau residents will be above retirement age by the year 2062 and only six out of ten will be actively working. That’s a demographic time bomb for the city’s social security system says a report from Towers Watson Hong
contributions from workers are kept at 45 patacas (US$5.60), then the government would have to increase its annual injection by four percent every year just to keep pace with increasing demand from new retirees. About 30 percent of the city’s population will be older than
65 in 50 years’ time compared to just eight percent now. The mandatory provident fund in neighbouring Hong Kong requires a five percent contribution from each employee’s monthly salary with the employer matching the same amount. MORE ON PAGE 4
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Casino focus boosts trade gap
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No multi-entry for mainlanders
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Multiple-entry permits for Macau will not be granted to selected mainland visitors in the manner of the recently announced Hong Kong scheme said Macau’s tourism boss yesterday. “No change has been applied to Macau” on multiple-entry visas, said João Manuel Costa Antunes, director of Macau Government Tourist Office. But people working in certain mainland cities can now apply for single-visit permits without returning to their hometowns.
Yuan trade role for city
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Macau is moving closer to becoming a hub for trade settlement in mainland China’s currency the yuan. Macau’s financial regulator is negotiating with China’s central bank over commerce between the mainland and Portuguese-speaking countries. Since 2008 China has signed a series of bilateral agreements with foreign countries to settle trades in yuan – mostly to reduce currency exchange risks for mainland businessman says an economist.
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Year I - Number 112 Tuesday September 4, 2012 Editor-in-chief: Tiago Azevedo Deputy editor-in-chief: José I. Duarte MOP 6.00
business daily September 4, 2012
Tourist wave swells into festival flood Expect more tourists around annual festivals with mainland officials removing a significant hurdle to visits for millions of internal migrants Tony Lai
illions of the mainland’s internal migrants are now free to travel to Macau and Hong Kong more simply than ever before. The mainland authorities announced last month that were making access to Macau and Hong Kong simpler for people that work or study in six cities but were not registered as residents there. Beginning from this month, internal migrants working or studying in Beijing, Chongqing, Guangzhou, Shanghai, Shenzhen or Tianjin will no longer be required to return to their home towns to obtain permits for single visits to Macau. But multiple-entry permits for Macau will not be granted to selected mainland visitors in the manner of the recently announced Hong Kong scheme. In Hong Kong, the announcement was greeted with shock and fears that it would not be able to cope with a surge of tourists. The Hong Kong government was able to clinch a three-week suspension of a scheme that allow internal migrants living in Shenzhen to obtain permits for multiple visits to Hong Kong. Macau Government Tourist Office director João Manuel Costa Antunes told reporters yesterday that the Macau government had no similar scheme. There were still mixed reactions here to simplified access scheme for millions of mainlanders. “If Hong Kong has problems in receiving the influx of visitors, Macau will face even more severe challenges, as it is a much smaller place,” said Ricardo Siu Chi Sen, a professor of economics at the University of Macau. Hong Kong had more than 41 million visitors last year, while Macau, a city one-fortieth of the size of Hong Kong, had a record-breaking 28 million visitors.
Room at the inn Mr Siu said simplified access for mainland internal migrants would put the city’s capacity to handle
More than 20 million mainlanders may soon have more streamlined access to the city
visitors under strain, given that the hotels and roads were nearing saturation point. “I’d rather the government use this time between now and 2016, when the Hong Kong-ZhuhaiMacau Bridge is to be completed, to consolidate the city’s infrastructure to be ready for the next wave of visitors by 2016,” he said. The government says there is still room for more tourists. “The carrying capacity of our city is not saturated yet,” said Mr Antunes. “We can continue to receive some more tourists.” Mr Antunes said the city would have more hotel rooms when the Sheraton Macau opened this month. More than 17,000 guestrooms were waiting for government approval in the first half of this year, the Land, Public Works and Transport Bureau said. Mr Antunes said the authorities here and in the nearby provinces
of Guangdong and Fujian had established lines of communication to help manage any influx of tourists, particularly during holidays. Guangdong and Fujian are the city’s biggest sources of mainland tourists. The president of the Macau Travel Industry Council, Andy Wu Keng Kuong, said: “The situation of Macau and Hong Kong are totally different as there is no multiple-visit visas allowed to Macau.”
Seasonal rush Mainlanders can visit Macau only if they have a travel permit, which takes about one month to obtain. Visitors may enter as individuals or on with a tour group. Exactly how many mainland internal migrants will have simplified access to Macau has not been officially disclosed. Hong Kong media have reported that the number could
exceed 20 million. “It’s not like all the 20 million mainland Chinese will immediately rush to Macau,” Mr Wu said. “Only a portion of them will be more keen on travelling to Macau.” Mr Wu thinks simplified access for mainland internal migrants will help the number of visitors to grow by up to 10 percent this year. In the first seven months of this year, 16.02 million people visited Macau, 1.4 percent more than at the same time a year before. But the number of visitors in May, June and July were each lower than the corresponding number of arrivals last year. Mr Siu said simplified access for mainland internal migrants would increase the number of tourists and be good for economic growth – to an extent. “The impact will also be seasonal as the students and workers can only travel during holidays like the coming National Day on October 1,” he said.
High-level tourism forum starts Sunday First Global Tourism Economy Forum to kick off here with high-level delegates from across the world Xi Chen
ey government officials, business experts, industry leaders and scholars from China and abroad will gather in Macau for the first edition of the Global Tourism Economy Forum, taking place between September 9-12. The forum will try to provide a platform for international delegates to exchange ideas on how to use tourism growth to promote economic development. “The forum is not just about tourism but about how tourism as a key sector can drive economic growth
and how the industry will shape up in the future,” vice chairman and secretary-general of Global Tourism Economy Forum, Pansy Catalina Ho Chiu King, told the media at a press conference yesterday. According to the forum’s website, it was established to drive a new chapter in the tourism industry globally, but with a China focus. It was originally conceived by the China Chamber of Tourism, which operates under the powerful All-China Federation of Industry & Commerce. The event is hosted by the Macau
government and coordinated by the Global Tourism Economy Research Centre. The centre also led by Ms Ho was just set up late last year to promote tourism development in Asia. The government is funding one third of the forum’s expenses while two thirds come from private sector sponsorships. High-level global participants, including ministers from Thailand, Portugal and South Africa, as well as the secretary general of the United Nations’ World Tourism Organization, will all speak during the forum.
International business leaders from the tourism sector will also participate in the forum, including 220 established entrepreneurs from China alone, Ms Huang Ping, chairman of China Chamber of Tourism said. Based on the research by the World Travel and Tourism Council quoted in a press statement, global tourism revenue passed US$1 trillion (8 trillion patacas) in 2011 and is expected to reach US$2 trillion this year, creating 100 million jobs along the way.
September 4, 2012 business daily | 3
August gaming revenue up 5.5 pct Storm in a teacup
Highest monthly tally this year despite Typhoon Kai-Tak Associate Editor
Typhoon Kai-Tak fails to bite
August market shares The casino operator market shares for August according to industry sources are as follows: SJM Holdings Ltd again retained top spot as it has since market liberalisation, recording a 26 percent share – the same as July and June. Sands China Ltd was down three points to 19 percent; Galaxy Entertainment Group Ltd was up three points to 21 percent; Wynn Macau Ltd was up one to 12 percent; Melco Crown Entertainment Ltd held steady at 13 percent, and MGM China Holdings Ltd was up one point to 10 percent. A.E.
Galaxy Macau – parent firm’s market share up in August
yphoon Kai-Tak – the third Signal 8 or above storm this summer – failed to make a major dent in the August gaming revenues. They reached 26.14 billion patacas (US$3.27 billion) – up 5.5 percent year-on-year according to data released by the Macau government yesterday. The August tally was the highest for a single month this year and compared to 24.78 billion patacas in August last year. The highest revenue intake was recorded in October 2011 when Macau took in 26.85 billion patacas. Nonetheless analysts had been expecting seven percent to nine percent year-on-year expansion in August. A factor in the lowerthan-estimated tally was that daily revenue totals – known to analysts as run rates – fell from an average 884 million patacas per day in the first 19 days – as estimated by J.P. Morgan in Hong Kong – to average
out across the whole month at 843 million patacas per day. The reasons for that discrepancy were not immediately clear to analysts approached by Business Daily. The breakdown on the August revenue figures are not yet available. But with well over half of all gaming revenue in Macau being produced by VIP baccarat, the presence or absence of a relatively small number of high rollers can make a significant difference to the totals.
Better days Several analysts told Business Daily that gaming regulators globally commonly count revenue for the 31st day of a month in the following month’s tally. Grant Govertsen of Union Gaming Research Macau added however that August’s numbers benefitted from having five Fridays falling during the period.
GAMING GROSS REVENUE (MOP million) 28000 26000 24000 22000 20000 18000 16000
“The August 2012 calendar comparison was somewhat favourable with one additional Friday as compared to August 2011,” he stated, adding that on a year-todate basis GGR is up 15.2 percent. It appears that as in June and July, mass-market growth is outpacing that of VIP, although the mass trade is starting from a smaller base. Kenneth Fong of J.P. Morgan said in a note issued ahead of the August figures: “From what we observed from the foot traffic and discussion with the operators, the high-margin mass segment continues to see robust growth tracking in excess of 30 percent year-on-year.” That view was echoed by Michael Ting, an analyst at CIMB Group in Hong Kong. He said revenues from the mass market segment, made up of China’s aspiring middle class, were still strong while the high volume but low margin VIP market seems to be stabilising. “It doesn’t seem to be getting worse, so I think gross gaming revenue growth for the rest of the year will just tread around mid single digits or so,” Mr Ting said. Analysts are mostly bullish on the long-term fundamentals of Macau, citing a highly underpenetrated Chinese market, substantial infrastructure improvements to speed travel between the mainland and Macau and increasing purchasing power of a growing middle class. “From a fundamentals point of view, with high margin and more profitable mass market (50 percent of earnings) still growing strongly at 30 percent year-on-year, we believe the underlying profitability of the casino operators will be stronger than the headlines suggest,” states Kenneth Fong of J.P. Morgan. With Reuters
MARKET SHARE PER OPERATOR (2011-2012)
yphoon Vicente, a Signal 9 storm in July, shaved 700 million patacas off that month’s tally – almost a full day’s takings – and contributed to a lacklustre 1.5 percent year-on-year growth in July. A key reason for the smaller impact of August’s Kai-Tak said analysts, was that it didn’t affect the important weekend trade. The Number 8 Signal was raised in the late evening of Thursday, August 16, and lowered the next morning, giving time for ferry and air services to return to normal for the weekend. “We note that this near-record GGR per day came despite yet another typhoon that disrupted ferry and flight services to and from Macau,” said Grant Govertsen of Union Gaming Research Macau. “This was the third consecutive month that a typhoon of Signal 8 or above has disrupted the region as compared to only one Signal 8 typhoon in 2011 (in September),” he added.
THE MAJORITY OF ANALYSTS HAVE SCALED BACK THEIR EXPECTATIONS FOR GROSS GAMBLING REVENUE GROWTH THIS YEAR Weather forecasts have not been the only gloom this year. China’s factory surveys for August, key indicators for the state of the economy, again suggest the export-focused country’s vulnerability to economic crises in its key Western markets. Several purchasing managers’ indices showed that the manufacturing sector has been badly hit by slowing new orders, a sign that the pace of growth in the world’s second-largest economy will weaken well into the third quarter. The majority of analysts have scaled back their expectations for gross gambling revenue growth this year, expecting around 10 percent compared with more than 20 percent expected at the start of the year. “Looking ahead to the fourth quarter 2012, we believe GGR growth in the mid-single-digits is likely, which implies full-year 2012 GGR growth to reach the low teens,” says Mr Govertsen. Macau government data in August showed that Macau’s gross domestic product significantly slowed in the second quarter, up 7.3 percent from 18.4 percent growth in the first quarter this year. A.E.
* Figures are rounded to the nearest unit, therefore they may not add exactly to the rounded total
business daily September 4, 2012
Social Security can only survive on govt top-ups If contributions by employers and employees stay the same, the government must pump extra money into the Social Security Fund, an analysis indicates Xi Chen firstname.lastname@example.org
patacas into the fund next year and in 2014, and another 13.5 billion patacas in 2015 and 2016.
The proportion of the population that is of working age may fall to 60 percent by 2062 (Photo: Manuel Cardoso)
nless contributions by employers and employees to the Social Security Fund increase, the fund will be sustainable for the next 50 years only if the government pumps even more money into it, according to Towers Watson Hong Kong Ltd. The professional services company says that if monthly contributions are kept at 45 patacas (US$5.60), the government would have to increase its annual top-up by 4 percent every year.
The government is pumping 4 billion patacas into the fund this year. The Towers Watson forecast assumes that the city’s population will grow at an average annual rate of 1.2 percent to reach 1 million by 2062. If that happens the city will face a pension problem, with about onethird of the population aged 65 or more, compared with 8 percent now. Towers Watson prepared 23 different scenarios based on various combinations of voluntary payments
into the fund, government subsidies and mandatory contributions from employers and employees. If the government subsidy grew by 4 per cent a year, there would be 32.5 billion patacas left in the fund in 2062, even if contributions remained at the present levels, with employers putting in 30 patacas a month and employees 15 patacas a month. Chief Executive Fernando Chui Sai On said last month that the government would put 5 billion
The fund has left a proposal with the Standing Committee for the Coordination of Social Affairs the doubling of monthly contributions to 90 patacas by 2015, with half to be paid by employers and half by employees. Towers Watson says 90 patacas a month would not sustain the fund in the long run. Hong Kong’s Mandatory Provident Fund takes 5 percent of an employee’s monthly pay, a sum matched by employers. In one Towers Watson scenario, even if the government’s subsidy increased by 3 percent a year, each contributor would have to start paying 1,882 patacas immediately to ensure the fund was solvent in 2062. Towers Watson warns that the working-age population, which pays for the social security system, could drop from 80 percent of the total population to 60 percent within the next 50 years. It says the fund would not be sustainable if mandatory contributions are increased gradually. The analysis found the Social Security Fund’s finances were easily affected by the annual increases in the old age and disability pensions. The fund has proposed another increase in the old-age pension for this year, which was raised to 2,000 patacas from 1,700 patacas in April last year.
Open border to cool home prices: Midland
pening a border crossing around the clock would tempt more residents to move to the mainland, helping cool Macau’s red-hot property market, according to one real estate agency. In its analysis of 12 solutions to help curb soaring home prices, Midland Realty (Macau) Ltd suggested Macau residents unable to afford a home here would be more likely to move to the mainland if they could come and go as they pleased, leading to a fall in rents.
An alternative was to extend the Gongbei gate’s opening hours from 6am to 2am. Midland’s other proposals included a plan for the government to sell or lease empty one-bedroom subsidised flats at market prices. There are currently about 2,000 vacant singlebedroom affordable homes. The company also suggested restricting mortgages for people with more than one property, increasing land supply for housing developments and speeding up approvals for
Additional taxes on foreign investors could damage Macau’s reputation as a free-market economy, Midland said
private-sector developers. One course of action Midland said it would not support was additional taxes on foreign investors. The tax would damage Macau’s reputation as a free-market economy, it said. Macau Association of Economic Sciences president Joey Lao Chi
Ngai told Business Daily that a tax on foreign ownership would improve housing affordability A government working group said last week it could not rule out new measures to curb prices that had increased by 62 percent in the 12 months to July. T.L.
September 4, 2012 business daily | 5
Diversification seen as exports’ only hope The trade deficit will keep growing as manufacturing contracts and the economy concentrates on tourism and gaming, an economist says Tiago Azevedo
s the city moves towards a record trade deficit this year, there is little upside for domestic exports as the manufacturing sector continues to shrink and the economy increases its dependence on gaming and tourism, says Henry Lei Chun Kwok, a professor of economics at the University of Macau. Exports were worth 638.9 million patacas (US$79.9 million) in July, 10.8 percent more than a year before, Statistics and Census Bureau data show. But that growth was due chiefly to re-exports. They were worth 423 million patacas in July, 15.6 percent more than a year before, while domestic exports grew by 2.3 percent to 215 million patacas. In the first seven months of this year, exports were worth 4.58 billion patacas and imports were worth 40.6 billion patacas, widening the trade deficit to 36.02 billion patacas – 23.2 percent more than the same period last year. Mr Lei sees “no hope for Macau’s exports to recover significantly before the achievement of economic diversification”, he said in an emailed response to questions from Business Daily.
Exports were worth 4.58 billion patacas in the first seven months of the year (Photo: Manuel Cardoso)
“Given the service sectordominated economic structure, there are very few manufacturing firms left in Macau.” If trade continues this way for the rest of this year, the city will end 2012 with a deficit of about 61.7 billion patacas, 11.6 percent more than last year. “The widened trade deficit could be regarded as the impact of continuous contraction of Macau’s manufacturing sector which is the result of concentration [on the] tourist/
Fresh gambling focus pays off for Paradise
aradise Entertainment Ltd increased its first-half profits by more than 100 times in yearon-year terms as the operator of the Casino Kam Pek Paradise concentrated entirely on its gambling businesses. Paradise Entertainment told the Hong Kong Stock Exchange last week its profit had risen to HK$52.8 million (US$6.8 million) in the first half from HK$484,000 for the same period a year earlier. Paradise Entertainment said the growth was due mainly to the continuing strength of the performance of its gaming business, which includes LT Game, a supplier of gaming machines and equipment. Revenue rose by 54.7 percent to HK$318.1 million. The company sold a loss-making subsidiary, LifeTec Pharmaceutical Ltd, for US$1 in April to exit the
pharmaceutical business. “The disposal enables the group to focus on its gaming business in the future,” Paradise Entertainment said. Paradise Entertainment said it remained optimistic about the future of Macau’s gaming industry and that it expected tourist arrivals to increase. The company had 356 employees at the end of June, 23 fewer than at the end of December, most of them marketing and promotion executives in Macau. But it said it was “actively seeking talent” to cope with the fast growth in its operations. Paradise Entertainment is giving two of its three executive directors a five-fold increase in salary. Chairman and managing director Jay Chun and Shan Shiyong will now be paid HK$12 million a year.
Paradise Entertainment’s businesses includes the Casino Kam Pek Paradise and gaming machine supplier LT Game
gaming business,” said Mr Lei. The city’s transformation into an entrepot could also face hurdles. “Unlike Hong Kong, Macau is not specialised in [the] transhipment business and I speculate that the volume of re-exports from Macau may not be able to expand extensively,” Mr Lei said. Official data show that 20.5 percent of domestic exports in the first quarter went to the United States and 14.2 percent to EU countries. But sales to these two markets are declining. In the first seven months,
exports to EU countries were worth 210 million patacas, 14.9 percent less than a year before, and exports to the United States were worth 302 million patacas, 13.4 percent less. Mr Lei said lack demand in the United States and European Union could be the major cause of the decline in domestic exports. “Macau’s manufacturing sector has been losing its international competitiveness given the increasing costs of production faced by the territory,” he said.
business daily September 4, 2012
MACAU Traffic accidents hit new record In July there were 1,341 reported traffic accidents, the highest monthly figure since the Public Security Police began collecting data, in 2000. The statistics released last week show that the accidents caused one death and 32 injured, 25 of which had to be hospitalised. The number of vehicles has been continuously increasing and it reached 211,904 by the end of July, up by 1,324 from the previous month. Most of the new vehicles are light cars (834), followed by motorcycles (474).
City could become yuan clearing hub Macau edges closer to becoming centre for settling trades between the mainland and Portuguese-speaking countries in yuan Vítor Quintã
The Monetary Authority of Macau and the People’s Bank of China have discussed the possibility settling some trade deals here in
he establishment here of a platform for settling trade between the mainland and Portuguese-speaking countries in yuan may be in the offing, now that the mainland and Taiwan have agreed on a way to settle their trade, an economist says. The People’s Bank of China, the mainland’s central bank, said on Friday that mainland and Taiwan officials had signed an agreement paving the way for a mechanism for currency clearing. The mainland’s official news agency, Xinhua, said the agreement is expected to come into effect in 60 days.
“That move is directly connected to China’s attempt to internationalise the renminbi,” an economist who asked not to be to unidentified told Business Daily. “However, they are doing it bit by bit, focusing first on the Asian countries China has closer connections with,” the economist said. He said this gradual approach was meant to ensure that the mainland economy was not adversely affected. “It’s not easy to suddenly fully open an economy to the world,” the economist said. The Monetary Authority of Macau said last November it was negotiating with the People’s Bank of China to
MACAU WAS NEVER A FINANCIAL SERVICES PLATFORM BETWEEN TAIWAN AND THE MAINLAND. THAT WOULD HAVE COME IN HANDY, BUT IT IS TOO LATE NOW José João Pãosinho, Millennium BCP, Macau branch
find ways to make Macau a centre for settlement in yuan of trade between the mainland and Portuguesespeaking countries. The economist believes the establishment of a yuan settlement platform here may be drawing closer. “There are definitely steps being taken in that direction,” he said.
No harm done The mainland has signed a series of bilateral agreements with other countries to settle their trade in yuan since 2008. The economist said these agreements were meant mainly to reduce the risk of foreign exchange losses faced by mainland businessmen. He said yuan settlement was also meant to prevent capital from flowing back into the mainland and feeding inflation. The Portuguese-speaking countries are important trading partners. Angola is the mainland’s biggest supplier of oil and Brazil is an important supplier of minerals and agricultural products. Hong Kong has been gradually evolving into an offshore centre for doing business in yuan but Macau is lagging far behind. But the economist said Macau’s links with Portuguese-speaking countries could present an important business opportunity for the city. The head of the Macau branch of Portuguese bank Millennium BCP, José João Pãosinho, told Business Daily that the currency clearing agreement between the mainland and Taiwan would do Macau little or no harm. The mainland and Taiwan will each designate a clearing bank to make settlements in the other’s currency. At present, mainland and Taiwan banks must choose a clearing bank in Hong Kong or Macau to make settlements, which takes longer. But Mr Pãosinho believes most of that business is done in Hong Kong. “Macau was never a financial services platform between Taiwan and the mainland. That would have come in handy, but it is too late now,” he said.
Weather Beijing 26/15o C Changchun 21/9o C
Harbin 18/10o C
Xian 27/16o C Shanghai 27/23o C Chengdu 30/17o C Kunming 25/17o C Haikou 30/23o C Sanya 30/26o C
Guangzhou 33/24o C
MACAU (3-8 September) DAY
Shenzhen 32/26o C
Hong Kong 30/25o C
Macau 30/25o C
September 4, 2012 business daily | 7
MACAU ‘One country two systems’ centre shuts down The government has wind up the One Country Two Systems Research Centre at the Macao Polytechnic Institute, in a dispatch published in yesterday’s Official Gazette. The centre’s assets and staff will revert to the academic institution but it is not clear whether the body will live on. According to its website, the centre led by former National People’s Congress member Ieong Wan Chong was working on a database over the ‘one country two systems’ principle, as well as on a collection of MSAR laws and regulations.
Profit collapses at Milan Station First half sales increase in Macau not enough to prevent handbag retailer’s profit from crashing by 98 percent Vítor Quintã
rofit at luxury handbag retailer Milan Station Holdings Ltd tumbled dramatically in the first half of this year. The company told the Hong Kong Stock exchange late last week that profit attributable to shareholders for the first six months to June 30 had crashed from HK$34.2 million (US$4.4 million) a year earlier to just HK$386,000. With a spike in selling and administrative expenses, and a sales slowdown at the company’s top-performing Hong Kong shops, the chain’s Macau outlet grew in importance. The shop here was one of the company’s best performing across Greater China, recording a gross profit of HK$8.1 million, up by 5.2 percent year-on-year, accounting for almost 10.4 percent of the total. Milan Station’s shop near Senado Square was also its most
profitable, operating at a 30.6 percent profit margin. During the first half of this year the shop recorded sales of HK$26.5 million with a year-on-year increase of 10.9 percent, the company said. It called the results a “satisfactory performance”. Milan Station said the past 12 months had thrown up uncertainties around the economy and travel industry here. But continual increases in tourist arrivals had allowed retailers to develop “vigorously”, helping attract internationally renowned brands. Milan Station said it would expand its mainland operations in the second half. Last month, the company signed a deal with Hong Kong-based Star Continent Holdings Ltd to launch a joint venture to sell secondhand luxury branded handbags in Chengdu, the capital of Sichuan.
Chow Sang Sang to open Cotai Central shop
Sands Cotai Central resort will have a new Emphasis Jewellery store later this year
ewellery retailer Chow Sang Sang Holdings International Ltd will open a new shop at Sands Cotai Central resort later this year, the company told the Hong Kong Stock Exchange last week. The new shop is likely part of the resort’s second phase, which is set to open on September 20 with a new level of duty-free shops, developer Sands China Ltd announced last month. After opening two new Emphasis Jewellery shops in the city centre last year, Chow Sang Sang seems intent on continuing to expand its business in Macau. However, the company admitted that leasing space for new ventures in the two SARs is becoming more expensive. Shop rental spending in Hong Kong and Macau rose by 30 percent year-on-year during the first half, the retailer said.
Chow Sang Sang’s sales in the two regions increased by 16 percent and the company believes that mainland Chinese visitors accounted for more than half of all sales. Even though the company has many more stores in the mainland, Hong Kong and Macau accounted for 59 percent of the jewellery turnover, which increased by 27 percent year-on-year to HK$7.27 billion (US$937.3 million). However, Chow Sang Sang’s profit fell by 11 percent to HK$439.4 million. The retailer says the main reason was the downward trend in the price of gold between late February and mid-May. “The slide stimulated the demand for gold, but at the same time it did cut into the margin of gold sales,” Chow Sang Sang wrote. V.Q.
Milan Station Macau had the strongest profit margin of the chain’s operation in the first half (Photo: Manuel Cardoso)
business daily September 4, 2012
GREATER CHINA FX market growing
China deterioration raises risk mi
China’s steps to open its capital account are quietly transforming the country’s onshore foreign exchange forward market by allowing interest rates to replace expectations of currency trends as the main driver of the forward curve. Spot yuan has fallen 0.8 percent this year, and many see further depreciation in store, leading some analysts to attribute a huge decline in the currency’s forward value to expectations that it will weaken further. While such expectations do play some role it is no longer the whole story, as many traders and analysts say that China’s forward curve increasingly behaves the same way as those in open economies where capital can flows freely across borders. That means that the interest rate differential is becoming the key driver of movements in the dollar/yuan forward curve. A key reason that interest rate differentials now exert a stronger influence on forward rates is China’s incremental steps towards capital account opening this year.
Economic conditions may complicate power transition
Chinese stocks rise on stimulus bets Chinese shares rose for the first time in four days after the first contraction in manufacturing in nine months spurred speculation the government will introduce more stimulus measures. China should “decisively” expand the strength of its fine-tuning in accordance to the changes in the economy and markets, People’s Daily said in a front-page essay by an unidentified commentator. The nation should have a “reserve” of fiscal, tax, financial, foreign trade and industrial policies to counter complex and difficult situations and study a suitable time to activate these policies, according to the commentary. Policy makers are trying to revive confidence in capital markets and boost economic growth. Interest rates were lowered in June and July after two reductions in reserverequirement ratios for lenders this year.
hina’s economy is showing mounting signs of deterioration from manufacturers to banks, raising the risk that outgoing Premier Wen Jiabao will miss his growth target for the first time since taking office in 2003. Manufacturing unexpectedly shrank for the first time in nine months in August, a government survey showed September 1. The reading added to evidence of weakness after a surfeit of unsold goods left near-record rubber stocks at China’s main hub for the commodity and financial strains saw a 27 percent jump in overdue loans at the five biggest banks in the first half. The last time China failed to exceed the communistparty’s annual growth target was during the throes of the Asian financial crisis in 1998. A miss of this year’s 7.5 percent goal may complicate a once-a-decade leadership handover. The outgoing generation of policy makers has held back on stimulus this year as it seeks to rein in a property-market boom and avoid a jump in bad debt. “If there is no further policy response, it’s very likely that GDP growth will fall below the target and this administration will likely hand over a hard-landing economy to the next one,” said Liu Li Gang, chief China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. The central bank should “revert to cutting banks’ reserve requirements more aggressively to revitalise the economy. If we have a cut soon we could have good fourthquarter growth.” The risk of below-7-percent expansion could potentially trigger financial distress or even a crisis if local governments run out of money, said Mr Liu, who has worked for the World Bank and Hong Kong Monetary Authority. Underscoring a build-up in strains, Construction Bank Corp. reported its overdue loans in the eastern manufacturing and export hub of the Yangtze River Delta doubled to 16.8 billion yuan
27 % RISE IN OVERDUE LOANS ON FIRST HALF (US$2.6 billion). Mr Liu cut his estimate for fullyear expansion to 7.8 percent from 8.2 percent after the release of the official manufacturing purchasing managers index. Asia’s next two largest economies are also showing signs of slowing. Japan’s industrial production unexpectedly slumped in July, data showed August 31. India reported the same day that its gross domestic product increased 5.5 percent last quarter from a year ago, down from an 8 percent pace in the same period in 2011.
Stimulus reticence China’s government has refrained from a stimulus on the scale of the 4 trillion yuan package unveiled during the global financial crisis that helped keep growth above 9 percent in 2008 and 2009 while the rest of the world slumped. Wen said in October the government would “fine tune” economic policies. Since then, banks’ reserve requirement ratios have been cut three times, approvals for investment projects have been accelerated and social security and health spending have risen. The central bank lowered interest rates in June for the first time in three years and cut them again in July. “The lack of really decisive bold action over the last few months
signifies at least in some part the government is content with a growth figure closer to the actual target than perhaps they would have previously liked,” said Alistair Thornton, an IHS Global Insight economist in Beijing. “They’ve got sufficient clout to turn things around if they really want to and they’ll only really want to when the labor market feels the impact.”
Lending hangover China is at risk of repeating the experience of South Korea in the 1990s, where a slower pace of growth resulted in a “significant deterioration” in profits as companies were burdened with higher fixed costs from capital
Manufacturing declines: HSBC China’s manufacturing contracted at the fastest pace since March 2009, a private survey showed, indicating the slowdown in the world’s secondlargest economy is deepening. The purchasing managers’ index released yesterday by HSBC Holdings Plc and Markit Economics had a final reading of 47.6 for August. The gauge was at 49.3 in July. The dividing line between expansion and contraction is 50. The report adds to evidence that China’s slowdown is extending into a seventh quarter after growth decelerated to a three-year low in the April-June period. A separate manufacturing purchasing managers index released September 1 by the government showed the first contraction since November. “China’s exporters are facing increasing difficulties amid stronger global headwinds,” Qu Hongbin, chief China economist for HSBC in Hong Kong, said in a statement yesterday. “Beijing must step up policy easing to stabilise growth and foster job market conditions.”
First time growth target risks being missed since 199
Money kept flowing somewhere else
Banks steeled for foundry bad debt Lenders go to court to recoup their loans
hina’s banks are coming after the country’s steel traders, hauling executives into court to chase down loans that some traders said they didn’t initially need and can’t now repay. The heavy push to recover the loans is another sign of strain on China’s financial system at a time when the country’s leaders are contemplating another round of stimulus to boost the economy, and when banks are worried about bad debts piling up. The battle between the banks and steel traders also exposes flaws in the 4 trillion yuan (US$629 billion) stimulus round in 2008, and offers a warning to those calling for pumping more money into the system. At that time, Chinese banks threw money at the steel trade – a crucial cog in supplying the country’s massive construction and infrastructure growth. But those steel loans, after offering a quick fix, became excessive, poorly managed, or a combination of the two. Government officials insisted more money was needed to prop up the industry. Steel executives said the money flow was too heavy, and they
September 4, 2012 business daily | 9
issing growth target
Cargill sees ‘mega-trend’ in meat, milk markets China will keep consumption rising
eat consumption in China, the world’s largest, will continue to expand even as the economy slows, sustaining demand for feeds made from corn and soybeans, according to Cargill Inc., the biggest U.S. agricultural company. “We are looking at a mega-trend of increasing consumption of meat, milk, eggs,” Christopher Langholz, president of Cargill Animal Protein China, said in an interview, without giving specific forecasts. Rising incomes in China, the second-largest economy, have increased demand for meat including pork, making the nation the largest buyer of soybeans, which are crushed to feed pigs and chicken. Soybeans and corn surged to records in Chicago last month as the worst U.S. drought in half a century cut supplies. “China has been very transparent in soybeans, so the market can respond,” Mr Langholz said. The transparency allows exporters to increase their ability produce, reducing price volatility over time, he said.
While slower economic growth in China has hurt commodities from copper to iron ore, prospects for sustained soybean export demand have helped the oilseed to rally. China may increase soybean imports in 2012-2013 even amid record prices, Rabobank International said in July. Soybeans reaching a record US$17.7125 a bushel on August 30, while soybean meal in Chicago has also climbed to an all-time high. China’s meat demand will rise 3.6 percent to 71.1 million tons in 2012 from a year earlier, and 73 percent of that will be pork, according to the U.S. Department of Agriculture. That may help push up soybean imports 3.5 percent to a record 59.5 million tons in the year from October, the USDA predicts. The Asian nation, whose soybean imports jumped fivefold in the past decade, increased purchases of the new U.S. crop beans by 26 percent compared with last year, buying 11.2 million tons as of August 23 even before the oilseed is harvested. Bloomberg
IF THERE IS NO FURTHER POLICY RESPONSE, IT’S VERY LIKELY THAT GDP GROWTH WILL FALL BELOW THE TARGET Liu Li Gang, A&NZ Banking
spending booms aimed at supporting the economy, according to Duncan Wooldridge, chief Asia economist at
had to put the money to work in real estate and the stock market. “After the financial crisis, when the government released its stimulus, banks begged us to borrow money we didn’t need,” Li Huanhan, the owner of Shanghai Shunze Steel Trading, told a judge at a recent hearing. “We had nothing to do with the money, so we turned to other investments, like real estate.”
Plush apartments While some loans did go towards equipment and expansion, executives admit money was also used for pet property projects, plush apartments and stock market bets. By the end of last year, China’s steel industry had a total debt burden of US$400 billion - around the size of South Africa’s economy. Some of China’s leading mills alone owe 200-300 billion yuan (US$32US$47 billion), according to the China Iron and Steel Association. The aggressive tack by China’s lenders, many of which are statecontrolled, comes as pressure builds inside a stretched financial system. Results at China’s big banks show
UBS AG in Hong Kong. “China’s reluctance so far this year to replicate the investment surge in 2009 is a good thing even if it delays a cyclical improvement by a few quarters,” Mr Wooldridge wrote in the August 30 note. “More policy easing helps shield against a major contraction, but is unlikely to catalyse a strong recovery because the economy and financial sector is still digesting the large investments made in recent years,” he added. With less than seven months left in office, Wen may need to leave the task of reviving growth to new crop of government officials due to take over in March 2013 after the annual session of the National People’s Congress.
Soya demand goes unabated
Non-manufacturing index rises
profit growth is at its weakest since the global financial crisis, while bad loans rose for a third straight quarter to 456.5 billion yuan (US$71.8 billion) by June, the China Banking Regulatory Commission said this month. Steel traders are unlikely to be helping the bad loan issue, with Shanghai steel futures having almost halved from their 2009 highs to below 3,400 yuan (US$540) a tonne. As the steel market turned – a victim of crippling over-capacity, heavy debt and sliding prices – alarm bells sounded among banks and regulators about the risk of lending to the industry. In June, after months of cajoling, banks were ordered to clamp down on new lending to steel traders. Steel industry executives complain the banks went overboard. “Banks should consider the greater good and not just focus on protecting their own interests,” said Xiao Zhicheng, head of the Zhouning Chamber of Commerce that overlooks Shanghai’s steel trading industry’s interests. “Instead of pumping in more blood to save the patient, it’s choosing to draw more blood.”
hina’s non-manufacturing industries expanded at a faster pace in August as construction and retail services picked up, an official survey indicated. The purchasing managers’ index rose to 56.3 from 55.6 in July, the National Bureau of Statistics and China Federation of Logistics and Purchasing said in Beijing yesterday. A reading above 50 indicates expansion. Yesterday’s report suggests the slowdown in China’s exports and industrial production isn’t spreading to services, providing some comfort to policy makers amid a deterioration in economic performance that’s hurt corporate earnings and led to surging inventories. The report shows that the “non-manufacturing economy is playing a more prominent role in stabilising economic growth,” Cai Jin, a vice chairman with CFLP, said in a statement yesterday. Service industries account for about 43 percent of the economy compared with about 90 percent in the U.S. Under China’s current five-year plan, the government is seeking to raise the share of services in gross domestic product to 47 percent by 2015, the official Xinhua News Agency said in May. A separate service-industries gauge will be released by HSBC Holdings Plc and Markit Economics tomorrow. The non-manufacturing PMI is based on a survey of about 1,200 companies covering 27 industries including construction, transport and telecommunications. The federation and statistics bureau started publishing a seasonally adjusted index for the non-manufacturing PMI starting with the March survey, and revised readings back to March 2011.
Services help to stabilise the economy
business daily September 4, 2012
ASIA N. Zealand growth may exceed forecast New Zealand’s economy may grow this year faster than the 2.2 percent pace forecast in May’s budget, the Treasury Department said. Gross domestic product probably expanded 0.6 percent in the second quarter, the Wellington-based Treasury said in a monthly report on recent indicators published on its website. “A similar pace of growth is expected to continue in the second half of the year and annual growth may be slightly higher than our budget forecast,” it said. Consensus forecasts are for a 2.4 percent expansion in 2012, it said.
India’s manufacturing dips further Factory activity falls to nine-month low as export orders tumble Rahul Karunakar
The lone bright spot among the survey’s otherwise gloomy data was that new jobs were created at the fastest pace since the series began more than seven years ago. The survey also showed output prices, or what consumers pay for products, jumped in August and may push India’s headline inflation rate up from July’s 6.9 percent. At the same time, input price pressures remained elevated, giving little room for the Reserve Bank of India to act on increasing calls for it to cut interest rates and support growth. “While input price rose at a slightly slower pace, output price
52.8 INDIA’S MANUFACTURING PMI IN AUGUST Manufacturing and export sectors have been key drivers of India’s economic growth
rowth in India’s manufacturing sector eased to a nine-month low in August as export orders fell for a second month, underscoring the risks to the wider economy from Europe’s debt crisis, a business survey showed yesterday. The HSBC manufacturing Purchasing Managers’ Index (PMI) eased for the second month to 52.8 in August, its lowest level since November, from 52.9 in July. However, it has kept above the 50 mark that divides growth and contraction for more than three years. “The momentum in the manufacturing sector eased further on the back of weak external demand and output disruptions
caused by the major power failures in early August,” said Leif Eskesen, economist at HSBC. Sixteen states in northern India, home to almost half of the country’s 1.2 billion people, fell into darkness last month as power grids collapsed, disrupting businesses and economic activity. Any slowing in the manufacturing sector, which accounts for a little over 15 percent of India’s gross domestic product, does not bode well for the overall economy, especially as this sector has been the biggest drag on growth. The Indian economy grew 5.5 percent in the quarter to June, languishing near its slowest pace of growth in almost three years, data
showed on Friday. With no concrete signs of a resolution to Europe’s debt crisis, the new export orders sub-index – an indicator of prospective overseas business – fell for the second month in a row to 49.2, its deepest contraction since October. The eurozone, India’s largest trade partner, has been ravaged by a debt crisis that began in Greece and appears to be hurting growth in heavyweight economies like France and Germany, posing further risks to the Indian economy. While domestic orders helped increase output in August, the pace of expansion was the slowest since November.
Trade deal calls for tough choices: U.S. envoy Ron Kirk says 2013 is key for Asia-Pacific agreement
trade agreement among about a dozen Asia-Pacific countries that is the centrepiece of President Barack Obama’s plans to increase exports will require tough choices to be completed in 2013, his envoy said. The Trans-Pacific Partnership is poised to expand to 11 nations later this year after Mexico and Canada were invited to join, which would represent about a third of global
economic output. Leaders of the 21-member Asia-Pacific Economic Forum, who have called for a wider agreement that would include both the U.S. and China, meet later this week in Vladivostok, Russia. “All of us want to get this agreement done because all of our economies are operating in a world now in which we realise there are just very few bright lights in terms of economic activity,” U.S. Trade
Representative Ron Kirk said in an interview in Hanoi on Sunday. “If we can work as smart as we have worked hard, and we are willing to make some of these difficult decisions, 2013 could be a pivotal year for us.” The U.S. and China are pushing separate regional trade talks that exclude each other as they compete for political and economic influence in one of the world’s fastest-growing regions. Mr Obama last year called
inflation picked up due to higher import costs and taxes. With the slowdown partly supply driven and inflation risks still lingering, these numbers underscore that the room for policy rate cuts is very limited at the moment,” Mr Eskesen added. The RBI next meets on September 17 and with inflation refusing to ease substantially the chances of a rate cut appear slim, even with growth slipping, after the central bank placed the onus of reviving the economy on the government. Pending government reforms include allowing foreign direct investment in the retail and airline sectors coupled with pension and insurance reforms. Reuters
on negotiators to complete the agreement by November, when he faces re-election against Republican presidential nominee Mitt Romney, who has also signalled his support for the deal. “If you skip over his statement about a timeline that could never be met, the talks are actually proceeding at a decent pace,” Deborah K. Elms, head of the Temasek Foundation Centre for Trade & Negotiations in Singapore, said of Mr Obama. “The big political decisions have all been postponed until early next year.”
Sensitive issues Trade negotiators will meet this week for the 14th round of talks since March 2010 in Leesburg, Virginia, while the Democratic National Convention is taking place. The
September 4, 2012 business daily | 11
ASIA Sharp shares fall on Hon Hai note Shares of Japan’s Sharp Corp. have dipped after a report that it had offered to lower the price of its stake sale to Taiwan’s Hon Hai Precision Industry Co. Ltd. Hon Hai had agreed a deal to buy a 9.9 percent stake in Sharp at 550 yen (US$7.02) per share in March. However, Sharp’s shares have plunged 66 percent since. Sharp shares fell as much as 8 percent yesterday, before closing 6.06 percent at 186 yen. Sharp’s president may travel to Taiwan in a bid to conclude as soon as possible the deal, a source told Reuters.
Indonesia inflation unexpectedly quickens
Etihad ups Virgin Australia stake Abu Dhabi’s flagship carrier Etihad Airways has raised its stake in Virgin Australia to 10 percent through open market purchases, the state airline said in a statement on Sunday. Etihad, founded eight-years ago, received approval from Australia’s Foreign Investment Review Board (FIRB) to increase its stake from five percent to 10 percent, it said in the statement. Etihad has already bought stakes in three other carriers – Aer Lingus, Air Seychelles and Air Berlin – in a push to chase the big Gulf state-backed airlines such as Dubai’s Emirates and Qatar Airways. Based on Virgin Australia’s current market value, the stake is worth about US$100 million. The airline had previously said it was keen to increase its Virgin Australia stake to at least 10 percent. But the airline does not plan to acquire a majority stake in Virgin Australia, Etihad’s president and chief executive James Hogan said in the statement. Virgin Australia is 26 percent owned by Richard Branson and 20 percent by Air New Zealand.
July trade deficit narrows from record gap Novrida Manurung and Hidayat Setiaji
ndonesia’s inflation unexpectedly accelerated in August on rising food costs, limiting scope for the central bank to cut interest rates even as exports slumped for a fourth month. Consumer prices rose 4.58 percent from a year earlier, after climbing 4.56 percent in July, the statistics bureau said in Jakarta yesterday. The median forecast of 27 estimates in a Bloomberg News survey was for a 4.41 percent gain. Bank Indonesia has refrained from adding to a February rate cut to try to support the rupiah, which is down more than 5 percent against the dollar in 2012 as exports slide and Europe’s debt crisis saps demand for emergingmarket assets. The central bank is also seeking to narrow a current-account deficit that analysts have said threatens to hurt economic stability. “With domestic demand in Indonesia robust, inflationary pressures still lie to the upside,” said Lim Su Sian, an economist at HSBC Holdings Plc in Singapore. Bank Indonesia may “continue to gradually tighten monetary conditions at the fringes” via the overnight deposit rate and instruments such as the reserve requirement ratio, she said.
Shipments decline Exports dropped 7.3 percent in July from a year earlier, after a 16 percent decline in June, the statistics bureau said yesterday. The trade gap was US$177 million in July, compared with a revised US$1.29 billion shortfall the month before. Indonesia’s trade deficit is passed its worst, Satwiko Darmesto, an official at the statistics bureau told reporters yesterday. “We expect the trade balance will
Annual inflation picked up as food costs rose during the Eid al-Fitr Muslim holiday
remain in deficit over the coming months as soft global demand weighs on export receipts, while the strong surge in investment boosts the demand for capital imports, keeping the import bill elevated,” said Fred Gibson, an associate economist at Moody’s Analytics in Sydney. Economic growth unexpectedly quickened last quarter as rising investments countered declining exports. Investments accounted for 32.9 percent of gross domestic product in the three months through June, the highest share since the Asian financial crisis.
Output gains Indonesia’s purchasing manager’s index rose to 51.6 in August from 51.4 the previous month, according to a report by HSBC Holdings Plc and Markit Economics yesterday. Consumer prices rose 0.95 percent last month from July as the world’s most populous Muslim nation celebrated the end of the
Top U.S. trade official Ron Kirk is in Southeast Asia for talks
APEC meetings will occur at the same time, with Secretary of State Hillary Clinton the highest-ranking U.S. official in attendance. Besides Canada and Mexico, which have yet to formally join, the agreement includes Australia, Brunei,
Chile, Malaysia, New Zealand, Peru, Singapore, the U.S. and Vietnam. The U.S.’s ability to compromise on sensitive areas is limited because the deal must be approved by Congress, Mr Kirk said. “We are willing to show some
fasting month, yesterday’s report showed. The core inflation rate was 4.16 percent, compared with a 4.28 percent pace in July. Indonesia’s inflation rate will probably average 4.5 percent in 2012 and 5.1 percent next year, according to the median estimate of 11 economists in a Bloomberg survey. The central bank said last month that the benchmark rate at a record-low 5.75 percent is still consistent with its inflation target of 3.5 percent to 5.5 percent in 2012 and 2013. The current-account deficit was US$6.9 billion in the three months through June, from a US$3.2 billion shortfall the previous quarter, Bank Indonesia said last month. The overall balance of payments deficit was US$2.8 billion in the second quarter, it said. Bank Indonesia expects the current-account gap to narrow to 2 percent of GDP in the second half and the balance of payments to return to surplus in the same period. Bloomberg
flexibility, but for the United States it would be difficult for me to go back and sell to Congress and the American public a Trans-Pacific Partnership agreement that wasn’t at least as forward-leaning as some of the agreements we have recently concluded,” he said, referring to deals with Panama, Colombia and South Korea that were completed under President George W. Bush and only approved by U.S. lawmakers last year. China, South Korea and Japan agreed last week to start talks on a separate preferential trade agreement that may be expanded to include the 10-member Association of Southeast Asian Nations. Both are possible templates for a wider Free Trade Area of the Asia-Pacific that would include all 21 APEC economies. Bloomberg
Lenovo ponders options to expand Lenovo Group Ltd said it will consider acquisitions to drive growth and build competence as the world’s second-largest personal computer maker expands in new areas such as mobile devices. “We would fully leverage this tool if the target is consistent with our strategy,” chief executive Yang Yuanqing said in a telephone interview from Beijing. “Any area which is consistent with our strategy where we are weak, we would like to consider acquisitions.” As Lenovo gets closer to its goal of passing market leader Hewlett-Packard Co. in global computer shipments, Mr Yang is looking at ways to sustain the fastest annual pace in sales growth in six years. The company, which overtook Apple Inc. in the three months through June for second place in smartphone sales in China, will introduce 40 models of phones in the year started April 1, Mr Yang said. “The mobile business, tablets and smartphones, is crucial for its long-term outlook, given the slowdown of global PC demand,” said Vincent Chen, an analyst at Yuanta Securities Co. in Taipei.
Nomura gains on plan to cut costs Nomura Holdings Inc. rose the most in more than two weeks in Tokyo after Japan’s biggest brokerage said it plans to cut another US$1 billion of costs by March 2014. The shares jumped 2.3 percent to 264 yen at the close in Tokyo. The benchmark Topix Index fell 0.4 percent. The reductions will centre on wholesale operations, which include investment banking and equities, spokesman Eiji Miura said at a briefing on Friday. Nomura, which has posted losses overseas for nine straight quarters, implemented a US$1.2 billion costcutting programme last year after expenses swelled following its acquisition of Lehman Brothers Holdings Inc.’s Asian and European businesses in 2008. “Investors reacted positively to seeing Nomura deepen cost cuts and its outline for achieving the actual reduction target,” said Masao Muraki, a Tokyobased analyst at Deutsche Bank AG. “It won’t be easy to turn to a profit overseas unless the market environment improves. Also, cutting the wholesale workforce could hurt revenue.” Nomura will cut jobs, mainly at overseas units including Europe, two people with knowledge of the matter said.
business daily September 4, 2012
Big banks are hazardous to U.S. financial health Simon Johnson Professor at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics
he debate over whether the U.S.’s largest banks are too big is heating up. Since the 2008 financial crisis, the perception has taken hold among some analysts and economists that certain U.S. institutions are too big to fail, meaning they would have to be bailed out to protect the financial system in the event of another calamity. The recent trading losses at JPMorgan Chase & Co. and scandals over money laundering at HSBC Holdings Plc and Standard Chartered Plc have prompted even financial-industry insiders to ask whether these complex global organisations are too big to manage. The continued downward spiral in Europe raises a similar question: are some banks too big to save, meaning their collapse could dramatically worsen the euro crisis (as happened in Ireland in the fall of 2008 and is happening now in Spain and Greece)? The critics must be gaining converts because, in recent weeks, the defenders of large banks have started to push back. William B. Harrison Jr., the former chairman of JPMorgan, and Wayne Abernathy, the executive vice president of the American Bankers Association, both wrote op-eds that argue against breaking up banks. The Financial Services Roundtable, a large-bank lobby group, has circulated two e-mails insisting that the critics’ arguments are based entirely on myths.
Three claims The big-bank proponents make three main claims about bank size; none is convincing when one considers the facts. First, Harrison argues that growth in banks’ size in recent decades was purely market-driven, in the sense that no government subsidies were (or are) involved. He neglects to mention that this growth is largely a much more recent phenomenon. In 1995, the Big Six – JPMorgan, Bank of America Corp., Citigroup Inc., Wells
ALL OF THIS IS REALLY ABOUT PRIVATISING THE BENEFITS WHEN THINGS GO WELL AND SOCIALISING THE COSTS WHEN THINGS GO POORLY Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley – had assets worth only 17 percent of U.S. gross domestic product. As recently as 2005, their collective balance sheets were valued at less than 50 percent of GDP. Today, the Big Six are much bigger, with combined assets of 60 percent of GDP. Their size, relative to the economy, isn’t as great as that of some German and U.K. banks, but that doesn’t mean the U.S. is safer – only that Europe’s problem is worse. Ironically, the biggest U.S. banks got even bigger, and more dangerous, through acquisitions and government-encouraged mergers in the 2008 crisis. Harrison and the others claim that the increase in bank size is driven by the demands of international trade in general and the specific needs of large, globe-spanning corporate clients. But international trade boomed for many years after World War II without bank sizes increasing relative to the size of the U.S. economy. When I talk to executives at multinational companies, they stress the need to buy financial services from a number of providers. It wouldn’t be good business practice, they say, to rely too much on one megabank. Bond issues, loans, payment processing and other financial services are handled across multiple banks. The big development since 1995 had little to do with global trade and a lot to
do with deregulation, which resulted from intense lobbying by powerful financial figures such as Sanford Weill, the former Citigroup chief executive officer. Weill championed the repeal of the Depression-era Glass-Steagall Act that separated investment banking from depository institutions, allowing him to create Citigroup as a banking supermarket. But Weill in July said he now believes investment banks should be kept separate from commercial banks.
Big six Besides, does anyone seriously think that any administration would allow another Lehman-type failure? Lehman Brothers Holdings Inc. had assets of about US$640 billion when it went bankrupt; Bear Stearns Cos. was slightly smaller at its peak. All of the Big Six are currently larger than either investment bank was when it failed. Due to this implicit protection, most analysts estimate that too-bigto-fail banks can borrow for about 50 basis points, or 0.5 percentage point, less than financial firms that aren’t effectively backed by the government. The bigger these subsidised institutions become, the more likely they are to receive government support in times of distress. Implicit subsidies increase as the systemic importance of a bank rises, creating more incentive for management to talk up the social value of their bank becoming even larger. All of this is really about privatising the benefits when things go well and socialising the costs when things go poorly. No one has found measurable economies of scale or scope for banks with more than US$100 billion in total assets, yet four of the Big Six have balance sheets exceeding US$1 trillion. Global megabanks have become a huge, non-transparent and dangerous government-subsidy program. Second, the Financial Services Roundtable baldly states that the U.S. doesn’t have the largest banks
in the world. This isn’t true if we do the comparison properly. Under U.S. accounting rules, JPMorgan has a balance sheet with slightly more than US$2 trillion in assets. As I explained in an earlier column, several non-U.S. banks are larger but they use international accounting standards, which don’t allow as much “netting” of derivatives positions as U.S. accounting rules do. Netting allows banks to report smaller liabilities on their balance sheets. My colleague at Massachusetts Institute of Technology, John Parsons, and I converted JPMorgan’s balance sheet to international rules and found that the assets would grow to almost US$4 trillion. Measured this way, JPMorgan and Bank of America are the largest banks in the world, and at least 50 percent larger than their nearest non-U.S. rivals. Third, the roundtable points out that some other countries’ banks are bigger as a percentage of their domestic economies than is the case in the U.S.
Excessive risks This is true, but think about the problems some European countries have encountered because of the excessive risks their banks took: Iceland’s economy collapsed and needed an international bailout; Ireland rescued its banks but the fiscal disaster that followed ended in a bailout; and Spain, in a downward spiral at the moment, is seeking a bailout for its banks. Large financial institutions in countries such as Greece, Italy and France pose a systemic risk to their governments – and perhaps to the euro area, as well. Do you really think big banks have been well-managed in Japan or Germany? Look at the exposure of German banks to troubled euro-area governments. And please don’t bring up Canada unless you are willing to discuss the full panoply of government support provided to its banks in general and during the 2008-09 crisis, in particular. Even Switzerland, sometimes synonymous with the phrase “powerful banker,” is trying to get its largest banks, UBS AG and Credit Suisse Group AG, to scale back and reduce the risks they pose to Swiss taxpayers. None of these countries offers an appealing model for the U.S., which should go in the other direction and roll back recent increases in bank size. The U.S. nonfinancial sector worked fine in the mid-1990s, including its ability to run global supply chains and to generate productivity increases. The U.S. should make its largest banks small and simple enough to fail without government or central-bank intervention. End their subsidies now. Bloomberg View
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September 4, 2012 business daily | 15
Federalism or bust for Europe?
Leading reports from Asia’s best business newspapers
BUSINESS TIMES CapitaLand Ltd yesterday officially launched its Raffles City Chengdu, the fourth ‘Raffles City’ development in the group’s international portfolio. Singapore Prime Minister Lee Hsien Loong, Wei Hong, member of the Standing Committee of the CPC Provincial Committee and Deputy Governor of Sichuan Province, Ng Kee Choe, chairman of CapitaLand and Liew Mun Leong, president and CEO of CapitaLand, attended the inauguration. The grade A office tower and shopping mall will begin operations this month with several major Singapore firms as its tenants.
JOONGANG DAILY The Tokyo District Court on Friday ruled in favour of Samsung Electronics Co. over Apple Inc. in another patent battle. The Japanese court said Samsung has not infringed a utility patent for multimedia content, such as music and video files, which are synchronised wirelessly between smartphones and computers. The utility patent discussed in Japan was not part of the case Samsung lost at the San Jose court. Apple filed the infringement suit about the technology against Samsung in June 2011.
JAPAN TIMES Fujitsu Ltd said on Friday it would withdraw from semiconductor chip production in Japan amid deterioration of its chip business due to the yen’s appreciation and slack demand. The company will close its Kyushu plant in Kagoshima Prefecture, and sell its Miyagi plant in Miyagi Prefecture and its Aizu plant in Fukushima Prefecture to J-Devices Corp., which makes semiconductors under contract. Fujitsu Integrated Microtechnology Ltd, which has operated the three plants with 1,900 workers, will be liquidated. Employees will move to J-Devices or Fujitsu group firms.
JAKARTA POST Polyester producer PT IndoRama Synthetics, part of the world’s largest polyester and PET manufacturer Indorama Corporation, expects a decline in net profits this year as falling sales will likely continue into the second half of the year, as the fall in cotton prices in the world’s markets will further cause a decline in the company’s sales. This year’s sales are projected to reach US$741.53 million, 5 percent lower than the previous year, and net profits to drop by about 9 percent to US$9.82 million.
Jean Pisani-Ferry Director of Bruegel, Professor of Economics at Université Paris-Dauphine, and a member of the French Prime Minister’s Council of Economic Analysis
ugust was quieter than feared on the European bond markets. So, while resting on Europe’s beaches and mountains, policymakers could take a step back from the sound and fury of the last few months and think about the future. Is the eurozone sleepwalking into becoming a United States of Europe? Is it exploring uncharted territory? Or are its constituent nationstates drifting apart? To answer these questions, the best starting point is the U.S. The model of a federal union that emerged from its history consists of a single currency managed by a federal agency; closely integrated markets for products, labour, and capital; a federal budget that partly, but automatically, offsets economic disturbances affecting individual states; a federal government that assumes responsibility for tackling other major risks, not least those emanating from the banking sector; and states that provide regional public goods but play virtually no role in macroeconomic stabilisation. This model served as a template for the European Union’s architects, notably for the creation of a unified market and a common currency. But, in several respects, Europe has diverged significantly from the American model. First and foremost, Europe has not established a federal budget. Back in the 1970’s, there was still hope that common spending would eventually amount to 5-10 percent of EU GDP, but this dream never materialised. The EU’s budget today is no larger than it was 30 years ago: a meagre 1 percent of GDP.
A different path Unlike in the US, where federal public spending grew as a consequence of the creation of new expenditure programs throughout the twentieth century, public spending was already high at the national level when Europe began to integrate. Significant federal spending programs could have emerged only from the transfer of existing national programs to the European level. Not surprisingly, such transfers were strongly resisted. More recently, the eurozone has begun to create a system of mutual insurance among member states. Since 2010, assistance has been extended to Greece, Ireland, Portugal, and now Cyprus. Spain may soon follow suit, with a particular focus on support for its banking sector. So a specific pattern is emerging: states help each other. But solidarity is not free. It is conditional on beneficiaries’ having signed on to a fiscal treaty that commits them to budgetary responsibility and makes them liable to quasi-automatic sanctions.
THE BIG QUESTION TO WHICH NOBODY HAS A CLEAR ANSWER IS WHETHER EUROPE IS IN THE PROCESS OF INVENTING A MODEL OF ITS OWN, OR HAS ONLY TAKEN A DETOUR FROM THE INEVITABLE CHOICE BETWEEN DISAGGREGATION AND CONVERGENCE ON THE STANDARD FEDERAL TEMPLATE
Moreover, assistance requires that beneficiaries implement negotiated measures and accept close external monitoring of policy developments. In other words, the price of solidarity is limited sovereignty. Unlike in America, however, EU member states’ governments – and, increasingly, their parliaments – are calling the shots. Because assistance does not rest on federal resources, but rather on the pooling of national resources, creditor states inevitably demand more power in exchange for providing more support to their neighbours. As a result, currency unification has not brought Europe closer to the U.S.; on the contrary, it has pushed Europe further away. In the U.S., the federal government acts as an overall shield against common risks and provides automatic, unconditional support to states in trouble; but, in the end, it does not come to the rescue of a defaulting state, nor does it take over its government. In Europe, by contrast, there is almost no aggregate shield and almost no automatic support for member states in trouble – better-off states simply extend a conditional helping hand to prevent default. So, while U.S. states compete with the
centre for power, in Europe they increasingly compete with each other. This inter-state rivalry – at times bordering on acrimony – is what makes the politics of European integration difficult. All federations have experienced periods of tense relations between the federal and state governments. But to accept that your neighbours look over your shoulder and tell you what to do is one degree more dreadful than to accept oversight from the centre. Indeed, a major problem with the current state of
affairs is the weakness of EU institutions that are in charge of advancing the common interest and that are accountable to Europeans as a whole. Common European direction cannot emerge from the calculus of national interests by governments and parliaments that are accountable only to national voters. The big question to which nobody has a clear answer is whether Europe is in the process of inventing a model of its own, or has only taken a detour from the inevitable choice between disaggregation and convergence on the standard federal template. One solution could be to provide national representatives a venue to convene for European-wide debates. Another would be to transfer the insurance role to a federal institution accountable to the European parliament. Whatever route it takes, Europe in the coming years will have to address the weak representation of the common interest – or else admit that no such common interest can justify remaining on the path of integration. © Project Syndicate
business daily September 4, 2012
CLOSING Poland to join the Euro
China probes ‘gutter oil’ claims
Poland’s foreign minister said his country will join the eurozone when the crisis-hit single currency bloc has resolved its problems, in an interview yesterday. “We are ready to join when you have resolved your problems and when we can say to our people ‘we can now safely join’,” Radoslaw Sikorski told the Frankfurter Allgemeine Zeitung. “You can hardly blame us for not wanting to enter while the eurozone is in a grave crisis,” he added. Poland has refused to peg a date for abandoning the zloty because of the debt crisis.
Chinese officials have told pharmaceutical firms to check their suppliers after claims that some have used “gutter oil” to make antibiotics, state-run media report. Officials are looking into firms that reportedly use the cheaper gutter oil rather than the more expensive soy bean oil. Gutter oil is reprocessed kitchen waste dredged from restaurant drains. It has been part of a series of recent food safety scandals in China. The government said it would release its findings soon, without giving further details. It is not clear whether these antibiotics pose a risk to public health.
Eurozone manufacturing down again Lower PMI adds pressure to coming ECB meeting
uro-area manufacturing contracted more than initially estimated in August, suggesting the economy may struggle to avoid a recession in the third quarter. A gauge of manufacturing in the 17-nation euro area based on a survey of purchasing managers was revised lower to 45.1 from the reading of 45.3 estimated earlier, London-based Markit Economics said yesterday. The index, which stood at 44 in July, has held for 13 months below 50, indicating contraction. European manufacturers are feeling the impact of the sovereign-debt crisis and tougher austerity measures that have undermined export and consumer demand. Euro-area economic confidence fell to a three-year low and inflation accelerated to 2.6 percent in August. The jobless rate held at a record 11.3 percent in July. “The euro-zone manufacturing sector remains firmly in contraction territory,” Rob Dobson, senior economist at Markit, said in the report. “The sector is on course to act as a drag on gross domestic product in the third quarter.” In the U.K., the downturn in manufacturing unexpectedly eased last month as domestic orders boosted output, with its PMI rising to a four-
month high of 49.5 in August from a downwardly revised 45.2 in July. Within the eurozone, the traditionally stronger countries of Germany and France failed to provide support to the weak ones. Germany’s PMI read 44.7 in August, its sixth monthly fall in a row. Italy and Spain’s readings have been below 50 for more than a year. Only Ireland saw manufacturing output rise. Irish manufacturing growth slowed in August to 50.9 in August from a 15-month high of 53.9 in July, a figure that still indicates growth, however.
Economic projections The euro-area economy may shrink 0.1 percent this year, according to European Central Bank forecasts. The ECB will publish updated economic projections next week. “The uncertainty and cost-caution resulting from the currency union’s ongoing political and debt crises are now being reinforced by softer global economic growth,” Mr Dobson said. “The eurozone product and labour markets are unlikely to show any real sustained improvement until regional structural issues are addressed and the broader global backdrop brightens.”
Manufacturing in Germany fell for the sixth month in a row
The ECB, which in July cut its benchmark interest rate to a record low of 0.75 percent, is working out details of a plan to purchase government bonds of distressed nations along with Europe’s rescue funds. So far, neither Italy nor Spain, strained by high borrowing costs, has
asked for help from the funds. The central bank, led by Mario Draghi, will hold its next meeting on September 5-6 in Frankfurt. Economists are expecting the bank to cut interest rates at some point to a new record low of 0.5 percent. Bloomberg
Merkel blasts markets for stoking crisis Says Greece must fulfil the terms of its bailouts
Angela Merkel attended one of the biggest and oldest fairs in Lower Bavaria
erman Chancellor Angela Merkel renewed her attack on markets for their role in stoking Europe’s financial crisis, saying the challenge for policy makers is to woo voters to support cutting debt levels to escape the sights of investors. Mrs Merkel made her comments at an event in the Bavarian town of Abensberg yesterday after her finance minister, Wolfgang Schaeuble, warned against heaping “false expectations” on the European Central Bank to end the debt crisis now almost three years old. Speaking at an event organised by the Bavarian Christian Social Union party, Mrs Merkel said that in the last five years, markets “haven’t served the people,” allowing a few to get rich at the expense of the many. Markets can’t be allowed to destroy the fruits of people’s labour and governments can’t be put at their mercy through excess debt, she said. “The real question about our democracy is: Can we in Germany
and in Europe win elections when we jointly stand up for solid finances, when we don’t always spend more than we take in?” Mrs Merkel said in a beer tent packed with local party officials dressed in traditional Bavarian lederhosen and dirndls. Mrs Merkel’s comments are the most explicit yet on her campaign themes for federal elections in the fall of 2013, to be held at the same time as a Bavarian regional vote that will determine the CSU’s fate. The chancellor reiterated that Greece must fulfil the terms of its bailouts in return for “solidarity,” while those programmes undertaken in Spain and Portugal “require an effort”. “We have to press for reforms in other countries even if they sometimes say we’re hard-line,” she said. “It’s not enough just to keep muddling though. But I also say that in such a difficult phase these countries deserve our solidarity and that we root for them to overcome their difficulties.” Bloomberg