Display to 30 September 2014
Storage wars Who’s winning hong kong’s self-storage wars?
c h i na as th e mega trader
re-assessing asia’s food inflation risks
ring the retail
hk’s debt levels rising
faster than the uk chinese firms seek
h k s u p e rta l l s
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FROM THE EDITOR
BUSINESS Established 1982 Editorial Enquiries: Charlton Media Group 19/F, Yat Chau Building, 262 Des Voeux Road Central Hong Kong. +852 3972 7166 Publisher & EDITOR-IN-CHIEF Associate Publisher
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The self-storage industry in Hong Kong is becoming more popular with shrinking apartment sizes and SMEs wanting to achieve operational efficiency. However, analysts’ data show that the available self-storage space from current operators meets only half of the market size.
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This is why they believe the industry is far from being saturated and is poised to grow by leaps and bounds over the next decade. Around 300 self-store locations are currently scattered throughout the territory with an average site size of 10,000 sq ft divided into 14-90 sq ft units. In this issue, we bring you a report on how this industry started in Hong Kong and how self-storage operators are faring today.
Meanwhile, our channel checks revealed that Hong Kong solidified its dominance as the preferred IPO market in Asia Pacific, capturing the lion’s share of what has been a bumper year for the region, while its rival Singapore languished with multiple delistings and a crisis of investor confidence. ADMINISTRATION
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HKB also went all the way down to Brisbane, Australia, the host city of this year’s G20 Leaders Summit, to find out what opportunities the city offers the Asian investor. We also bring you regional reports on Asian inflation, global trade, and Hong Kong’s capital flows plus other stories about Hong Kong’s retail, banking, gaming, and property industries. We have a lot in store for you so start flipping the pages.
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CNH: Will Qianhai jeopardize Hong Kong’s position? 6 Sep 2013
Interest rate strategy
CNH: Will Qianhai jeopardize Hong Kong’s position? DBS Group Research
6 Sep 2013
In mid-2012, the China’s State Council approved the development of the Qianhai Shenzhen-Hong Kong Modern Service Industry Cooperation Zone. Four industries were focussed upon: finance, logistics, information services and science & technology services. Particular emphasis was placed on finance, for which the government designated Qianhai to be built into an experimental zone for financial innovation and further opening-up to the outside world. Back then, market watchers found it difficult to associate the mudflat with such bold plans. We, however, have been optimistic about the project. Specifically, we stated in earlier report that the zone’s development would be kicked off by the launch of a cross-border RMB lending scheme (see “CNH: RMB lending set to cross border in pilot plan”, 16 April 2012). In Jan13, only nine months after the approval has been granted, fifteen Hong Kong banks were authorized to offer a combined RMB2 bn of loans for Qianhai companies. More impressively, the first Qianhai land auction was held in July and construction is planned to start by October. It signals that the zone has already entered into an expansion period.
An analogy of Shenzhen SEZ in 1980s While many were previously skeptical about Qianhai’s future, they have now turned to the other extreme of worrying that its rise might jeopardize Hong Kong. Such fears are overblown. In our view, the Qianhai project is similar to the establishment of the Shenzhen Special Economic Zone (SEZ) in the 1980s, which has, in fact, bolstered Hong Kong’s competiveness.
Three decades ago, Hong Kong’s manufacturing industry was seriously hit by soaring costs
Three decades ago, Hong Kong’s manufacturing industry was hit by soaring costs. Factory rents and manufacturing labor wages ballooned 140% and 170% respectively during 1980-90. The city’s international competiveness was being challenged by several lower-cost developing countries in the region. For instance, the manufacturing labor costs in IndoneChart 1: Transformation of HK economic activities sia at the time was only during 1980-2000 one-fourth that of Hong Kong. 30% 90% Shenzhen became an expansion outlet for Hong Kong manufacturers and the timing could not have been better. The availability of abundant inexpensive land and labor in Shenzhen made it possible for Hong Kong manufacturers to move labor-intensive processes across the river. Meanwhile, more skill-inten-
20% 80% 15% 75% 10% 70%
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*If you’re reading the small print you may be missing the big picture
el niÑo: re-assessing 40 Beyond asia’s food inflation risks
STORY 22 COVER How Hong Kongers can pack up, store and stow away
is might as Chinese 30 Height firms seek HK supertalls
08 Are posh homes in Hong Kong
38 Investing in Brisbane: What
opportunities await the
09 Ring the retail alarm bells 10 How are Hong Kong banks
losing $25b? faster than the UK: should we be worried?
14 Macau gaming sits out World Cup 16 Check out Hong Kong’s most
12 Hong Kong’s debt levels rising
20 Financial Insight 25 Rankings 36 Legal Briefing
34 China as the mega-trader 36 Accessing HK’s capital flows
expensive credit cards
Published Bi-monthly on the Second week of the Month by Charlton Media Group Pte Ltd, 19/F, Yat Chau Building, 4 262 HONG KONG BUSINESS | SEPTEMBER Des Voeux Road Central, Hong 2014 Kong
46 Ian Perkin: Growth and politics 48 Tim Hamlett: Companies’ rights
50 Hemlock: Empty, soulless town in
midst of seething overcrowded city
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Evolving consumption pattern hurts Hong Kong retail market In addition to the slowing rate of growth towards the end of 1H14, the lower spending and changing shopping patterns of Chinese tourists, who increasingly prefer spending more on affordable luxury and mid-priced products instead of expensive goods, also started to weigh on the market. A release by JLL reveals that retail sales retreated by 0.2% y-o-y from January to May.
Providers, this may be the startup for you to ramp up your revenue Realizing the financial advantages of selling a virtual appliance to enterprise customer, Alexander Williams co-founded Unscramble which brought Jidoteki with his bestfriend for 10 years. Both have worked with Github, web-based hosting service before founding their own company. Alexander and his best friend Patrice LaFlamme are originally from Montreal, Canada.
China real estate market inching towards greater transparency JLL and LaSalle Investment Management’s biennial Global Real Estate Transparency report shows continued progress in the transparency of commercial real estate around the world, and notes the Chinese real estate markets as progressing in transparency. According to JLL, real estate markets in China’s Tier I cities were “Semi-transparent” and ranked 35th among the 102 markets.
How “Plan B” works for Hong Kong events BY LAWRENCE CHIA Hong Kong’s notorious rainy season is poised to begin. Bad weather traditionally adds a layer of complexity and stress to an event manager’s already difficult task, especially for those managing outdoor events. For events without a solid bad weather backup plan – a ‘Plan B’ – the effects can range from the embarrassing to the catastrophic. Hong Kong’s subtropical climate often gives rise to severe weather that may damage property.
Is Click & Collect the saviour of retail? BY DOMINIC POWERS Traditional bricks and mortar retailers are facing significant challenges due to the wave of digital disruption. Shopping and spending in Hong Kong – in fact, all throughout the Asia Pacific – is shifting online as technology progresses and consumers become more digitally-savvy. Asia Pacific will surpass North America to become the world’s largest market for business-toconsumer e-commerce sales (Forrester), with sales of nearly $1.5 trillion (eMarketer).
most read commentary Website redesign mistakes Hong Kong companies are making BY JOSHUA STEIMLE Each year hundreds of companies in Hong Kong redesign their websites. I met with one recently that had just relaunched their website and was excited to show it off and get started with an online marketing campaign. Sadly, this company, and many others here in Hong Kong and elsewhere, make critical mistakes during the redesign and launch of their new website, erasing significant value that has been built up over time.
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FIRST over this period. Chu forecasts that luxury residential rentals will drop by a further 5% in the coming 12 months. The number of expatriate arrivals at junior and middle management level has also increased, thereby resulting in stronger demand for smaller units, explaining the rental resilience in the mass residential leasing sector. “The leasing market for mass residential properties remained strong as the restrictive measures in the sales market have led to stronger leasing demand, as people find it more difficult to buy,” adds Chan.
hk banks’ status
Hong Kong’s banking sector is increasingly challenged by nonbank competition and regulatory pressures, but bankers are rising to the challenge to maintain their industry’s leverage. Hong Kong’s overall banking scene is thriving thanks to significant gains, particularly HSBC’s sale of its investment in Ping An, KPMG reveals in its Hong Kong Banking Survey 2014. The profitability of banks surveyed increased by 39% but even excluding the Ping An sale, profitability increased measurably by 19%. There have been small improvements in net interest income, but banks are still suffering from the low interest rate environment. Growth in non-interest income has strengthened due to trade finance and loans fees, and trading income decreased overall due to lack of demand from investors. Hong Kong banks’ income mix In terms of income mix, HSBC, Standard Chartered and DBS had a more balanced income mix. Interest income makes up between 43% and 79% of total operating income for all banks surveyed. KPMG’s outlook for the sector remains clouded by regulatory pressure and uncertainty regarding the US, Europe and China economies. To address these doubts, banks are devoting significant resources to compliance-related activities, which has added to operating costs. KPMG says the real challenge lies in the banks’ ability to find new ways of improving cost efficiencies while maintaining a sufficient level of resources to meet regulatory demands, and maintaining credit quality in order to safeguard their capital base.
8 HONG KONG BUSINESS | SEPTEMBER 2014
Limited pressure on HSBC’s CIB revenue
Rental resilience in mass residential sector persists
Are posh homes in Hong Kong losing appeal?
ash-strapped employers in Hong Kong depriving expats of their housing packages are causing a significant drop in demand for luxury residential units. Particularly cautious about expansion are employers in the banking and finance sector, whose decisions to cut costs are collectively slowing down the luxury property market. “They are not bringing in as many expats as in the past, therefore affecting leasing demand for luxury residential units from the expat community,” says Marcos Chan, senior director of research at CBRE Hong Kong, Macau and Taiwan. Stronger demand for smaller units Demand for high-end properties priced at HKD100,000 per month has noticeably dropped, and smaller units are getting more attention with attractive prices of HKD50,000 and below. Clara Chu, senior director of research at Colliers International, says more expat employees are removing their housing package and moving the cost into salary. Expatriate families bring in only seasonal demand when they look to settle down before the start of the new school year. Due to this frictional search, luxury leasing demand will become more stable
Demand for high-end properties priced at HKD100,000 per month has notably dropped.
Wait-and-see approach Meanwhile, those who still opt to buy high-end properties instead of leasing them can benefit from a slight relaxation of the Double Stamp Duty (DSD). This allows end-users an additional one to two months to sell their old properties and waive the DSD. Potential buyers have decided that patience is a virtue and are waiting for residential prices to go down, in the meantime staying in the leasing market and providing some support to mass residential leasing demand. Buyers from the secondary market are turning to attractive prices in the primary market, but some projects in the urban and traditional luxury areas lost some bargaining power, so they began offering rebates and other sweeteners to draw buyers toward new homes. “Luxury sites remain expensive after a negligible drop of 0.5% in 2Q14, leaving minimal pressure on owners and developers to significantly reduce prices,” says Angel Law, executive director for residential at Cushman and Wakefield.
Monthly no. of overall residential vs luxury residential transactions
Note: Transactions with a consideration above HK$10 million are defined as luxury *Preliminary figure
Source: Cushman & Wakefield
FIRST The government’s proposed plans to reduce Mainland tourist numbers by as much as 20% may have a knock-on effect.
Chinese shoppers: Going, going, gone?
Ring the retail alarm bells
hina’s proposed rules to reduce tourist arrivals are feared to leave a lasting dent in Hong Kong’s already hurting retail sector. “The government’s proposed plans to reduce Mainland tourist numbers by as much as 20% may have a knockon effect, as will the ongoing burden of high rental costs, tighter margins and a slowdown in sales,” says Tom Gaffney, head of retail, Hong Kong at Jones Lang LaSalle. The news was hard to swallow, especially for hard-hit Hong Kong retailers such as jewellers and watch brands who have seen sales plummet as luxury spending has decelerated.
The anti-corruption campaign in Mainland China has continued to impair sales of these expensive items which has softened leasing demand from these retailers, says David Ji, director and head of research & consultancy, Greater China at Knight Frank. Targeted, not blanket rules But Ji expressed doubt that the proposal to control the number of Mainland visitors will substantially hurt the retail sector: “The rules are unlikely to be blanket rules but targeted measures, for example, targeting day traders of Northern New Territories.
If that’s the case, the reduction in the number of day traders will only impact retail sales and rents in the Northern New Territories or along the East Rail Line, mainly of drug or grocery stores.” Online sales picking up As retail sales decelerated in the first half of the year, online sales flourished with a 30% growth in sales. This gave landlords an idea: win back consumers with special in-mall perks and events to make them spend more in traditional shopping centres, says James Macdonald, director, China at Savills Research. Initiatives include providing free Wi-Fi, launching mobile apps and promotions through key social networking channels in order to keep consumers in malls longer, and hosting large events like K11’s Monet art exhibit that drew in 400,000 people in three months.
Hong Kong retail sales
Source: Census & Statistics Department
The Chartist: median household income It wouldn’t be too hasty to assume that Hong Kong’s households are getting more cash-strapped and daily consumption is becoming an everyday struggle. Charts on the right show how much the real median household income has dived since its glorious peak in 2012. According to Hang Seng Bank’s report, There has been a steady deceleration in median household income growth over the past couple of quarters and while household income grew in the first quarter of this year, it was only up 0.4% in real terms. “This is not the first time that Hong Kong has seen moderated growth in household income in recent years.
Real median household income and real GDP (% YoY)
Average propensity to consume and marginal propensity to consume
Source: CEIC, Hang Seng Bank
Source: CEIC, Hang Seng Bank
HONG KONG BUSINESS | SEPTEMBER 2014 9
How are Hong Kong banks losing $25b?
ong Kong banks are alarmingly losing a $25b opportunity to non-financial institutions as banks fail to implement a customer-centric business model. Unhampered by clunky legacy systems, these new entrants pose a threat to Hong Kong banks with their capabilities in understanding customer needs and designing innovative solutions to meet them. According to PwC’s global Retail Banking 2020 survey, 80% of banks recognise they have a problem with customer service, but only 18% are actively tackling it. “Banks in Hong Kong are vulnerable at every point along the value chain,” says Harjeet Baura, PwC Hong Kong Financial Services Partner. A PwC-commissioned poll of 300 Hong Kong banking customers reveals that only 14% believe their bank will listen to their feedback and only 15% of these customers would be willing to recommend their bank to friends and family. Paul McSheaffrey, head of Hong Kong Banking at KPMG China, notes, “Given the high usage of social media in Asia and the early adoption of new technology there is a massive
Only 14% of HK customers believe their bank will listen to them
opportunity for banks to engage with customers in a different and more compelling and engaging way.” Meanwhile, Eric Tong, partner at Deloitte Touche Tohmatsu, explains why the non-financial firms are successful: “The importance and power of platforms is one theme we are continually seeing as a critical success factor in todays’ markets. Platform scale and size advantages alone however will not predetermine success. Building the necessary flexibility and capability to understand and leverage the platform is necessary. This flexibility and agility is necessary at all levels of the organisation – both technically and operationally.”
80% of banks recognise they have a problem with customer service, but only 18% are actively tackling it.
Only 6% of Hong Kongers satisfied with customer service Customers in Hong Kong are leaving companies’ doors with a frown as owners remain convinced their services are topnotch. PwC reveals in its latest survey that only 6% of Hong Kongers are very satisfied with the level of service delivered across multiple industries – from retail and banks to utilities and government services. Three in five executives surveyed believe they have industry-leading customer experience practices and capabilities, which does not fit the fact that more than half of Hong Kong customers say they are dissatisfied. Company owners need to consider this sentiment carefully, as the statistics imply that on average, 94% of customers are predisposed to switching to a competitor for their next purchase. PwC adds that most dissatisfied customers will avoid the same company for their next purchase. 10 HONG KONG BUSINESS | SEPTEMBER 2014
After realizing the lack of comparison sites for financial needs in Hong Kong, Morgan Stanley investment banker-turnedstartup founder, Alister Musgrave discussed the idea of starting up one with his friend and a former colleague, Gerald Eder, Managing Partner of CompareAsia Group, who was coincidentally setting up a comparison site in Malaysia at the time. Two weeks later, Alister joined him and arrived in Hong Kong, to set up MoneyHero. Within a year, they gathered seed capital amounting to $3 million from Nova Founders Capital and some local HK venture capital investors, including Stem Capital and angel investors. The price compairson site began operations in May with a team composed of Stuart Glendinning, Laurence Chau and Stefan Bruun.
Drawing on his dual experience in IP law and investment, Hidero Niioka has developed a marketplace solution to IP monetization. Founded in 2012, IP Nexus matches IP owners with interested buyers, licensees, or their agents globally, and offers a range of other complementary services and features. “While working in the IP field, we saw that there were very few opportunities for smaller companies and individual inventors to monetize their IP. At the same time, buyers and licensees sometimes struggled to find unique and unsifted IP. We felt there was an opportunity to match these two groups through an online marketplaces,” says Niioka. The platform secured USD880,000 from Hong Kong Cyberport, a venture fund, and angel investors.
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Hong Kong’s debt levels rising faster than the UK: should we be worried?
oncerns abound that Asia is headed for a financial crisis similar to that of the US in 2008. But since the general outlook on the region has been optimistic, many of these contrarian opinions have been dismissed as misguided, or simply inconvenient. It seems people are forgetting that, in hindsight, the US probably would have benefitted from a few more ‘inconvenient truths’ before the 2008 crisis. Particularly in Hong Kong, household debt levels are pointing to a wake-up call. Frederic Neumann, an analyst at HSBC, notes that Hong Kong, along with Malaysia, China and Korea, has seen a bigger rise in household debt than the UK between 2001 and 2007, the critical run-up to the Global Financial Crisis. Save or splurge? It is held as truth that the majority of Asians will not be so foolish as to borrow beyond their means to pay, nor would their banks let them. Asia, they say, will avoid the mistakes of Western nations that became too greedy with credit and ended up crippled by the Global Financial Crisis. But can Asia be so invulnerable that its households can keep on racking up loans for cars, homes and other big-ticket items without repercussion? Is it really safe or
sustainable to allow household debt levels to continue to rise unabated? This is the question posed by worried analysts who foresee a painful end to the hubris of Hong Kong and the rest of Asia. They cite data that show most of the countries in the region are already leveraged at alarming rates with no signs of a slowdown, not unlike an accelerating car that has lost its brakes and will eventually crash. “In the last several years, consumer debt has surged across the region, financing not only purchases of new, flashy condos, but also of cars, motorcycles, and everything else the heart desires,” says Neumann. Pace of leveraging up unsustainable Duncan Wooldridge, an economist at UBS, also warns of mounting liquidity risks. “UBS expects the Fed to hike 25bps in mid-2015 and raise Fed Funds to 1.25% by end 2015. Countries with current account deficits, high loan to deposit ratios, or completely open capital accounts should find it difficult to grow deposits fast enough to sustain the current pace of credit growth,” he adds. This is true even for economies with relatively low leverage such as Hong Kong. “In our opinion, the pace of leveraging up cannot be sustained even assuming global
Ballooning household debt point to a wake up call
rates do not rise,” says Wooldridge. And when credit growth falters, Hong Kong and other Asian nations should be ready to grapple with the headaches of steep declines in domestic demand, property prices and economic growth. “Household debt may not be as big a systemic financial risk as it was in the West, but it highlights a potential growth problem in Asia – without it, how resilient would consumption spending really be?,” asks Neumann.
A sneak peek at Facebook Hong Kong’s new office Facebook recently unveiled its new office at One Island East Building, Quarry Bay. The design is centered around making life easier for staff and guests so they can focus on the work they love to do. Special features include a complimentary open kitchen, locally commissioned art work, treadmill and moveable height desks, colloquially named meeting rooms, a massage chair, chill lounges and a signature floor to ceiling ‘Write Something’ wall to capture messages from staff and guests. Colloquial names for meeting rooms and spaces include “Be Bold Like Ginger”, “Big Tea Rice”, “Dimmer Than Sugar Cane”, “Wind Blow Water Rise”, “Janet Bean”, “Blow Water” and “Jar Fit.” Jayne Leung, Head of Sales, Facebook Greater China, said: “The office design embodies the culture and value of our company, which is, make the world more open and connected.”
12 HONG KONG BUSINESS | SEPTEMBER 2014
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14 HONG KONG BUSINESS | SEPTEMBER 2014
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JP Morgan Cup’s supposedly negative effect on Especially given the rare occurrence most enjoyable Hong Kong’s finance 1. JP Morgan looking for? Hong Kong’s finance Career Their collea Their colleagues in prospects gaming revenues in Macau would professionals of professionals the World Cup (at least relative 2. Goldman % 2. Goldman the Gulf and the Gulf and France most happy be a cause of great concern. The mosttohappy casino visits, which could occur are the most burnt out Sachs are the most Sachs at work?at work? UK 77% 24% question lingering in the minds ofof finance every day), it is no surprise that UK 77% 24% ...and 26% the most professionals in 3. HSBC US 74% People they US 74% 26% opportunist actively Hong Kong are many investors today is, how large many gaming patrons chose to 3. HSBC People they SG 62% 39% work with SG 62% 39%1 are in Germany. or open toon this opportunity in magnitude was the World Cup’slookingcapitalize HK 65% 35% work with HK 65% 35% opportunities Aus 77% 23% effect on the sector? instead. This is the reason why the Aus 77% 23% Increased Top 3 employers % GU 61% 39% Finance Professionals sector saw very weak results in June.Top 3 employers FR GU 61% 39% compensation of choice 68% 32% in the UK and Australia FR 68% 32% Let the statistics speak However, is it likely thatin weak Hong Kong DE 72% 28% find their workplace of choice What keeps 72% 28% 2 DE To start with, the numbers paint results will continue to persist most enjoyable 1. JP Morgan Hong Kong’s finance in Hong Kong Their colleagues in a very clear picture. According to even after the World Cup? Phoebe professionals % 2. Goldman the Gulf and France most Macau gaming are the most burnt out Charlene Liu, analyst at HSBC, the happy Tse, analyst at Barclays, believes Sachs work? revenues gaming sector’s total revenuesatfor there is a possibility that the World 3. HSBC People they continue to negatively grew 15.8% the month of June amounted to Cup could work with annually – MOP27.2 billion, a 4% decline year impact gross gaming revenues in the slowest on year, and the only time in the last the coming months. Evidently, the Top 3 employers revenue 12 months that the sector registered weakness is seen of to persist in the growth rate an actual contraction in revenues. mid-term, but mostchoice are still positive Source: eFinancial Careers in Hong Kong since 2009. On a year to date basis, Macau in the long term.
FIRST also get to enjoy the privilege of instant recognition at the most luxurious hotels and resorts worldwide. Priority Pass is also given to card owners for unlimited free access to over 600 VIP airport lounges worldwide. 6 American Express Peninsula Platinum Card, by invitation, annual fee of HKD7,800. Special discounts and privileges at The Peninsula Hotels await cardholders. Cardholders enjoy the Complimentary Priority Pass for unlimited free access to over 600 VIP airport lounges worldwide.
Check out Hong Kong’s most expensive and exclusive credit cards
ong Kong Business has partnered with MoneyHero, billed as HK’s first financial comparison site, to bring you 10 of the most expensive and exclusive credit cards that may be found in only the wallets of Hong Kong’s wealthiest. Many of these plastics are by invitation only, offered only to high net-worth individuals and those who spend millions of dollars on credit. 1 American Express Centurion Card, by invitation, annual fee of HKD38,800. This is the near-mythical black credit card that only a rare few are granted the privilege of owning. There’s an air of mystery about the specific benefits of the card as AMEX doesn’t make this information known to the public – but of course, that only adds to its appeal. There’s also an initiation fee of HKD5,000. The Centurion card gives access to some of the most exclusive private clubs in HK and other parts of the world. It has no pre-set limit, in theory. The largest purchase ever made on this card was reportedly USD36 million for a rare, antique porcelain chicken cup. 2 Citibank Ultima Card, by invitation, annual fee of HKD23,800. There are only about 1,000 people in the city who have the privilege of flashing this card, which is offered according to a mysterious annual salary requirement. While invitations are no longer
16 HONG KONG BUSINESS | SEPTEMBER 2014
sent out since the beginning of the year, its highlighted features include a dedicated Lifestyle Relationship Manager handling your lifestyle needs, great rates for yacht charter services and airport transfer limousine services. The privileged cardholder also gets 120,000 complimentary Asia Miles each year.
7 Standard Chartered Priority Banking Credit Card. The annual fee is waived perpetually, while the annual salary requirement is around HKD500,000, as reported by current card owners. The card features a unique rewards programme for cardholders. Priority Banking 360° Rewards allows them to earn points not only on card expenditure, but also with all account balances to earn up to 50,000 points every month. Principal cardholders are granted complimentary access to over 600 airport lounges with the Priority Pass.
3 HSBC Premier Card, by invitation. The HSBC Premier card requires an annual income of HKD1.5 million. The Card gives bonus rewards from the MasterCard Traveler Rewards program and advanced booking for luxury cruise and vacation packages. A Premier Relationship Manager is always ready to assist cardholders when they travel around the world.
8 BOC Visa Infinite Card Bank of China’s (BOC) by invitation only Visa Infinite credit card provides a concierge service that assist cardholders with planning trips and restaurant reservations. BOC’s jet-setter customers earn triple reward points when they use their card overseas, and at restaurants here in Hong Kong. By simply presenting BOC Visa Infinite Card, cardholder can enjoy a host of facilities available at specific Plaza Premium Lounges.
4 Citibank Prestige Card. The card has one of the highest minimum annual income requirements at HKD600,000 or above. Cardholders can enjoy complimentary nights at more than 700 luxury hotels in some of the most fabulous cities in the world, as well as complimentary green fees at over 2,400 golf courses around the world.
9 Dah Sing VIP Banking Visa Infinite Card, by invitation, no annual fee. This card provides an extra-high credit limit. Users can earn up to 4x reward points when using the card for select investment and insurance services. Cardholders can also earn up to 1.2 million bonus points quarterly with this card.
5 American Express Platinum Card, by invitation, annual fee of HKD7,800. The card automatically enrols cardholders in the AMEX Membership Rewards Turbo Program, where they can earn 2 points for every HKD1 spent. Cardholders
10 Hang Seng Visa Infinite, by invitation. The lucky shopper who flashes this card doesn’t have to worry about preset spending limits. This card also serves as an all-access ticket to several membersonly private clubs in the city.
FIRST The Analysts’ call
Where is Sa Sa headed this year?
Sa Sa International branch in Hang Lung Centre
Will Sa Sa International shut down stores in Hong Kong?
a Sa International used to make a hefty profit from cash-flush Chinese shoppers wanting to get their hands on more than 600 brands of beauty products available in its flashy boutiques. But the cosmetics retailer has lost favour with these shoppers, registering worrying results for its Mainland China segment. Sales from the segment grew at a pace of only 2.7% year on year and incurred a massive EBIT loss of HKD68 million, almost double the loss seen the
Sa Sa shut down a total of six stores in Mainland China in the first quarter of 2014. previous year. As a result, Sa Sa shut down a total of six stores in Mainland China in the first quarter of 2014. And, that’s not all. Stores in Hong Kong and Macau may soon be closed down if underperforming as the company struggles to improve overall operating efficiency. As of 30 June 2014, the Group’s retail network has a total of 274 stores, including eight singlebrand counters/stores. Analysts say the losses being incurred from the Mainland China segment should not be viewed as a significant threat, as sales from the segment account for less than 5% of the group’s total revenues, suggesting that the segment is still only a small part of the business. The key point is that Sa Sa 18 HONG KONG BUSINESS | SEPTEMBER 2014
International’s operations in other segments are evidently strong, and are therefore capable of shouldering the weakness from the Mainland China segment. The bright spot in the company’s FY14 results was its Hong Kong and Macau segment, with revenues posting a 16.7% growth year on year, showing that sales from the Hong Kong and Macau segment were strong. The segment’s earnings before interest and taxes (EBIT) grew at an even stronger rate of 18.6%, indicating that the segment’s strong sales generation is further bolstered by operational efficiency. In fact, operating margins should improve further as the segment contemplates closing inefficient or underperforming stores. “Two store closures in tourist areas in FY15 could help protect margins,” according to Katherine Chan, analyst at CIMB. Moreover, the company continues to be vigilant regarding its growth plans for the segment. “Sa Sa aims to continue to improve store level profitability and open more small store format stores,” says Phoebe Tse, analyst at Barclays. “It also plans to focus on Southern China openings.” While one should not overreact to the losses being incurred from the Mainland China segment, positive views should also be tempered with regard to the Hong Kong and Macau segment. Note that the segment’s second half results were relatively weak, so its planned store closures must be monitored closely to determine if the improvement is significant.
Phoebe Tse – Barclays We believe Sa Sa is still likely to continue to see slow revenue growth this year in the HK/Macau segment, as mainland spending in Hong Kong remains weak, and the company continues to focus on better value products. There is also downside risk if government decides to implement policies to restrict the growth of mainland visitors to Hong Kong. We are looking for 7% HK/Macau sales growth in FY15E. Katherine Chan – CIMB We think Sa Sa is vulnerable to an uncontrollable slowdown in tourists arrivals, with 20%+ of its stores located along the train lines and Chinese tourists sales account for ~70% of the total. We expect sales growth to normalize to 11%/12% in FY15-16, mainly on ticket size declines, from 20%/14% in FY13-14. We expect Sa Sa’s FY15-16 earnings growth to normalise to 10-15% from as high as 31% in June 2008, due to slowing Chinese tourists’ growth. Renee Tai – UOB The company’s initiatives to change product mix and its store revamp in China will yield more positive impact from 2HFY15. We still peg our target price at 18x FY15F PE, at a 20% discount to its historical mean. We think this is justified, given the increasing challenges stemming from slower Chinese visitor arrivals in Hong Kong, which will result in slower earnings growth momentum. The threat from online is currently limited, given the 20% price gap between Hong Kong and products sold at online stores in China. Nonetheless, Sa Sa is still expected to deliver a respectable net profit CAGR of 18% over FY14-17.
FINANCIAL INSIGHT: IPOs
The HK IPO market saw a 110% increase in deal numbers
Hong Kong IPO market rides high as Singapore’s sinks The disparity in momentum widened further in the first half of 2014.
ong Kong solidified its dominance as the preferred initial public offering (IPO) market in Asia Pacific, capturing the lion’s share of what has been a bumper year for the region, while its rival Singapore languished with multiple delistings and a crisis of investor confidence. Deal numbers and funds raised in the territory doubled over the past year, driven by stronger demand from Chinese and international investors that lured in issuers from Singapore and other shaky IPO markets. Regional hotspot The HK IPO market saw increases of 110% and 104% y-o-y in terms of deal numbers and funds raised respectively in the first half of 2014 (1H14). This was mainly due to the continued moderate
20 HONG KONG BUSINESS | SEPTEMBER 2014
Globally, HKSE ranked fourth in terms of IPO proceeds, and captured 9.5% of market share.
recovery of the global economy and solid performance of the stock market, says Ringo Choi, Asia-Pacific IPO leader at EY. A number of so-called mega IPOs led the surge, with the top three IPOs accounting for over half of total funds raised in 1H14. Topping the list during the period was the market debut of HK Electric Investments whose US$3.1 billion IPO made it the largest equity capital market, not only in Asia Pacific but in the world, by funds raised in 1H14. The HK IPO market’s sterling performance is magnified by the fact that Asia Pacific led global activity in 1H14. The territory, in particular, has emerged as a regional hotspot because of its less aggressive pricing and subsequent listing of most firms at reasonable valuations. Thomson Reuters data show
that the Hong Kong Stock Exchange (HKSE) captured US$11.5 billion in proceeds, or 42.1% of this year’s initial public offerings in Asia Pacific, which totalled US$27.3 million. HKSE proceeds are up 129% compared with the first half of 2013, when it drew in US$5.0 billion. In effect, HKSE has secured a stronger foothold as a premier IPO market in the region. Its market share in IPO listings is almost double that of the secondranked and also fast-growing Australian Securities Exchange (ASX) with 19.2% market share and US$5.3 billion in IPO proceeds, up 140.2% from the same period last year. Globally, HKSE ranked fourth in terms of IPO proceeds, and captured 9.5% of market share. New York took the lead, with US$21.6 billion, up 27.7% from the first half of 2013. New listings surged The HKSE may have missed out on several mega IPOs in recent months but the local market was buoyed by a crush of new
FINANCIAL INSIGHT: IPOs listings this year, says Elaine Tan, senior analyst, deals intelligence, Thomson Reuters. IPO proceeds from new listings amounted to US$11.5 billion, and there was a 175.0% increase in number of issues. “China pork producer WH Group cancelled its US$1.6 billion Hong Kong IPO, which would have been Hong Kong’s largest IPO based on its targeted size of US$5.3 billion. However, the group cut the offer size by more than half, before eventually pulling the deal completely due to weak demand,” says Tan. “In addition, Chinese internet commerce business Alibaba Group Holdings chose New York over Hong Kong for its IPO, which is expected to raise in the region of US$20 billion. Nevertheless, Hong Kong still managed to achieve the highest level of first half IPO issuance since 2011, at US$14.6 billion.” Around two-thirds or at least US$7.7 billion of IPO proceeds raised on the HK stock market came from Chinese companies. Two H-share IPOs alone raised over US$1 billion: China CNR Corp’s deal totalled US$1.3 billion, and Harbin Bank raised US$1.1 billion. “China’s decision to allow fewer IPO listings on its local bourses in 2014 could act as an incentive for mainland issuers to tap overseas equity markets, and may prove favourable for alternate venues such as Hong Kong,” says Tan. “A robust IPO pipeline for the remainder of 2014 and financial reforms to boost investor confidence – including the recently launched Shanghai-Hong Kong Stock Connect programme – could boost the city-state’s IPO market.” Near-term future looks bright The HK IPO market is set to grow even more in the near-term thanks to the burgeoning synergy between the HK and China capital markets. “We expect that the connection between Hong Kong and
Mainland China capital markets will be further forged,” says Choi. “A number of polices will be issued which will attract more mainland China companies to Hong Kong market, such as Shanghai-Hong Kong Stock Connect, which is expected to be implemented in the second half of 2014, and the full circulation of H share.” Choi says HK could also benefit from the long waiting list in the A-share IPO, as some companies seeking to be listed in A-share market could consider turning to Hong Kong in order to rush their listing. He also expects a number of B-share listed companies to continue turning to H-share market. Dismal performance While the HK IPO market flourished, Singapore’s shrank at a worrying pace. Thomson Reuters data show that proceeds from Singapore IPOs totalled only US$1.1 billion during the first half of this year, a 61.3% year-onyear decline. The Singapore IPO market experienced its slowest first six-month period since 2012. “The Singapore IPO market had a weak start in 1H14 as the crash of penny stocks in the later-half of 2013 hampered retail investor confidence. Moreover, the country has seen an increase in the number of delistings over the past few months as owners being putoff by decline in trading volumes and encouraged by cheap credit are opting to take companies off the market,” says Choi. Due to the barrage of delistings and negative sentiment that weakened the confidence in the Singapore Exchange (SGX), officials have been rolling out measures in an attempt to reverse flagging investor interest. SGX has cut clearing fees on stock trades to revive investor confidence and is amending secondary listing rules to attract more overseas firms, says Choi. SGX measures will go a long way in pushing the IPO market past the rough waves brought
on by volatile macroeconomic conditions and short-term fears, says Dr Ernest Kan, chief of operations, clients & markets at Deloitte Singapore. These measures should help the exchange ride out the current slowdown and enter the second half of 2014, during which prospects are rosier due to a stronger pipeline of IPOs. Big-name listings Despite the underperformance in recent months, several bigname listings seem undeterred and are slated to list in SGX. Namely, Accordia Golf Business Trust – Japan’s largest golf-course operator’s upcoming US$626m cross-border listing – which will be the largest IPO in more than a year. Among the companies that opted to list in Singapore, PACC Offshore Services Holdings Ltd was a standout with its US$375.5 million proceeds, making it the largest IPO in Southeast Asia this year. The offering is also the largest in Singapore since the IPO of Soil Business Space REIT, which raised US$395.7 million in August 2013. Analysts note that SGX attracted mainly real estate investment trusts (REITs) and business trusts deals, but it needs to expand from being a niche market. Singapore must shore up its IPO pipeline and address potentially higher interest rates if it is to have any chance of competing with Hong Kong and the rest of the listing leaders in the region.
IPO in Hong Kong Stock Exchange (HKSE) First Half-Based Volume Trend
Source: Thomson Reuters
HONG KONG BUSINESS | SEPTEMBER 2014 21
ANALYSIS: self-storage industry
MiniCo self-storage facility in Hong Kong
How Hong Kongers can pack up, store and stow away For space-hungry Hong Kong residents, self-storage is the way to go.
hen Henry Chan scanned the Hong Kong market in 2001 to see whether there could be a demand for self-storage services he noticed that the territory was on the cusp of an industry boom. Not only had Hong Kong become densely populated, affluence was also climbing rapidly. Many Hong Kong residents were willing and able to afford self-storage; usually short-term rented spaces where users could store non-daily items like furniture, seasonal clothes, documents and keepsake collections. Self-storage allows users to free their cramped homes of clutter, and was viewed as a better option than discarding precious items or moving to a larger, more expensive abode. Convinced of the potentially high demand for self-storage services in Hong Kong, Chan
22 HONG KONG BUSINESS | SEPTEMBER 2014
Around 300 selfstore locations are scattered throughout the territory with an average site size of 10,000 sq ft divided into 1490 sq ft units.
leased space in a building in Kwun Tong and opened the first MiniCo self-storage facility. In just over a decade MiniCo has grown exponentially. “We started our first operation with 15,000 square feet (sq ft). We are now nine times larger with 140,000 sq ft of storage space,” says Chan, now the general manager at MiniCo Asia Limited. MiniCo’s growth can be attributed to providing consistently high quality service to the specific self-storage needs of Hong Kong residents. Industry insiders describe the typical self-storage residential customer as someone who wants the facility to be easily accessible from home and the Mass Transit Railway (MTR). Business customers, meanwhile, often require climate control to keep their wine and art goods in pristine condition. “Hong Kong’s population wants
its self-storage closer to home than most Westerners. The humid environment means climate controlled facilities are in much higher demand. Its growth as a wine and art trading hub creates demand for niche players,” says Andrew Work, former executive director of the Canadian Chamber of Commerce in Hong Kong from 2007 to 2012. The self-storage penetration rate in Hong Kong is currently at 0.35 sq ft per capita per person, estimates Helen Ng, deputy chair of the Self Storage Association Asia. She says demand is driven by the territory’s densely packed population teeming with middleincome families, expats, and small and medium enterprises. Self-storage facilities are commonly located closer to the MTR since the average customer tends to use the MTR. “The key demand driver is insufficient on-site storage space among domestic and corporate users. Self-storage provides flexible off-site storage options for households living in private residential premises. Operators offer their facilities with flexible, beneficial lease terms for corporations requiring extra storage space when their existing facilities become insufficient to accommodate their inventories,” says Doreen Goh, associate director, research & advisory at Colliers International. Supply and competition What began as a wide-open playing field for MiniCo has turned into a competitive arena consisting of more than 70 operators in Hong Kong, with a combined 3.5 million sq ft of gross space occupied, according to CBRE data. The majority of facilities in Hong Kong operate under a franchise model. Around 300 self-store locations are scattered throughout the territory with an average site size of 10,000 sq ft divided into 14-90 sq ft units. “The most expensive locations
ANALYSIS: self-storage industry for self-store are, not surprisingly, on Hong Kong Island within proximity of Central such as North Point and Kennedy Town,” says Darren Benson, senior director, industrial & logistics services, Hong Kong, Macau & Taiwan at CBRE. He says the property selection process is critical to the success of the various facilities. “Self-store operators have benefited twofold; firstly through improved facility management and returns, and secondly by securing large increases in the value of the underlying assets – effectively a form of cash flow positive land banking.” For its part, Goh provides a more conservative estimate of 2.8 million sq ft of self-storage space currently operating in the city. Hong Kong residents have embraced the concept of self-storage due to the general lack of a storage room in the typical home and wide availability of self-storage spaces. Goh estimates that as of last year about 820,000 households were living in homes without a store room. “If half of these households would lease 15 sq ft of self-storage space each – about 50% of the size of a dedicated store room – to accommodate their storage needs, the market size of self-storage would be about 6 million sq ft,” she says. Given Goh’s data assumptions, the available self-storage space from current operators meets only half of the market size. This is why analysts believe the industry is far
from being saturated and is poised to grow by leaps and bounds over the next decade. “In both Singapore and Hong Kong, we have not reached the point of market saturation yet, although the increased competition has driven operators in both countries to introduce more innovative and holistic offerings, such as pairing selfstorage with packing and delivery services,” says Ng. Work estimates that the Hong Kong self-storage market could grow another 500% based on benchmarks against the more developed US market. Main players Hong Kong’s self-storage industry is a highly fragmented market dominated by a few main players and a smattering of smaller players. The top four self-storage companies control more than half, or 52%, of the market in terms of gross space occupied: Store Friendly with 20% market share, followed closely by SC Storage (17%), The Store House Ltd (9%), and Apple Storage (6%). But the leader rankings could soon be shaken up, with Apple Storage expanding rapidly, says Benson. Among the smaller players, which include MiniCo with its 4% market share, competition is also bound to become brutal. The likes of Cube Storage are taking up significant new space in Kowloon East, while
some Singaporean operators also coming to Hong Kong to secure a piece of the unserviced market. Benson foresees an imminent industry consolidation given the current crush of competitors in Hong Kong. Those that manage to survive have plenty of room to grow with demand expected to balloon as more residential and business customers find uses for these spaces. “We expect significant industry consolidation as the market matures, as it is currently very fragmented with many operators with typically small facilities. We have seen significant take-up of industrial space by operators which is then converted to self-storage space, thus in effect forming a new user sub-market,” adds Benson. Challenges and risks Managing the skyrocketing growth and fast maturation of the selfstorage industry will be a key challenge for all players, as well as the Hong Kong government. Industry standards and regulations will need to be enforced to ensure healthy competition and sustained high standards of service for customers. “New operators will need to learn from those that came before them. Industry standards, and its guarantors, will be needed to educate and reassure a new selfstorage consumer class. Industry standards will also guide inevitable regulation that will follow industry development,” says Work.
Hong Kong has a highly fragmented market
A new user sub-market was formed by converting industrial space to self-storage space.
hong kong’s 20 largest Banks more than last year. Standard Chartered Bank (SCB) is in fourth place with a headcount of 6,000. SCB recently appointed May Tan as the bank’s first female chief executive in Hong Kong. Our channel checks with analysts indicate that boosting weak profits will be a major challenge for Tan, who took on the top job at the start of July.
HSBC clinches top spot for the second time in a row
What’s new at Hong Kong’s biggest banks? HSBC increased headcount by 9% to 29,000 and opened a new building in Shek Mun this year.
ong Kong and Shanghai Banking Corp (HSBC) remains the largest licensed bank in the city, based on the number of employees with 29,000, according to Hong Kong Business’ second annual survey. This represents 9% growth from last year’s 26,712. The number is expected to grow further this year as it opened a new building in Shek Mun in May. Comprising 12 floors with a gross floor area of more than 42,000 square metres, HSBC Building Shek Mun houses a data centre to complement HSBC’s primary data centre in Tseung Kwan O. It provides world-class office space for up to 1,800 employees of various departments, complete with staff amenities to promote worklife balance, including mother-care rooms, prayer room, gym and a 24 HONG KONG BUSINESS | SEPTEMBER 2014
Altogether, the top five comprise 74% of the 85,841 total employment of the 20 largest banks in the list.
social lounge on the roof. Sean O’Sullivan, Group Chief Operating Officer, HSBC, was quoted as saying, “The Shek Mun building represents the next generation of data servicing at HSBC and is a practical demonstration of how we’re reducing complexity and improving our operational excellence.” Maintaining their rankings All other banks in the list maintained their rankings from last year. Bank of China (BOC), which saw staff strength growing to 14,647 from last year’s 14,638, is ranked second. Recent media reports say that BOC is currently hiring traders and salespeople as it plans to set up a high-yield bondtrading platform in the city. Hang Seng Bank, with 7,932 people, came in third. This is 200
SCB’s major challenge SCB’s 1H14 core operating profit plunged 20% YoY (USD3.3b). MayBank Kim Eng report that the lacklustre performance was due to a 20% YoY decline in Financial Markets income; a mid- to single-digit YoY decline in Retail Products income; and high-teens YoY increase in loan impairments. Moving forward, MayBank also cautions about the quality of commodity finance in China. “SCB had USD250m in commodity-related exposure in Qingdao in Jun 2014. It is unclear whether SCB suffered from the recent alleged commodity-finance fraud of Decheng Group in Qingdao. We raise our credit cost forecast from 0.53% to 0.64% for 2014.” Barclays agrees, while noting that some of the Hong Kong banks have already seen some credit quality deterioration here, although China overall remains a small part of Standard Chartered’s loan book. Rounding out the top five is Hong Kong’s largest independent local bank with total consolidation assets of HK$754.0 billion as of end-2013, the Bank of East Asia (BEA). It employed 5,692 people in Hong Kong. BEA’s opening of its new centre on the 33rd floor of Tower One at Times Square unveiled new look for its SupremeGold brand. To further strengthen its presence in Causeway Bay, BEA has opened two digital branches – one at the ifc mall in Central and the other on Level B3 at Times Square. Altogether, the top five comprise 74% of the 85,841 total employment of the 20 largest banks in the list.
hong kongâ€™s 20 largest Banks
The 20 largest licensed banks in Hong Kong No. of employees 2013 2014 Ranking
No. of employees 2013
ceo country head
Hongkong and shanghai banking corp.
BANK OF CHINA (HONG KONG)
hang seng bank
Rose Lee Wai Mun
standard chartered bank
bank of east asia
David K.P. Li
china construction bank (asia) corp.
Dah sing bank
wing hang bank
Fung Yuk Bun (Patrick JP)
industrial and commercial bank of china (asia)
wing lung bank
shanghai commercial bank
David Sek-Chi Kwok
china citic bank international
Raymond Wing Hung Lee
Tan Yoke Kong
chiyu banking corp.
STANDARD BANK (HONG KONG)
tai sang bank
Ma Ching Hang, Patrick
tai yau bank
Data provided by companies *estimates, media reports, company websites, previous data **latest annual report *** After integration of China Construction Bank (Asia) and HK Branch of China Construction Bank Survey period until March 2014
HONG KONG BUSINESS | SEPTEMBER 2014 25
FATCA’s impact on HK ORSO Schemes How to comply with this tax avoidance law and possibly secure exemptions.
ow that an intergovernmental agreement (IGA) has been reached between Hong Kong (HK) and the United States (US), the territory’s retirement schemes that fall under the Occupational Retirement Schemes Ordinance (ORSO) have clearer guidelines on compliance and exemptions. ORSO schemes have also effectively been given until 2015 to comply – a transitional relief period that should be used wisely to foolproof their FATCA compliance procedures or risk being subjected to a large withholding tax, according to tax law experts. What is FATCA? The Foreign Account Tax Compliance Act (FACTA) legislation is a complex US anti-avoidance tax law aimed at stopping US citizens and taxpayers “hiding” income offshore, say Richard Norridge and Casey O’Hara, lawyers at Herbert Smith Freehills. Norridge and O’Hara say the FATCA rules are meant to force all non-US foreign financial institutions, including those in Hong Kong, to report to the US Internal Revenue Service information about their US financial accounts. Non-compliant foreign financial institutions will have a 30% withholding tax imposed on all US source withholdable payments, including US source dividends, interest, rents, salaries and gross proceeds from sale.
“HK ORSO schemes that fall into one of the categories of “exempt beneficial owner” will be excused from this withholding tax penalty.” How does IGA affect FATCA compliance? Previously, Hong Kong financial institutions, including ORSO schemes, were uncertain about how to comply with demanding FATCA compliance rules, say Karl J. Paulsen Egbert and Michael Hirschfeld, partners at Dechert LLP. But the IGA, along with other temporary compliance relief from the US Internal Revenue Service (IRS), eased some of FATCA’s most pressing tasks and clarified the actions available to ORSO schemes. Norridge and O’Hara say the IGA will require Hong Kong financial institutions to register with the US tax authorities and to report information directly to them. Hong Kong financial institutions should also find it easier, through IGA provisions, to become FATCA compliant and therefore not be subject to withholding tax. 26 HONG KONG BUSINESS | SEPTEMBER 2014
Hong Kong financial institutions will now have two sets of tax reporting obligations – their existing basic reporting obligations to the Inland Revenue Department, and FATCA reporting directly to the US IRS with the first reporting deadline on 31 March 2015, say Egbert and Hirschfeld. Duncan Abate
What schemes will be considered “exempt beneficial owners” under the IGA? HK ORSO schemes that fall into one of the categories of “exempt beneficial owner” will be excused from this withholding tax penalty. Duncan A. W. Abate, partner at Mayer Brown JSM, says there are two categories of “exempt beneficial owner” that could apply for ORSO schemes identified in the IGA: Broad Participation Retirement Funds and Narrow Participation Retirement Funds. Different conditions will apply for satisfying the two different categories, but four conditions are shared between Broad and Narrow Participation Funds, which are as follows: the ORSO scheme must be established or located in the HK Special Administrative Region; to provide retirement, disability or death benefits; to current or former employees of one or more HKSAR employers; and the ORSO scheme must be approved and registered by the Mandatory Provident Fund Schemes Authority. Is there are transition period for compliance? Egbert and Hirschfeld say that the IRS has outlined the transition period until the end of calendar year 2015 during which there will be lax enforcement of many of FATCA’s requirements, including withholding, for financial institutions that are making “good faith efforts” to comply with FATCA. They also note that withholding agents that are tasked to implement FATCA’s 30% penalty tax are also given leeway if they, too, are making good faith efforts to comply. “As a result, Hong Kong financial institutions are unlikely to face withholding before 2015. Through the transitional relief, financial institutions also have additional time to start conducting due diligence on new accounts that are opened by entities,” say Egbert and Hirschfeld, although that time should not be squandered or financial institutions may find themselves stuck with faulty FATCA compliance procedures and punished with high withholding tax. “Fund documents must be updated, and subscription processes must be tested. The IGA illuminates their path, and the transitional ‘good faith’ relief should allow compliance officers to sleep easier. But FATCA remains an intricate law – and the interplay of the transitional relief, local IGAs and the underlying regulations adds a new complication.”
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Facebook vs Google in mobile marketing
Choosing either – or even both – comes down to your target audience and brand goals.
arketers know that when it comes to down to it, a mobile campaign should be built around one or both of the most popular platforms in the world: Google and Facebook. But even with just two choices, the decision is far from straightforward due to their comprehensive suites of features that help you push out a product and promote your brand. The savviest of mobile marketers will take time to scrutinize the strengths of each platform to see which platform can help drive home key objectives. Do you harness Google’s tremendous targeted search capability? Or leverage Facebook’s community building competence? Or maybe both? Once the strategy is set, then it is just a matter of sticking to your guns to make sure the campaign execution is immaculate, according to industry experts. Pull and push Currently two of the biggest companies in the world, Google and Facebook, have built up impressive platforms that can reach millions of mobile users. But their methods of doing so are starkly different. “Google and Facebook demonstrate the difference of pull and push mobile marketing strategy,” says Tammy Foo, social media marketing director at GHC Asia. “The audience needs to take the initiative to search from Google, while Facebook’s message just pushes out to their followers.” Marketers who choose to play to the ‘pull’ strengths of Google like Andrew Flanagan, executive director, social media and digital marketing at Lenovo, usually tap the platform for its ubiquitous search engine and massive video reach. “Google also offers a wide range of digital marketing tools which we leverage every day. Two 28 HONG KONG BUSINESS | SEPTEMBER 2014
The audience needs to take the initiative to search from Google, while Facebook’s message just pushes out to their followers.
specific tactics stand out; search (search engine optimization/search engine marketing) and video are essential ingredients in our campaigns and daily execution,” says Flanagan. He says mobile search is crucial to support a brand’s retail shopping experience. When customers are looking for product information, they are more open to deals or coupons that could catch their attention and speed them along the buying process. For Lenovo, placing in the top 10 for each keyword search result is a must to capture potential customers as early as the enquiry stage. Lenovo also leans on Google YouTube for video brand campaigns, live events, product launches and product tours. Video marketing provides a richer experience, says Flanagan, and is optimal for entertaining, educating, and inspiring consumers. Facebook strategies Meanwhile, marketers who choose Facebook to ‘pull’ customers to their brands should adopt a strategy which mobilizes fans to interact with and share your content. Chinmay Malaviya, managing director at foodpanda Hong Kong, found using Facebook to be the most successful strategy when it comes to getting fans to download foodpanda’s mobile application. “We see two main reasons for this. Firstly, Facebook allows us to reach out to more potential customers as most of Facebook users do not actively search for food on Google. Secondly, Facebook allows better reporting and tracking for mobile marketing which we find very useful.” Marketers can simply follow a four-pronged approach to build their own successful campaigns on Facebook, according to Kenneth Bishop, director, marketing (APAC) at Facebook, that is, Build-Connect-Engage-Influence. First, build a social media presence by creating a Facebook page. Second, connect and grow your audience by getting more people to become fans, either organically or using Facebook tools that let you reach out to specific target audiences. By now your audience is fairly large, so the third step is to engage them with the story of your business and brand – and make sure to leave room for plenty of fan interaction. The fourth and most crucial step is to drive word-of-mouth by encouraging fans to tell their friends about the brand. Before you know it, you will have gone viral in the world’s most popular social network – and all because you asked your passively browsing mobile fans to get involved and take action. “Facebook’s reach is unparalleled - there are over a billion people on Facebook, and over 600 million active mobile users. As the largest global and local mass medium, it’s also the only single platform that can provide marketers the opportunity to reach a target audience at a massive scale throughout the day,” says Bishop.
ANALYSIS: asia’ supertalls
Hong Kong’s central business district crowded with supertall office buildings
Height is might as Chinese firms seek HK supertalls Firms from Mainland China yearn for the prestige of occupying a supertall office in Hong Kong.
can the floors of Hong Kong’s six supertall office buildings and you will find them increasingly filled with tenants from Mainland China, alongside the biggest banks and financial firms. Price is no problem for most of these ambitious and cashflush companies. For PRC firms, the high rental premiums for leasing spaces in the 188-storey International Commerce Centre (ICC) and other buildings with a height of over 300 metres are worth the price. Not only do they receive a huge branding boost from having an office address in a famous Hong Kong supertall – which they advertise profusely to potential clients – they also obtain a slew of business benefits such as increased operational efficiency and partner accessibility. As more Mainland
30 HONG KONG BUSINESS | SEPTEMBER 2014
The smallest office unit size in Central Plaza and Two IFC are approx. 900 sq ft. and 1,300 to 1,500 sq ft. respectively.
China companies have expressed their intent to open offices in Hong Kong’s supertall buildings, landlords have accommodated them for being some of the most affordable tenants in the market, according to Denis Ma, head of research at Jones Lang LaSalle. Many of these companies have succeeded on the domestic front and want to test the waters in the territory before proceeding with a regional or global expansion, so the steep rents are no problem for them. “Paying higher rental prices may not be their primary concern,” says John Siu, managing director at Cushman and Wakefield, implying that companies would rather pay high rents than be located somewhere a little less attractive. “The most affordable tenants leasing in Hong Kong have been
PRC companies, rather than a particular industry sector. Larger tenants are often the biggest beneficiaries of the efficiency and economies of scale provided by supertall buildings and as a result usually make up the bulk of occupancy,” says Ma. PRC firms, along with the traditional tenant base of banking and finance firms, currently comprise the majority of occupants in supertall office buildings. “Most of the occupiers in Two IFC and ICC in Hong Kong are banks and financial institutions, whereas the occupiers in Nina Tower are mainly trading companies. The tenant mix in Central Plaza is diversified,” adds Siu. That is not to say that smaller but fast-growing firms have no room in supertall buildings. In fact, Ma says most landlords typically reserve some floors for smaller businesses since these tenants are willing to pay the highest unit rentals. Due to the demand for these smaller spaces, some serviced offices have opened in supertall buildings, providing a more cost effective option for even the smallest of businesses. Servcorp, a serviced office provider in Hong Kong, offers such spaces in IFC that cater to smaller businesses through customised offerings. “There are small units in these super tall buildings. For examplethe smallest office unit size in Central Plaza and Two IFC are approx. 900 sq ft. and 1,300 to 1,500 sq ft. respectively,” adds Siu. Rental premiums PRC firms and other tenants that want to lease spaces in supertall office buildings have to pay a premium, says Ma, and are almost always willing to do so for the prestigious address, enhanced efficiency, and breathtaking views. “Super tall buildings tend to attract office occupiers who seek prestigious office accommodation in city.
ANALYSIS: asia’ supertalls These buildings will, to some extent, raise the profile and enhance the competitiveness of the city,” adds Chiu. In a recent CBRE survey, companies were asked what factors affected their decision to lease space in a supertall building, and they cited positive image and branding as the most important consideration. “The high profile, prestige and visibility of supertall office buildings mean occupiers frequently use them as a marketing tool,” says Henry Chin, head of Asia Pacific Research at CBRE. Tenants are also attracted to supertall buildings because they are well located in prime districts or newly developed Central Business Districts (CBDs). Supertall buildings boast of high standards of infrastructure and connectivity to transportation networks and other major downtown areas, making them extremely appealing work locations. Ma adds that supertall buildings allow their tenants to be in relative proximity to each other. “Hong Kong is one of only a few cities in the world where an individual can attend up to 5 or more meetings in one day. A big part of this has to do with the relatively high density of the city’s core office markets.” “Planning, designing, constructing and operating a supertall office building is very demanding and must overcome numerous challenges including wind and earthquake resistance, fire separation, and elevator
connectivity. The standard and quality of power back-up, airconditioning and water supply systems are generally much higher than in other Grade A office buildings,” says Henry Chin, head of Asia Pacific Research at CBRE. Last but not least is aesthetics, with supertall buildings providing unmatched views of the Hong Kong cityscape. This is why higher floors in supertall buildings are noticeably more expensive to lease. “Open views typically command higher rents and, in a built up city like Hong Kong, that generally means being on a higher floor,” says Ma, citing transactional evidence that indicate tenants are willing to pay a rental premium to be located on higher floors. This premium could be as much as 25% between low and high floors in buildings like 88-storey Two International Finance Centre (2IFC). Home of supertalls Hong Kong has long been renowned for its tall and supertall office buildings. Hong Kong ranks fourth globally among cities with 69 tall office buildings measuring more than 150 metres, according to CBRE Research data as of June 2014. The territory ranks behind New York City (152 tall office buildings), Shanghai (96) and Tokyo (75), and ranks above Chicago (62). With six supertall office buildings, Hong Kong also leads the world among cities with
the largest number of supertall office buildings, CBRE data also show, beating out Chicago (5), Guangzhou (5), Dubai (4) and New York City (4). Chin notes how Tokyo, Hong Kong and Singapore all rank highly on the Global Financial Centres Index, which rates the competitiveness of global financial centres. These three Asian cities are in fact within the top six cities in the index, and have a large number of tall buildings, which may not be a coincidence. “The high profile of these cities has created the perception within the region that mature global financial centres are comprised of tall building clusters,” adds Chin. However, Siu warns that there are some disadvantages of occupying a supertall office building, such as higher building management charges (due to higher building maintenance costs), longer vertical travelling time in lifts, lower space utilization ratio, and safety and evacuation concerns. Stalling on supertalls While cities like Shanghai are expected to build more supertall and tall office buildings, Hong Kong’s new supply is seen to be one of the lowest in the next five years. The lack of new tall buildings in the pipeline for Hong Kong can be attributed to two factors, says Ma. The first is more stringent building height restrictions, due to the government imposing
Factors influencing tenant selection of space in supertall office buildings
Source: CBRE Research, CTBUH, June 2014
The 78-storey Central Plaza behind other skyscrapers
HONG KONG BUSINESS | SEPTEMBER 2014 31
ANALYSIS: asia’ supertalls
ICC Tower, Kowloon
height restrictions on developments in an effort to preserve the views of the city’s ridgelines from key vantage points. Secondly, Hong Kong is facing a shortage of large development sites, especially in the CBD, on which to construct tall buildings. Ma says tall buildings require large development sites, citing how supertalls like the 2IFC and ICC, the tallest building in Hong Kong and seventh tallest in height in the world, have floor plates in excess of 25,000 sq ft. Other building controls such as plot ratios, site coverage, and setbacks have also impeded the growth of supertall and tall buildings in Hong Kong, adds Ma. In contrast, China now dominates the development pipeline of supertall buildings. The country accounts for 71% of the total future supply of supertall office buildings to be completed during the period, with Tier 2 cities accounting for 51%. With a high percentage of supertall building tenants flocking to Hong Kong from the Mainland, developers in the latter seem determined to provide rival spaces in emerging financial hubs like Shanghai and Guangzhou. Supertall strategy is not enough With a dearth of supertall office buildings on the horizon, is Hong Kong in danger of slipping in the competitive rankings of global 32 HONG KONG BUSINESS | SEPTEMBER 2014
Nina Tower skybridge
financial centres? Not likely, say analysts. Ma argues that Hong Kong’s status as a global financial centre does not hinge solely on its supertall buildings. He admits that the sight of these magnificent constructs helps build a perception of progress, and it should be easier to convince businesses considering a move to Hong Kong that it is a global financial centre upon seeing its skyline filled with supertall buildings, but other factors also come into play. “It takes more than just supertall buildings to be a global financial centre, but as a visual cue, yes, the number of supertall office buildings in a city would probably be a reasonable indicator; at the very least it would likely mean that the city is aspiring to become a global financial centre.” “Other possible indicators, taken collectively in conjunction with supertall office buildings, would include: the breadth of bank signage on the city’s buildings, and the number of high-end hotels and restaurants,” adds Ma. Chin believes that other Asian cities that are trying to catch up with Hong Kong to compete as a global financial centre would have to do much more than erect a string of supertall office buildings. “The ‘build it and they will come’ strategy adopted by emerging
“Hong Kong is facing a shortage of large development sites, especially in the CBD, on which to construct tall buildings.”
financial centres in Asia has not worked. Whilst Shanghai has attracted a steady flow of financial sector occupiers and is making gradual progress towards establishing itself as a financial hub, other cities have been unable to attract the same calibre and volume of tenants, despite constructing high quality supertall office buildings,” says Chin. “This reflects the reality that there are far more important success factors required than the mere construction of supertall office buildings for a city to establish itself as a regional or global financial centre,” adds Chin. He says that emerging cities that want to compete with Hong Kong need to improve factors like the business environment, legal and tax systems, market transparency, and political stability.
Distribution of tall office buildings by 2018
Source: CBRE Research, CTBUH, June 2014
REGIONAL ANALYSIS 1: GLOBAL TRADE a sharp reduction in China’s current account surplus and slowing GDP growth over the last few years, has raised concerns about China’s ability to continue to drive global trade higher.
China has emerged as a mega-trader Exports, major trade corridors,1990 and 2012 Source: IMF DOTS, Standard Chartered Research
China as the mega-trader
China’s ability to continue to drive global trade higher is questioned.
recent paper from the Peterson Institute suggested that China is the only genuine mega-trader to have emerged since the time of the British Empire (Subramanian and Kessler 2013). The authors define a mega-trader as a country with a significant share of trade both domestically (relative to its own GDP) and globally (relative to world trade). While other Asian economies such as Singapore and Korea enjoy very high trade/ GDP ratios they do not have a significant share on a global scale. The significance of China on the world trade map is evident from its dominance in terms of the world’s largest ports, a good proxy of world trade. China’s rise to the second biggest economy has been partly driven by its booming exports. China has grown to be the biggest contributor to world trade, accounting for over 11.5% of total world trade, second only 34 HONG KONG BUSINESS | SEPTEMBER 2014
China has grown to be the biggest contributor to world trade, accounting for over 11.5% of total world trade, second only to the EU.
to the EU. While world trade has slowed following the GFC, the emerging markets have shown resilient growth. China’s share of world trade has risen to 11.5% in 2012 from 7.5% in 2007 even as developed markets’ trade has fallen by 10ppt and even as China’s share of trade in its own GDP has gone down. More than half of China’s burgeoning trade is with Asia, accounting for 52% of China’s exports and 56% of its imports. In addition, China is also already the biggest trade partner for almost all the Asian countries. China’s exports to emerging Asia suffered a mild setback during the GFC, but did not experience as significant a reduction as did trade with the developed markets. The contribution of net exports to China’s growth has fallen significantly since 2008 and growth has been powered increasingly by investment and domestic consumption. This, together with
Slowing trade growth China’s trade is beginning to slow. This is only natural given the rising dominance of China in global trade and output. But the process seems to have intensified since the GFC. There has been no contribution of net trade to overall growth since 2010. This reflects a greater slowdown in China’s exports than imports. China’s exports fell as a share of GDP to 25% in 2012 from around 35% in 2007, while imports fell by a smaller 5ppt to 22% of GDP. This is more dramatic than for other major countries. China’s export slowdown has been quite broad-based, with even export growth to Asia easing to just 12% annualised since 2010 from around 20% annualised during the 2000-07 period. Exports to other EM partners such as Latin America and Africa have also slowed, but are still growing at double-digit levels. China’s export growth has been dragged lower by a sharp decline in exports to the developed world, with exports growing at an average 6% to Japan (from 12% in 2000-07), 7% to North America (from 21%) and a mere 3% to Europe (from 26%). China’s exports to countries such as Italy and France have fallen as these countries have battled recessions. As export growth has slowed, and given China’s role in the global supply chain, import growth has also weakened over the last few years. Big drops in import demand are seen from Latam (averaging 9% annual growth during 2010-13 compared with 32% pre-GFC) but import growth has also slowed from Asia due to supply
REGIONAL ANALYSIS 1: GLOBAL TRADE chain inter-linkages (7% now compared with 20% pre-GFC). Meanwhile China’s GDP growth has powered ahead, boosted by high investment in infrastructure, housing and industrial capacity, all of which have a lower import content than does export activity. There are several reasons why we remain constructive on China’s position as the leader of world trade. Why China’s still a trade leader First, China stands to gain considerably from the ongoing recovery in the developed world. China’s trade has been growing at a rate of more than 10% since the GFC, despite muted demand from the developed world. The DM growth outlook is picking up now so China should benefit overall. The United States was, until recently, China’s biggest export destination. 45% of China’s exports to the United States are machinery and electrical equipment, which amounted to USD 169bn in 2013, bigger than the total exports of several EM countries. These exports will grow as US consumption increases and demand for technology rises. As a result, we expect China’s trade surplus to rise in the near-term, led by stronger exports over 2014. Second, China remains a leading force in world trade, having consolidated its position as key player in global supply chains. As we argued above, while China’s low-cost advantage is China: Asia’s biggest trade partner % share of total
Source: CEIC, Standard Chartered Research
China’s trade has been growing at a rate of more than 10% since the GFC, despite muted demand from the developed world.
eroding, the pace of movement of manufacturing to lower cost countries or to reshoring/ onshoring by developed countries is likely to be slow. China is moving up the valuechain, increasing its share of medium- to high- technology exports. Almost a third of China’s overall exports are hi-tech products, particularly mechanical and electronics products. While many of these exports are still only assembled in China, they require semi-skilled labourers as well as technology infrastructure. We believe it is unlikely that there will be significant migration of these processes out of China for lack of suitable replacement centres, with both the infrastructure and the scale to accommodate these exports. Locations such as Vietnam, Bangladesh and Sri Lanka certainly provide cheaper options than China for low-end exports such as clothes and toys, particularly as Chinese wages continue to rise. However, it will likely prove hard for migration of semi-skilled, value-added activities, such as the assembly of tech products, to these economies in the absence of significant investment in infrastructure and an increase in the availability of skilled labour. Additionally, reverse migration to Taiwan or back to the United States is unlikely, as the cost of labour in China is significantly cheaper than in developed markets. Countries tend to be exporters in industries where they have large domestic markets (Krugman 1981). Even if China pursues policies that support greater domestic consumption over time, it could still be a strong exporter in those sectors where there is large domestic demand on account of improving efficiency. Finally, we believe that concerns about China’s trade dynamics focus too much on export performance. China’s growing weight in the global economy has already made it the marginal buyer of a host of commodities. China has the largest share of demand for most major
commodities except oil, where it is second to the US; and natural gas, where it is the fourth-largest buyer. The focus on more balanced growth and structural reforms domestically will, over time, allow for lower savings and higher consumption. It will also lower the emphasis on infrastructure spending, as is already happening. Some of this shift towards consumption will filter into greater imports from the rest of the world, strengthening global trade growth and SouthSouth trade in particular. China’s trade to double by 2020 We expect China’s trade to continue growing at a steady rate, doubling in size by 2020. It is likely to increase its share of world trade significantly as it will be a key driver of growth in both emerging and developed markets. China’s trade growth is unlikely to rebound to the double-digit level seen over the last couple of decades. However, it is important to remember that the sheer size of China’s trade will mean that even 7% GDP growth, faster than the growth in developed world trade, would make China the single biggest contributor to world trade in absolute terms. This further reinforces China’s status as a world leader in trade and reiterates the central role that it will likely play in the continued growth of global trade. As the world’s mega-trader, China will have an increasing interest in promoting and maintaining free trade. And to satisfy consumer demand, to successfully move up the value chain and to keep trade partners happy, China will likely want to open up further to imports over time. Moreover, it will remain heavily dependent on imports of raw materials (unlike the US). Hence, like Britain in the 19th century and the US after 1945, China could, over time, become a champion for liberalising world trade. By Madhur Jha, Macroeconomic Research, Standard Chartered HONG KONG BUSINESS | SEPTEMBER 2014 35
ANALYSIS: capital flows
Renewed capital inflows the single most important trend in Asian markets
Accessing HK’s capital flows Find out what’s really driving inflows and what to expect of Hong Kong monetary conditions.
rowth in both developed and emerging markets decelerated in the early part ofthe year. US first-quarter growth was disappointing, the correction in mainland China’s property market continued and various geopolitical situations around the world gave cause for concern. With the persistence of significant overcapacities and inflation a non-issue, central banks have every reason to continue pursuing accommodative monetary policies. Renewed capital inflows have probably been the single most important trend in Asian markets over the last quarter. Reduced policy uncertainty has again driven capital inflows into the region. In Hong Kong, consistent capital inflows have seen the HK dollar testing the strong side of convertibility undertaking of its trading band. In response, the 36 HONG KONG BUSINESS | SEPTEMBER 2014
The HKMA has made purchases of US dollars in the spot market, injecting a total of HKD43.7 billion into the banking system.
Hong Kong Monetary Authority (HKMA) has been passively intervening in the foreign exchange market by buying US dollars and selling HK dollars since early July. The HKMA has made purchases of US dollars in the spot market, injecting a total of HKD43.7 billion into the banking system to prevent the local currency from rising beyond its permitted range. This intervention, the first after 18 months, has gained significant market attention. Other sources of inflows As a result of the HKMA capital injections, the Aggregate Balance — the sum of all the bank clearing balances kept with the HKMA — has swelled since early July. The changes of the daily closing value of the Aggregate Balance is depicted in the graph on the next page. As is readily apparent, the Aggregate Balance remained
largely constant during the first half of this year and then rose sharply in July to a level about similar to that recorded during the second quarter of 2013. Making use of daily changes in the Aggregate Balance as an indicator of capital flows, some observers have concluded that the size of capital inflows during the first half of this year was negligible. It should be pointed out that there are at least two major limitations when using changes in the Aggregate Balance as a measure of capital flows: Firstly, the measure may include noise generated by the HKMA’s open market operations. Of note, the HKMA may issue or redeem Exchange Fund papers to adjust the size of the Aggregate Balance at its discretion. Given that Exchange Fund papers are eligible as collateral for banks to access the discount window with the HKMA and are therefore included in the definition of the monetary base, it is misleading to interpret a variation in the Aggregate Balance as a change in Hong Kong dollar liquidity. Secondly, banks may be willing to absorb capital inflows on their own through taking some currency mismatch on their balance sheets, without squaring such positions with the HKMA. One example is the liquidity rally experienced during 2012 – when the Aggregate Balance barely bulged despite strong fund flows into Hong Kong – as banks increased the foreign currency assets they held. The Aggregate Balance may rise with capital inflows only when banks are reluctant to soak up capital flows on their own and therefore act to pass their foreign currency exposures to the HKMA. How to measure capital flows In essence, contrary to popular perception, no intervention by the HKMA or a steady Aggregate Balance does not necessarily mean there are no capital inflows. To capture the dynamics of openmarket operations by the HKMA
ANALYSIS: capital flows and banks’ foreign currency exposures, we derive a proxy for capital inflows based on two indicators: (1) change in monetary base (which consists of the Aggregate Balance, Outstanding Exchange Fund Bills and Notes, Certificates of Indebtedness and coins issued) and (2) change in net foreign asset position of authorised institutions. There was a switch to capital outflows in January and February, but since March Hong Kong has been receiving respectable inflows. Capital inflows over the past few months have been in the order of around HKD51 billion per month – a level last seen in September 2013. For the first five months of this year, cumulative capital inflows were about HKD45.2 billion, larger the total HKMA intervention amount of HKD43.7 billion. Still, the direct impact of the recent inflows could be limited given the small incremental expansion they represent relative to the size of existing liquidity stock. Recent months also saw another interesting flows dynamic emerging – a significant portion of capital inflows to the city were absorbed in the net foreign asset position of the banking system instead of being recorded through the Aggregate Balance of the banking system. Of the HKD45.2 billion in capital inflows recorded over the first five months of the year, HKD44.6 billion was reflected in the increase of the net foreign asset position of the banking Aggregate balance (HKD million)
Source: HKMA, CEIC, Hang Seng Bank
Capital inflows over the past few months have been in the order of around HKD51 billion per month – a level last seen in September 2013.
system. We believe an increase in the willingness of banks to absorb foreign capital to a large extent reflects the rapid expansion of their foreign currency loan portfolios over the past two years. What’s really driving inflows? Having made the case that the city has been witnessing capital inflows, the next question is why? The influx of foreign capital may be related to a host of factors, including: increased risk appetite of foreign investors; undervaluation of equities; interest by foreign investors in both seasonal issues by listed firms and initial public offerings (IPOs); speculation on potential appreciation of the renminbi; and marginal widening in the interest rate differentials between HK dollar rates and their US dollar counterparts. Using monthly data from the period between January 2000 and May 2014, we sought to identify primary factors driving the capital movement. We ran a multiple regression with our proxy of capital flows and several independent variables including: (1) price-to-earnings ratio for the Hang Seng Index; (2) funds raised through equities; (3) 12-month non-deliverable CNY forward (NDF) premium; (4) Chicago Board Options Exchange Volatility Index (VIX); and (5) rate spread between 1-month Hibor and 1-month Libor. Our study suggests that the price-to-earnings ratio for the Hang Seng Index significantly affects capital flows, while the interest rate differentials between the HK dollar and the US dollar are not significant. The point is that capital flows were probably attracted to Hong Kong not by yield differentials per se, but because of the real growth prospects behind the yields. In our view, the market’s recognition that the Mainland economy could have bottomed has been an important trigger for the capital influx. Of course, there have been other factors in play. According to our
analysis, the swing in capital flows is also related to expectations around the renminbi’s exchange rate. Despite the largely unchanged rhetoric of officials from the People’s Bank of China, the market started to price in a milder depreciation in the currency following the release of strongerthan-expected trade figures and Purchasing Managers Index for April to June. Turning to equities-related fundraising activities, the link with capital flows is robust. However, a lesser-known fact is that the funds raised during the first half of this year averaged HKD35 billion per month, just about half of the level seen in the last quarter of 2013. We are therefore of the view that the impact of normalisation of fund flows after the seasonal pick up in fundraising activities would be modest. Finally, we found that changes in VIX are highly correlated with the direction of capital flows, but that the magnitude did not reach the ‘statistically significant’ threshold. Monetary environment outlook Given the likelihood that the quantitative easing taper will be ongoing in 2014, there is a belief that capital outflows from Asia will persist. However, monetary conditions improved for Hong Kong during the first half. It appears that the recent stream of inward capital flows is largely a function of fluctuations in Mainland risk concerns as well as expectations regarding the renminbi exchange rate. The key question is whether conditions prevailing in the first half will continue for the rest of the year. Our baseline scenario is that the improvement in the Mainland economy and expectations for a stronger renminbi are likely to endure. Hong Kong monetary conditions are likely to remain highly accommodative for some time despite a likely move by the US Federal Reserve to conclude its asset purchase programme in October. By Ryan Lam, senior economist, Hang Seng Bank
FEATURE: investing in brisbane
Eagle Street Pier, an iconic waterfront precinct with a great view of the Story Bridge
What opportunities await the Asian investor in Brisbane? Discover why Brisbane was chosen to host this year’s G20 Leaders Summit and what it has to offer as a gateway to Australia. By Roxanne Primo Uy
any people would consider Sydney or Melbourne as the gateway to invest in Australia, but another city is slowly gaining ground as a key business and investment hub in the Land Down Under. Brisbane, tagged as Australia’s new world city, was selected to be this year’s host city of the G20 Leaders Summit, the principal forum for international economic cooperation and decision-making. Brisbane will be in the global spotlight on 15 and 16 November, with around 4,000 delegates from the world’s most influential economies and 3,000 international and local media gathering at the Brisbane Convention & Exhibition Centre. In the lead-up to the 2014 G20 Leaders Summit, Lord Mayor Graham Quirk tasked Brisbane Marketing, the city’s economic development board, to embark on 38 HONG KONG BUSINESS | SEPTEMBER 2014
a series of initiatives to ensure that the city fully capitalizes on the global attention captured by this important event. The economic benefits of G20 are expected to inject more than $100 million into the local economy so the whole city is involved in making sure that they do it right the first time. According to Quirk, one of the most important things for Brisbane is its identity. “If people don’t know the name of your city, they won’t visit it and certainly can’t invest in it. We are gaining momentum in terms of visitations. Last year we had a 10% growth in tourism and a 20% growth in business and international conventions in the city. The G20 will provide an opportunity for that momentum to continue.” John Aitken, CEO of Brisbane Marketing, says Brisbane was the first host city to have almost two years’ notification that the G20 is coming.
They have since been very active in coming up with various initiatives to make sure that there are enough opportunities to promote tourism, build international networks and highlight the best Brisbane has to offer. According to Quirk, “It is true that when you talk to people overseas and talk about Australia, Sydney is the city that is best known and that’s natural because it’s the biggest city. But we are an emerging global city and this international recognition that we are given to host G20 is a terrific opportunity for us.” Investing in Brisbane Brisbane has a $135 billion economy that benefits from a strong mining and energy sector, servicing many countries around the world with coal and other commodities. Jones Lang LaSalle recently named Brisbane as the fastest growing mature city in the world in terms of GDP, with a forecast average annual GDP growth rate of 5% over the period 2012 to 2020. Brisbane not only holds the enviable position of being Australia’s sub-tropical capital with 261 days of sunshine, but is also the closest Australian capital city on the eastern seaboard to Asia, making it a
FEATURE: investing in brisbane strategic location for investments in the Asia Pacific region. So what does Brisbane have to offer as a gateway to Australia? What are the opportunities for the Asian investor? Quirk notes that one of the most distinct features of Brisbane lies not in its architecture but in its people. A business-friendly city Walking down the streets of Brisbane, one will notice the friendly and relaxed mood, which translates to ease of doing business in the city. In fact, the 2013 World Bank Doing Business Annual Report named Australia one of the most “business friendly” countries in the world. “Brisbane was also named the most business-friendly region in Australia as part of the Regional Australia Institute [In]Sight Index. The results of the index also show Brisbane as the number one city in Australia for local government assistance to business and Brisbane City Council as the local government with the most influence on its state and federal counterparts when it comes to bettering the business environment,” adds Quirk. Investors will also find that Brisbane has fewer bureaucratic problems compared with other cities, where you need to go through several government bodies before you can set up a business. The Brisbane City Council is unique in that it is the largest local government authority in Australia. According to Quirk, “We’re 20 councils amalgamated into a single local government authority in 1925. So in Brisbane, if you go out 20 kilometres from the centre of the city, you’re just in one council. You do that in Sydney, you’re dealing with 35 different councils. In Melbourne, it’s 31 different councils.” Investors seek opportunities in Brisbane across the renewable energy, clean technology, food and beverage, infrastructure, manufacturing, life sciences and mining and technologies sectors. “Brisbane is a major hub for large resource and energy companies, a significant centre for research and innovation, and the engine room of much of Australia’s continued economic growth, in defiance of the global downturn of the
past five years,” adds Quirk. With an economy predicted to grow to $223 billion by 2031, Brisbane offers an attractive business environment in a region supporting an ever-increasing share of global economic growth. Brisbane and Hong Kong According to Paul Bloxham, chief economist for Australia and New Zealand at HSBC Global Research, strong ties to Asia have been a key driver of Australia’s relative economic success in recent years. These connections extend across three dimensions: trade, population, and financial flows. By 2020, Bloxham expects that 80% of Australia’s exports will go to Asia, up from 73% now and only 50% in 2000. China is expected to continue to be Australia’s fastest growing trading partner, although other Asian countries should also see strengthening ties. Australia’s financial links to Asia are still fairly small, but are growing quickly. According to Bloxham, Asia accounts for only 13% of total foreign investment in Australia. “China accounts for only 1.3% of total foreign investment in Australia, although this has risen from 0.3% ten years ago. Together, China and Hong Kong – through which some of the mainland investment is funnelled – account for 3.4% of foreign investment in Australia,” he adds. Statistics from the Hong Kong Economic and Trade Office show 28% of Chinese investments to Australia go to Queensland with mining and real estate industries proving the most likely to attract their interest. Brisbane is aggressively targeting several countries, including Hong Kong, with the message that Brisbane
Brisbane city centre skyline
“28% of Chinese investments to Australia go to Queensland with mining and real estate industries proving the most likely to attract their interest.”
embraces international trade, investment, and collaborative opportunities. There are several companies from Hong Kong with a presence in Brisbane, and more companies are making their way into the city. For instance, Far East Consortium (FEC) and Chow Tai Fook (CTF) are a shortlisted bidder to develop a six-star multi-billion dollar integrated resort development at Queen’s Wharf Brisbane. They partnered with Echo Entertainment in June to bid as the Destination Brisbane Consortium. Echo will contribute 50% of the $1 billion project cost and CTF and FEC will each contribute 25% to the project. The consortium are competing against James Packer’s Crown Casino Group who recently teamed up with Greenland, one of China’s largest property developers. “We are a city with a lifestyle obsession, global ambitions and a contagious energy and entrepreneurial spirit that lubricates the business environment. This, coupled with a single local council that governs the entire city and a strong economic development focus, is giving Brisbane a bright glow on the international radar,” notes Quirk. Roxanne Primo Uy was a guest of the city of Brisbane.
Forecast economic growth (2013-14 to 2016-17)
Source: Australian Government, Mid-Year Economic and Fiscal Outlook 2013-14; Queensland Government, State Budget 2013-14 and Mid-Year Fiscal and Economic Review 2013-14
South Bank - River Quay
HONG KONG BUSINESS | SEPTEMBER 2014 39
regional analysis 3: asian inflation
India is facing relatively tame food inflation prospects
Beyond El Niño: Re-assessing Asia’s food inflation risks
The phenomenon’s increasing regularity is threatening the region’s food security and safety.
ust a few, short weeks ago, headlines suggested that a powerful El Niño was developing in the Pacific Rim. The warming of water temperatures, on the back of changing atmospheric wind patterns, pointed to the prospect of potentially large-scale weather disruptions, especially in Southeast Asia and the Indian subcontinent. Though the last strong El Niño occurred in 1997, several several episodes have developed in the past decade, causing moderate disruptions to agricultural production and having a noticeable, though luckily not severe, impact on food prices in a region where it constitutes the largest component of many countries’ CPI baskets. Fortunately, the latest forecasts are showing water temperatures returning to normal and increasingly lower probabilities of a serious El Niño event occurring. However, the risks to Asian food inflation don’t end 40 HONG KONG BUSINESS | SEPTEMBER 2014
“As a region, food prices should be able to weather the multidirectional turbulence, given high levels of defences.”
there. Just ask the BSP (Bangko Sentral Ng Pilipinas) or the RBI (Reserve Bank of India): they have clearly expressed concerns that food CPI is too sticky. In the Philippines, agricultural production is still recovering from last year as the new typhoon season sets in, which is partly why we expect the central bank to tighten next week. In India, history shows that even a weak or moderate El Niño could correspond to a weak monsoon season, which would bring along widespread food and inflation disruptions. In Indonesia, where Ramadan is coming to an end, food prices may face additional pressures – in the past on average a 1-1.5ppt increase in y-oy food CPI. Outweighing all of these concerns, however, is a positive commodity outlook and better regional ‘defences’. Sure, headline-grabbing fish and dairy prices continue to rise. However, the broad CPI baskets will likely be under control due to
plentiful rice stocks in Asia and nearrecord grain production overseas, especially in the Black Sea region, from where cheap wheat is being imported, according to Reuters, at a lower cost compared to the usual alternatives. Our verdict? As a region, food prices should be able to weather the multi-directional turbulence, given high levels of defences. However, the risks should not be understated. Most at risk Looking at the most recent data from May and June, we are able to establish a view of the food inflation dynamic by country going into the summer, compared with the 2013 average to represent recent trends. Let’s start with Japan, which has the highest food inflation momentum compared to last year’s average (the May print was a 21-year high). While surprising at first, it can be easily explained by the effects of the
regional analysis 3: asian inflation “The rule of thumb we use is that if rainfall is deficient by 10%, this will boost food inflation by 2.8ppt, and headline WPI and CPI by 0.7ppt and 1.3ppt, respectively.”
Ramadan Indonesia is one other country where the food inflation dynamic seems under control. However, there is potential for a higher-than-expected July CPI reading on the back of Ramadan, which is observed by the majority of Indonesia’s population (and which falls mostly in the month of July this year). Although the effect isn’t as strong as in certain countries across the Middle East, back-of-envelope calculations suggest that food CPI is around 1-1.5ppt higher (y-o-y) during Ramadan months, with a slight lingering effect. While an uptick is likely, we aren’t expecting any dramatic food price increase. The government reported last month that the country has sufficient stocks of basic food commodities to contain any surge in demand that may lead to ‘runaway’ price increases, learning from historical episodes. Moreover, reports show that national authorities are starting to allow rice imports, potentially delaying an opti
Vietnam has amassed excess reserves on the back of strong consecutive harvests
April tax hike and Abenomics, the latter through the weakening of the yen, and the pass-through impact on prices of imported food. Japan imports 60% of its agricultural consumption, while much of the rest is produced with the help of high subsidies. The second most-affected, the Philippines, is a more familiar case. Typhoon Haiyan and the lingering impact on domestic food supply have taken their toll, as new typhoons this season threaten further disruptions. Moreover, the government’s policy of subsidising domestic rice producers, while limiting imports in a bid to foster self-sufficiency, has contributed to high prices. In the case of Taiwan, a rise in food inflation comes alongside an overall increase in inflation, embodied by the 14-month high in June’s headline number. Food prices rose on the back of higher dairy, meat, fish and fruit prices. Two of the perennial food inflation-prone countries, India and Indonesia, seem to be facing relatively tame food inflation prospects. While it is true that the situation does seem relatively subdued, it nevertheless remains potentially volatile. We highlight two key reasons. El Niño and monsoons It is true that the most acute risks from a summertime El Niño have subsided. However, that is unlikely to calm the RBI or other Indian policymakers. Looking back, even
the less severe El Niño occurrences have had a notable impact on India’s economy, since the country is affected by a different channel when compared to Southeast Asia. In India, it all boils down to the impact on monsoon rains. Weak and moderate El Niño occurrences have led to serious drought conditions with almost double-digit deviations from the long period average rainfall. For example, in 2009-10, during a relatively mild El Niño, food prices jumped by over 20%. The rule of thumb we use is that if rainfall is deficient by 10%, this will boost food inflation by 2.8ppt, and headline WPI and CPI by 0.7ppt and 1.3ppt, respectively. We continue to see signs that this year’s rains are already significantly below target. This is likely to create a headache for RBI Governor Rajan. Although food CPI and WPI have been remarkably tame in recent months, a bounce is expected and many are debating whether or not a monetary policy adjustment is warranted. Concerning the impact on growth, we believe that GDP could be impacted by 0.5ppt in the case of a full drought. We are comforted by the fact that government granaries are well stocked, although there are nonetheless legal restrictions about drawing down reserves. The official NOAA forecast has set the possibility of an El Niño developing this summer at 70%. For Asia at large, risks still remain. The weak
and moderate El Niño occurrences of 2006-7 and 2009-10, respectively, have arguably led to cyclical momentum in food inflation. Moreover, just a small adjustment in rainfall risks exacerbating the forest fire season in parts of Indonesia, when agricultural crop burning can get out of control, creating widespread damage. The Indonesian meteorology agency BMKG has already announced a drought alert for Eastern Indonesia in August due to El Niño-related conditions. In other words, Asia is not yet out of the woods from El Niño-related issues, though we aren’t expecting any dramatic episodes this year.
Some of the commodities most affected by an El Niño
Source: FAO, HSBC
HONG KONG BUSINESS | SEPTEMBER 2014 41
regional analysis 3: asian inflation mistic goal to achieve self-sufficiency by 2014. Got rice? The aforementioned risks are fortunately countered by a positive global outlook and better policy across Asia. First of all, while prices of certain food commodities such as fish, pork and chicken are continuing to rise on the back of rising consumption from an larger middle class, the short-term price dynamic for most cereals, used not only as a staple but also as a feed input for other agricultural undertakings, is favourable. Moreover, in terms of food reserves and grain stocks, emerging Asia has changed dramatically over the years. Take rice, for example. Lessons have been learned from the 1990s and the 2007-08 food crises in Asia, when rice prices tripled in a matter of weeks. Governments started to build up reserves and since 2008 it is estimated that Asia’s top grain-buying states have accumulated an additional 100m tonnes of rice and 90m tonnes of wheat – often far
“The world experienced more El Niño occurrences between 1979 and 2009 than in any other 30-year period during the past 600 years.”
Prices of key cereals remain subdued
Source: IMF, HSBC
Meats and fish are showing strong price increases
Source: FAO, HSBC
42 HONG KONG BUSINESS | SEPTEMBER 2014
above official targets. Thailand is perhaps the most notable example. The country’s rice subsidy scheme started under the former government resulted in substantial financial losses and has created a 30m tonne reserve. The scheme also saw Thailand lose its position as the world’s primary rice exporter, although it will probably regain the no. 1 spot this year as some stocks were sold at a loss to compensate farmers and the government negotiates deals. Vietnam, another strong exporter, has also amassed excess reserves on the back of strong consecutive harvests. These stocks, while problematic for international rice prices, serve as a regional food buffer, and should be able to compensate for lost production (perhaps as a result of an El Niño or other weather-related occurrence) and guard against inflationary pressures. In recent weeks we have seen several intra-ASEAN deals facilitating the exports of rice to the Philippines and Indonesia. Other Asian countries India is also in a good position. As of April 2014, reserves at government warehouses stood at 30.3m tonnes (double the required buffer and strategic reserve of around 14m tonnes), following several years of good monsoon rains. This will prove useful, given the poor monsoon expectations this year (although there are some legislative restrictions limiting the use of reserves). As a result, India will also likely lose its role as the world’s largest rice exporter in 2014. There has also been a regional effort to prevent the type of food crisis that could lead to ‘runaway’ prices. In Indonesia, we already know that this year’s rice harvest is likely to be below target, the country does not have abundant reserves like India and Thailand and signs of drought have already been detected. Indonesia’s rice procurement agency, BULOG, set a 2014 rice procurement target of 3.85m tonnes, up 20% from last year. However, as of March 2014, the agency had only procured 86,000 tonnes from domestic sources, down 80% from last year. The US Department of Agriculture estimates that the government will
have to import around 1.5m tonnes this year (the Indonesian government forecasted in January that there would be no need to import rice in 2014). The region also benefits from near-record worldwide grain crops, especially in the US and the Black Sea region, resulting in contained wheat and corn prices. Recent reports suggest that several Asian countries, such as Japan and Indonesia, have been buying cheaper Black Sea wheat, due to a strong price differential compared to Australian and US variants. Though of inferior quality imports, the wheat will be mostly allocated to feed stocks and should contribute to an overall trend of tame food prices. In the event of a worse-than-expected El Niño, wheat is one of the most affected commodities, especially in Australia – a key producer. A long-term concern Across EM Asia, policymakers have taken commendable steps to improve the response mechanism to food crises, and the global outlook is currently favourable. However, over the long term, a rising middle class and world population will place increasingly strong price pressure on the ‘finer’ food commodities. Moreover, though the El Niño this year may not be too problematic, it seems clear that these events are happening with increasing regularity. The world experienced more El Niño occurrences between 1979 and 2009 than in any other 30-year period during the past 600 years (according to a study published in the October 2012 volume of Climate of the Past, a journal published by the European Geosciences Union), suggesting that more frequent extreme El Niño events are likely as a result of global warming. Given that there are likely to be more weather-related disruptions to agriculture and the environment, increased economic volatility appears inevitable. This means that policymakers across Asia need to ensure that proper stocks are maintained and contingency plans are in place, which is already starting to happen. Food safety and security is also an increasing concern in Asia. By Joseph Incalcaterra, Economist, HSBC Global Research
co-published Corporate profile
Hollywood: The Asian investors’ next frontier Scott Morgan of Creative Genius Asia shares why businessmen from Singapore and Hong Kong should consider producing films and television shows in the US.
t’s not as difficult as winning both the pot money and the girl in Slumdog Millionaire but it’s also not as easy as duping people in the Wolf of Wall Street. Investing in films and television shows takes a lot of guts and street smart but its rewards are tenfold. Scott Morgan, an award-winning writerdirector and production consultant, says the time is ripe for Asia to dip its hands into Hollywood and see what films and television shows have to offer in terms of profits. Since the rise of the Internet in the 1990s and the recession in 2008 that affected many studios, substantial shifts have been experienced by the US entertainment industry. “Fifteen years ago, at least 60% and up to 90% of all released films were funded by studios. Now, less than 20% are,” Morgan says. He explains that many studios had their levered advertising cash in real estate values and many of them never recovered after the economic crash. Nowadays, a lot of financing come from hedge funds and other sources like Singapore, Shanghai and Hong Kong.“The natural un-tapped source is Asia. This vacuum of investments filled by such business-profit-savvy cultures in Asia will surely change the dynamics of profit,” Morgan says. A sweeter fruit Morgan, who won awards in three film festivals for his film “Playing Solitaire,” has since worked as a producer and consultant for investors interested in entering Hollywood. He says outside investors are
Scott Morgan directing a TV show
44 SINGAPORE BUSINESS REVIEW | SEPTEMBER 2014
often clueless and naïve on how to go about producing films and television shows in the US. His advice is not to take everything by face value and to find the ‘coveted secret fruit.’ “Basic truth in all business: don’t swallow what those in power throw, seek the sweeter fruit higher in the tree they hope you don’t see,” he explains, pointing out that others often take advantage of outsiders. Morgan says an investor should start with a good script and later build on the other requirements. “All it takes to join this world is access to the best material, and true understanding of what drives the people in Hollywood,” both of which he is willing to provide. He warns that many agencies shortchange newcomers to benefit themselves. He suggests investing in television, which generates revenues that dwarf film profits. By investing in both film and television, investors are able to diversify their sources and maximize their capital. Many independent investors had made a killing at the box office because they were able to spot valuable screenplays. Examples of these include “The Conjuring,” which had a budget of $17 million and $148
“Fifteen years ago, at least 60% and up to 90% of all released films were funded by studios. Now, less than 20% are.”
Scott Morgan with Vietnamese orphans
million in revenues. “Slumdog Millionaire,” which cost $15 million earned as much as $417 million. With decades of experience in the film industry, Morgan has started working with businessmen from Asia who seek guidance when it comes to investing on Hollywood films.“Very few professionals in the film Industry reach a level of deep understanding of both the creative and business sides of the Entertainment business anymore,” he says, adding that many of his mentors were film icons like Freddie Fields and Barry London who was the vice chairman of Paramount Pictures. “I’ve worked as an actor, cinematographer, photographer, writer, producer, director, financier, stunt man, and consultant,” Morgan adds. “Every one of these skills gave me another perspective to write or produce with more realism, more artistry, but also with more financial wisdom.” The Asian connection Morgan says he started taking an interest in Asia after recognizing the region’s potential for future film producers. “I recognized the rise of Asia as a market and financial giant in films almost 20 years ago,” he explains. The former actor-turned-screenwriter said he has since been going around Asia not only for work but also for charity. For the last 14 years, he had been caring for orphans in three Asian countries. Through his travels, Morgan discovered that the “cinematic art of many Asian films surpasses American films.” He further enhances this by guiding the producer into tweaking films for international audiences.
INVEST IN FILM AND TELEVISION Award-ÂWinning Hollywood Writer-ÂDirector Consultant to Singapore Entertainment Industry Investors
NO OTHER INVESTMENT RETURNS THESE PROFITS SO QUICKLY Examples of Investment and Profits.
TELEVISION VALUATION â€œGLEEâ€?
Total Revenue $330 million 2012
Revenue $435 million
Purchased for $950 million
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SCOTT MORGAN Writer-ÂDirector *$!%%#%' &$$!
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Growth and politics
ong Kong’s economy grew by a real 2.5% in the opening quarter of this year. It seems likely to have expanded at a similar pace in the second quarter and therefore for the first half of the year. This outcome will make it difficult to reach the government’s estimate for the full year in the range of 3-to-4% and the consensus forecast of private sector economists of 3.6% for the year. It will be all the harder to achieve if the current political debate over the means of choosing candidates for the position of Chief Executive does not see a successful (and broadly acceptable) outcome in the near term. To reach the lower end of the forecast range there needs to be growth of at least 3.5% in the second half of the year, and to hit the higher end second half growth will need to be 4.5% or better. The latter already seems unachievable given present conditions and the global outlook for the next six months, which has already been downgraded by international bodies such as the IMF. Outlining the first quarter numbers on 16 May, the government economist noted that exports of goods had been ‘sluggish’ (exports up 0.5% over the year and imports 1.2% higher) in the opening three months of the year as a result of the modest recovery in world growth and trade. However, services trade was better (exports up 3.1% on a year earlier and imports down 0.2%) and the domestic sector expanded with private consumption up 2.4%, government consumption 2.4% higher and investment 3% higher, led by construction up 10.2%. Looking ahead, the prospects for an external revival of any magnitude seem slim, with overall global growth being downgraded in recent months and the outlook for major economies modest at best. The exception, as ever, seems to be the Mainland, where the outlook continues to be good Gross Domestic Product (GDP) growth of around 7.5% as the economy re-balances from export-led to domestic growth. The immediate Hong Kong outlook therefore rests on domestic activity and this is where the recent political and social unrest over the method of choosing the next Chief Executive in 2017 may have an impact. Some 17 years ago, Lu Ping, head of the Hong Kong and Macau Affairs Office during the return of Hong Kong sovereignty to the Mainland in 1997, famously declared, “Hong Kong is an economic city not a political city”. The implication was that if Hong Kong focused on economics and business and stayed away from politics it would continue to prosper. Since then political issues have emerged centre stage from time-to-time, including the battle over Section 23 of the Basic Law (regarding treason, secession, sedition and subversion), the resignation of Tung Chee Hwa as Chief Executive, and now the choice of future Chief Executive. At first glance the future Chief Executive choice (the next being in 2017) seems relatively straightforward. Article 45 of the HKSAR Basic Law says “the ultimate aim is the selection of 46 HONG KONG BUSINESS | SEPTEMBER 2014
IAN PERKIN Independent Economic Consultant firstname.lastname@example.org
HONG KONG: GDP GROWTH 2014 (%)
Source: HKSAR Government
the Chief Executive by universal suffrage upon nomination by a broadly representative nominating committee in accordance with democratic procedure”. The present debate and associated protests (especially the 1 July march in Central and the so-called “civil referendum”) are not about universal suffrage but the nomination of candidates for Chief Executive. The Basic Law cites the nominating committee as the sole source of candidates; the protestors want a wider choice. As recently as February, the Financial Secretary, John C Tsang, made the link between the debate over the selection of a future Chief Executive and the economy when he said in his 2014-15 Budget: “The community is now discussing the methods for selecting the Chief Executive in 2017 and for forming the Legislative Council in 2016. I fervently hope that the community will set aside differences, reach a consensus and chart a course towards universal suffrage.” Although he did not specifically spell out his concerns, it seems clear enough that they related to the potential for a prolonged and heated debate to adversely impact economic activity by sapping confidence and hitting consumption and investment. The selection of a Chief Executive ought to be a debate primarily for Hong Kong citizens, although at the end of the day the Basic Law has the final say, and its interpretation (and any amendment) is ultimately in the hands of Beijing (Articles 158 and 159). The foreign business community is an important pillar of the Hong Kong economy, but it would be unfortunate for it to be drawn into the Chief Executive debate, although some have already been tempted to express their opinion). Protestors also need to proceed carefully. Article 45 of the Basic Law also provides that the method of selecting the Chief Executive should take into account the “actual situation” in the HKSAR at the time. It would be irony indeed if civil unrest aimed at a broader selection process only succeeded in convincing authorities that Hong Kong was not ready for a wider democratic choice.
Companies’ rights and wrongs tim hamlett Former Editor of Sunday Standard and Associate Professor of Journalism
am sure Jake Van der Kamp is a nice man; kind to children and dogs, a cherished companion to his peers and a beloved adjunct to his family. I do not doubt that in his personal behaviour he tries to be fair, just and good, as most of us do. He is unusual, though, in that from time to time he feels it necessary to write a piece urging the view that company directors have no moral obligations. All they must do is obey the law. This cannot be right. I understand, and indeed I share, the view that Corporate Social Responsibility is an overblown concept which adds little to the notion of doing the right thing, and that attempts to display CSR usually look suspiciously like image-polishing. I agreed with Mr Van der Kamp about both the cases he cited in his latest outburst. One concerned an attempt to persuade a light bulb company to stop selling the old incandescent bulbs because the new hi-tech version is better for the environment. This sort of call is an attempt to avoid the hard graft of persuading the public to agree with you, and replacing it with a bit of moral blackmail. Similar moral obligations People are entitled to make their own decisions about which light bulbs they use, without having disapproved ones swept from the marketplace. I object on similar grounds to attempts to make shark’s fin unobtainable. I do not eat shark’s fin myself, because it is overpriced and tasteless. On the other hand, people who believe it is OK to eat any animal which would willingly eat you are entitled to their view, and shark-huggers should be trying to persuade them to change it, not sabotaging the supply chain. Mr Van der Kamp’s other target was the notion that companies had some moral obligation to engage in orgies of charitable fundraising. They don’t. That doesn’t mean it is wrong for them to do it, but those which choose not to participate in conspicuous parades of corporate do-gooding have every right to refuse. But these two points do not justify the leap to the position that directors can ignore morality altogether, as long as they obey the law. After all, shareholders are people, under the same moral obligations as other people. If it would be wrong for you to do something yourself, then it is also wrong to employ other people to do it on your behalf. From the directors’ point of view, the excuse that “I was following the shareholders’ interests” works no better than “I was following the Führer’s orders”. Actually it is a recurring failure of modern economics to assume that there are no relevant moral imperatives, even though it is quite easy to establish what many of these are. For example, it is perfectly legal, if you are a shop selling umbrellas, to double your prices when it starts raining. Most people understand that this would be unfair and most shopkeepers do not do it. If you are employing an office assistant for $100 an hour and you discover, reading the job ads, that office assistants can now be recruited for $80 an hour, it is not acceptable for you to cut the wages of 48 HONG KONG BUSINESS | SEPTEMBER 2014
your hapless assistant – though if she leaves voluntarily you are free to offer the lower rate to her replacement. If these examples sound too trivial for the Finance Industry (as the people who rob you with a fountain pen are now called) then we can look at more grandiose examples. Working out the limits Is it acceptable to sell a mortgage to somebody who cannot possibly keep up the payments, wrap the payments stream in a complicated financial instrument, get it rated AAA by a bemused rating agency and flog it to the unsuspecting public? It seems that this is perfectly legal, at least in America, but is it right? It is perfectly legal to sell any product which has not yet been adjudged to be dangerous. Does that mean we can without guilt poison babies? Of course not. Once you admit that there are some things it would be wrong for directors or companies to do, then you have accepted that there are limits somewhere and you have an obligation to work out what those limits are. This means that companies, like the rest of us, have to wrestle with questions of right and wrong, justice and injustice, fairness and exploitation. It is easier, of course, just to say we do anything which the law allows. But that’s a cop-out.
It’s all a matter of choice!
Empty, soulless town in midst of seething overcrowded city
ong Kong’s Financial Secretary John Tsang attempts to justify the continued flood of Mainland shoppers inundating the city, saying that we should continue letting the hordes across the border because we are not over-reliant on them. Since we are not overreliant on them, they do not adversely affect the daily lives of local people. To turn logic upside down this way is impressive. That the economy does not need the shoppers is readily apparent (we were doing fine before the flood began five or so years ago), confirming that there is no economic case for letting all these shoppers in. And whether we need a constant stream of thousands of shoppers or not, they cannot help but damage local people’s interests in some ways. I took a trip up to Yuen Long yesterday. Beside the shoppers/traders dragging their infernal suitcases everywhere, the town is also a magnet for private car owners, at least on a Sunday. Both the sidewalks and the streets are horrendously overburdened. There is no way to increase capacity for vehicles or people, yet no-one dares consider the only alternative: reducing access. Planners did build some pedestrianized areas away from the main strip, where relatively calm local life continues. Much of it is Indian, Nepalese and Indonesian, and its concentration in these side streets seems have a Mainlanderproofing effect. I was in fact passing through Yuen Long en route to my once-a-decade visit to Fairview Park, the gated community of miniature houses with miniature back yards. It is starting to look shabby. But after a long absence – and a brief interlude in the crowded dystopia of Yuen Long – the biggest surprise is the almost deserted feel of the place. Obviously, it’s low-rise and lowdensity. And it’s not the bizarre post-apocalyptic hermit kingdom that is Sea Ranch. It’s just that there’s something seriously missing. Although every little house comes with a little car port, everyone parks right up on the sidewalk. And maybe that’s a clue to what this place is, or isn’t, about. To a more-frequent visitor to Discovery Bay, it is impossible not to make comparisons. First, the topography/ feng-shui. FVP is built on flat swamp among old fishponds, hisses with insects and snakes, and lies not far from Lok Ma Chau border crossing. DB nestles on picturesque coastline beneath
50 HONG KONG BUSINESS | SEPTEMBER 2014
impressive mountains, and is half an hour from Central and the airport. No competition. DB is sterile, a bubble famously insulated not just from Hong Kong but Asia generally, and a bit of a joke. Until you stroll around FVP and realize how much DB actually buzzes. In FVP, everyone sits cloistered away behind the walls of their little homes. You get the impression no-one knows, or wants to know, each other. Parking on the sidewalk isn’t selfish, lazy or anti-social, it’s what everyone does. There is a central zone of shops, complete with a lake, yet few go there. There is space for kids to play and cycle, but (even allowing for the hot day) hardly any do. It’s as if everyone is sitting on black sofas watching their 62-inch TVs, oblivious to the world. DB, with its yapping dogs, screaming children, gossipy pregnant women and boozing menfolk, does at least have human life. It even has character, of a sort. It actually is, dare I say it, a community. Both developments are aimed at people who want the sort of Western suburban environment Hong Kong can’t have. The demographics are quite different. DB appears roughly 50% Westerners, 25% Chinese, 25% other Asian; FVP seems a good 90% Chinese. Perhaps just as important, it must appeal to a different sort of market – maybe people with business across the border. I’ll leave anthropologists and sociologists to explain. They don’t seem too keen on nature in even its most tamed form.
by hemlock www.biglychee.com Email: email@example.com
Does Hong Kong’s economy need shoppers?