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BLOCKBUSTER YEAR FOR IPOs Following an upbeat first half, which sector will drive the record-breaking 150 IPOs expected this year?






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Established 1982 Editorial Enquiries: Charlton Media Group Hong Kong Ltd 19/F, Yat Chau Building, 262 Des Voeux Road Central Hong Kong. +852 3972 7166

Welcome to Hong Kong Business. In this issue, we looked into the upbeat Hong Kong IPO and equities landscape. The first half of 2017 remains bullish with a total of 72 new listings in Hong Kong—an 80% increase on the same period last year. Total funds raised reached HK$53.6b, increasing 23% year on year. The trend is the same for GEM board, with 35 IPO deals amounting to HK$2.6b in total fundraising—a 133% increase in number of firms and 136% in terms of funds raised. There were also 37 new listings on the main board within the period, with total funds raised standing at HK$51b, which is a 48% increase in IPOs and a 20% increase in funds raised.

Publisher & EDITOR-IN-CHIEF Tim Charlton associate publisher Louis Shek production EDITOR Genelie Sta.Ana-De Leon graphic artist Elizabeth Indoy

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Hong Kong banks scramble to keep up with the digital wave, but analysts predict a lag as digital disruptions increase. With the rise of virtual wallets and non-traditional players in the market, studies show that one in four people in Hong Kong no longer use banks as their primary financial services provider. With all these challenges ahead, how can Hong Kong banks survive? Meanwhile, we talked to analysts and they predict that it will be hard for the Hong Kong economy to keep its growth momentum beyond a few quarters, with Moody’s recent sovereign downgrade showing that the road ahead is still bumpy. Structural issues such as an ageing population and rising mainland competition on key sectors will make it hard for Hong Kong to sustain its pace of economic expansion, which has been bolstered by pickups in trade and tourism. On a lighter note, viral marketing is getting all the ‘likes’ from our marketing experts, saying that this could be a cheaper, yet effective tactic in boosting return on investment. In this issue, you will find how to best maximise viral marketing and leverage your businesses with the hype that comes with it.

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Financial Insight Why IPO volume could reach record high

FIRST 06 Is the worst finally over for the retail sector?

07 Exports’ fastest growth in 4 years 08 MNCs bid central bye bye



Ranking How banks are leveraging cross-border capabilities


analysis Twenty years after the handover, shaping a new Hong Kong


16 Economy Watch 28 Legal Briefing 30 Marketing Briefing

46 Tim Hamlett: What is a Hong Kong identity?

48 Hemlock: Has Buggle lost his mind?

as rents hit record high

10 It’s boom time for coworking spaces 12 Retail sector seen to recover as Chinese tourists become more sophisticated

Published Bi-monthly on the Second week of the Month by Charlton Media Group Pte Ltd, 19/F, Yat Chau Building, 2 HONG KONG BUSINESS | SEPTEMBER 2017 262 Des Voeux Road Central, Hong Kong

For the latest business news from Hong Kong visit the website

News from Daily news from Hong Kong most read



63% of Hong Kong firms adjusted hiring processes for millennials

Hong Kong gender pay gap widens to Demand for co-working office space 22.2% from 19.1% in Hong Kong on the rise

With millennials set to make up 50% of the global workforce by 2020, the millennial generation is expected to make a positive and progressive impact on Hong Kong businesses, according to new independent research by Robert Half.

It topped Singapore’s pay gap by 10ppt. Bloomberg Businessweek noted that Hong Kong’s pay gap widened to 22.2% from 19.1% a decade ago. This is 10 percentage points higher than Singapore’s and the United Kingdom’s pay gaps.


One in two Hong Kong travellers go solo, according to a survey Solo trips get increasingly popular for Hong Kong travellers, according to a recent survey from global travel search engine Skyscanner. Findings from 6,900 respondents across seven APAC countries revealed that 53% of Hong Kongers travelled solo and 78% travelled alone more than twice.





Over 3 in 5 retailers eye opening new stores in Hong Kong in 2018 Retail rents in the city have dropped 41.2%. A recent JLL survey found that 62% of international and local retailers have plans to open new stores in Hong Kong in 2018. It shows retailers are calling the bottom of the retail market and predicting an improvement since the retail rents in core shopping districts have dropped.

Returning stock arising from expiring leases led to a net withdrawal of 16,000 sq ft in the Grade A office market. The leasing activity remained robust, led by demand from co-working spaces seeking out expansion opportunities.


Residential supply to rise 94% in the next three years JLL predicted that residential supply in Hong Kong will see a 94% expansion in 2017 to 2020, rising to 21,000 units from the annual average of 10,800 units recorded between 2007 and 2016. Comparing to the annual average of 25,100 units recorded between 1992 and 2006, the supply is lower.

FIRST No thanks, boss

Most employers in Hong Kong who extend counteroffers to employees wanting to leave their jobs find themselves rejected. Whilst it is considered a common practice, survey results from recruitment consultancy firm Robert Half show that counteroffers prove to be ineffective in averting top talent from resigning. Robert Half revealed that 69% of Hong Kong CFOs who have extended counteroffers said their employees still ended up leaving the company. Extending counteroffers seems to be common practice in Hong Kong businesses as more than a third of the surveyed respondents (31%) apply this practice “often,” more than half (51%) “sometimes,” and 6% “always.” Around 7% say they “rarely” make a counteroffer and merely 5% stated they have “never” extended one. Robert Half managing director Adam Johnston noted that extending counteroffers is just delaying the inevitable. He added that even for those who can be convinced to stay in the short-term, the employee will often choose not to remain with the company in the long-term, making counteroffers ineffective and redundant. “Employers would be better placed to withhold a counteroffer and immediately start the hiring process to replace them,” Johnston added. A negative precedent The desire to keep company information confidential is the main driver for 60% of CFOs who have made a counteroffer, and more than half (59%) point to the additional costs related to the hiring, onboarding, and professional development. Half (51%) refer to cultural fit as the employee fits in well with the company. Johnston said that counteroffers can set a negative precedent for employers as it creates the impression staff members need to threaten to resign in order to receive a pay rise. He also noted that employers need to be proactive when it comes to staff retention. 6


Abercrombie’s concept store in Hong Kong will be similar to their prototype store in Polaris Fashion Place in Ohio

Is the worst finally over for the retail sector?


merican apparel brand Abercrombie & Fitch was one of many brands that pulled out of Hong Kong due to frigid retail sales. Late last year, the brand announced the closure of its four-storey flagship store in Hong Kong, following Forever21 and Coach’s move to shutdown some of their branches in central. But this June, Abercrombie & Fitch reversed its earlier decision of exiting Hong Kong. Instead, it plans to build a 6,800 sq. ft. concept store in the city’s largest mall, the Harbour City. Analysts reckon retailers are flocking back to Hong Kong after seeing fresh seeds of profitability: deflating retail rents, more accommodating landlords, and the throngs of high-spending mainland tourists. Real estate services firm CBRE’s head of research for Asia Pacific Henry Chin noted that Hong Kong hasn’t lost its retail lustre after all, saying the city remains the most popular destination, with more retailers keen to expand now that rents have fallen to more affordable levels. In a CBRE survey, Hong

Kong was chosen by roughly 23% of respondents as their location of choice for retailer expansion in 2017 — the highest in the Asia Pacific region, beating China (22%), Japan (17%), and Singapore (15%). Meanwhile, a recent survey conducted by real estate services firm JLL found that 62% of international and local retailers have plans to open new stores in Hong Kong next year. “Hong Kong’s retail market is still challenging but the mood amongst retailers has changed from pessimistic last year to believing the worst is over,” said JLL’s director of Asia Pacific retail James Assersohn. JLL surveyed 50 international and local retailers in June and found that half of the respondents think Hong Kong’s retail market will recover next year. Enthusiasm is largely driven by plummeting retail rents in core shopping districts, currently 41.2% below the market peak in 2014. JLL further noted that the rental correction created opportunities for more retailers to enter the market.

Elevating the shopping experience For Abercrombie & Fitch, improving the shopping experience to the point 62% of of pampering is critical. To engage international more customers and maximise the and local retail space in the new 6,800 sq.ft. retailers have concept store, each fitting room plans to open will be designed with moodnew stores in Hong Kong next enhancing features, patterned after the Abercrombie & Fitch prototype year. store which opened in February in Ohio. There will be separate controls for light and music, a phone charging dock and even a family-and-friendsfriendly room where two individual capsules are contained within a large, private suite. The new concept store in Hong Kong will be opened in December 2017. Most popular locations for retailer expansion in 2017

Source: CBRE Research, June 2017

FIRST of Hong Kong exports is expected to moderate in the second half of 2017 amidst a higher comparison base,” he added. Hong Kong’s exports recovery rallied in June with an 11.1% yearon-year growth. Citi noted that June exports were buoyed by demand from the UK (+24.8% yoy), Japan (+13.4%yoy) and mainland China (+12.2% yoy), whilst other Asian demand also grew double digits.

June exports posted a strong 11.1% year-on-year growth

Exports’ fastest growth in 4 years


hilst many exporters have been sporting soured faces in the past year due to weakening activity, the worst could finally be over as global trade starts to churn faster again. Exporters revealed a very sanguine outlook as the Hong Kong Trade Development Council Export Index soared to a 16-quarter high of 50.1 in the second quarter of 2017 from 47.1 in the first quarter of the year. Rising above the watershed mark of 50 reflects a shift to positive sentiment from negative amongst

local exporters, according to HKTDC, and led HKTDC Research to upgrade its Hong Kong export growth forecast to 5% from its flat projection last December. “Given an improving global trade environment, Hong Kong’s export performance has been above par thus far,” HKTDC director of research Nicholas Kwan said.“With the expansion in both developed and emerging economies staying generally on course, overall foreign demand should remain sturdy over the medium term, although growth

Looking ahead Michael Spencer, analyst at Deutsche Bank, warns of a slightly weaker export growth in the coming quarters as the commodity price effect wanes and Chinese growth moderates. “It’ll probably be a very gradual Hong Kong’s slowdown, leading to probably the export fastest growth in exports in 2017 performance has since 2013 and possibly even 2010,” been above par he said. Meanwhile, 2018 will see a thus far. moderation of export growth. Real exports of goods and services

Source: CEIC and Deutsche Bank Research

The Chartist: Mainland credit crunch to hurt HONG KONG exports What goes up must come down — and, in the case of mainland China’s cyclical recovery and recent uplifting effect on Hong Kong trade, the descent is close at hand. The flattening yield curve will likely discourage Chinese financial institutions from lending as freely as they have in the past months. “We expect slowing credit impulse in the mainland economy to weigh on factory activity as private manufacturers face difficulty in accessing credit,” said BMI Research, noting that this will crimp Hong Kong re-exports to Chinese factories, which account for more than half of overall exports. BMI research further explained that the Chinese authorities are increasingly concerned about financial risks in the economy, and that they are taking efforts to rein in the economy’s reliance on easy credit.

Reduction in credit reliance to weigh on economic activity

Source: BMI, Bloomberg , NBS, PBoC

Trade expansion starting to moderate

Source: BMI, Censtatd



FIRST No return, no exchange

Retailers will have to work doubly hard in pleasing Hong Kong shoppers as a survey by loyalty marketing agency ICLP found out that almost nine in 10 (88%) shoppers do not see the value in giving personal details to retailers. This is the highest percentage amongst the Asia Pacific markets surveyed compared with 78% of shoppers in Singapore and 67% in China. Only 9% of Hong Kong shoppers have their shopping, payment, and delivery preferences remembered by retailers. This is a major neglect on retailers’ part as they fail to maximise and harness data to improve customer engagement. According to the study, a majority of Hong Kong consumers do not expect to get anything in return for sharing their personal details with retailers. ICLP executive vice president for APAC Mary English explained that the reason for this is either because retailers might not be able to collect enough personal data or they don’t harness the data they have to improve customer engagement. She noted further that collecting data is one thing, but drawing insights to create a meaningful dialogue with customers is critical to trigger action. This also showed that shoppers do not believe that retailers will deliver much when it comes to personalisation. Additionally, only 9% of the customers say that brands remember their past purchase, and 12% find that retailers remember the most basic level of customer recognition: birthdays. English noted that this feedback implies that Hong Kong consumers lack passion and excitement for receiving a brand’s information. The risk for a brand is that these consumers will ignore its communications — considering them irrelevant — and seek excitement elsewhere. She added that without that passion and the personalised dialogue, there is limited opportunity for the brand to improve its relationship with its customers.



MNCs bid central bye bye as rents hit record high


ultinational companies (MNCs) looking to set up shop in Hong Kong — but not willing to pay the hefty central business district rental rates — may have to settle for office spaces at the city’s peripheries. This is because office rates at Hong Kong’s CBD remain the highest globally, reaching up to US$303 per sq. ft. annually, according to CBRE’s Global Prime Office Occupancy Costs report. This is significantly costlier per year than London’s West End (US$213.85 per sq. ft.) and New York’s Midtown Manhattan (US$203 per sq. ft.) districts. Rising demand amidst Hong Kong’s already limited land availability have pushed rental rates in Greater Central to surpass 2008 peak level — with rates seen to rise further in 2H17 — pushing MNC’s with cost-saving concerns to look for other districts to get things rolling, according to a separate study by commercial real estates services firm Cushman & Wakefield. Managing director John Siu said that the pace of decentralisation will increase further as the rental gap between Greater Central and non-core areas such as Hong Kong East continues to widen. He also added that he expects more MNCs to consider

Prime office rents for upper floors in skycrapers

Source: Knight Frank, Newmark Grubb Knight Frank, Sumitomo Mitsui Trust Research Institute

Rising demand amidst Hong Kong’s already limited land availability have pushed rental rates in Greater Central to surpass 2008 peak level.

relocating to quality business space in non-core areas this year despite low decentralisation figures in Q2. Chinese companies, however, are bucking the looming decentralisation trend as they drive demand for office spaces in Hong Kong’s CBD. According to Cushman & Wakefield executive director Keith Hemshall, Chinese firms remained the most active in Hong Kong’s Central, accounting for 85% of major new leases in the 2Q17. Some notable transactions in the past quarter were HNA Group’s lease of 93,600 sq. ft. in Three Exchange Square and Huarong Group’s lease of 18,700 sq. ft. in Two Pacific Place. Not surprisingly, skyscrapers in Hong Kong are also the priciest globally. Knight Frank’s head of research for APAC Nicholas Holt said that the continued strong demand in Hong Kong’s office property market, given a lack of new land supply, continues to push values higher, with prices reaching US$8,000 per sq. ft., double than that of Manhattan at US$3,700 per sq. ft.

Mobile App Watch

CozyGo makes business travel manageable for SMEs Managing business trips could be a pain in the neck for most SMEs as the entire process of booking flights and getting approvals can be time consuming. TravelSky aims to address this concern with the launch of CozyGo, Hong Kong’s first business travel management mobile app. The app is designed to enhance the efficiency of the booking process, and the autonomy of the traveller tomanage his/her own booking and approval process within just a few clicks. It also stores frequent flyers’ information to provide convenience for repeated bookings. “We are excited about extending our technology to Hong Kong. CozyGo is our flagship product for travel management companies in China, which achieved 120,000 downloads in 2016,” said Peng Bo, general manager of GDS (Global Distribution System) Business Unit, TravelSky Technology Limited.

Peng Bo of TravelSky


It’s boom time for co-working spaces


hen HSBC took over 400 desks in WeWork’s Tower 535 in Causeway Bay, it was clear proof that Asia Pacific-based multinational corporations are following the widespread adoption of flexible workspace. This trend was previously seen in the UK and the US with Microsoft, for instance, moving 70% of its New York sales staff to flexible workspaces. Now Hong Kong is following suit with its own flexible office market growing exponentially in the past couple of years. According to independent flexible workspace specialist Instant Group, the Hong Kong market has grown by 16% in the last year and has approximately doubled in size in the past two years. The fast growth in this sector led them to confidently predict that it is set for continued growth and, increasingly, operators are looking to the region for opportunities. Data from the firm revealed that there are now 202 flexible workspaces available in Hong Kong, which compares to 330 in New York City and 1,136 in London. This is more than any of the key cities in the EMEA region with Paris lagging at just 156 centres and Berlin in third place with 123. Co-working space operator WeWork, for example, is relentless in its Asian expansion to accommodate more companies wanting

to join the bandwagon as it recently took 93,000 sq. ft. for just one Hong Kong centre, and a sprawling 200,000 sq. ft. in Seoul’s CBD. In Singapore, they also recently acquired co-working start up SpaceMob. According to CBRE Hong Kong’s director for advisory and transaction services Dane Moodle, by leasing co-working space, MNCs can save a significant amount of capital expenditure for new office fit out and take advantage of flexible lease terms. He also added that co-working spaces allow MNCs to be more flexible when expanding or contracting their operations, especially as the lease term in such spaces can be much shorter than the traditional 3-year terms offered by portfolio landlords. The hunt for the cheapest desks Current average desk rates in Hong Kong are approximately 31% cheaper than in London ($616 compared to $897) and almost half as cheap (44%) as New York City, which is $1,110. This also means that flexible workspace is less expensive in Hong Kong than Paris at $842, Abu Dhabi, and Dubai at $717 and $755, respectively. This is in direct contrast to conventional office rents where Hong Kong has some of the most expensive real estate in the world and shows the benefits of procuring flexible space in such a competitive market,

6 cities with the highest average desk rates

Source: Instaoffices

the firm added. Colliers’ regional tenant representation associate director Jonathan Wright added that smaller local operators are heating the competition up as theDesk, Campfire, Metta, and Garage Society have taken up space in Grade B Buildings, though these are all under 8,000 sq. ft. Diverse end users Wright shared that the growth in this sector has been fuelled by a diversification of end users. He said that, typically, traditional serviced office end users were international firms taking branch offices in Hong Kong or using this space as swing space. However, growth in the startup community, partly fuelled by government investment and coupled with occupiers looking for creative real estate solutions, has led to the rapid take-up of desk space in flexible workspace centres across Hong Kong.


Kafnu reimagines urban shared spaces Commercial real estate services firm CBRE’s latest research noted that towards the end of 2017, 1.18 million sq. ft. of land in Hong Kong will be occupied by co-working spaces. With many co-working spaces sprawling to meet the burgeoning demand for office supply, hospitality group Next Story wants to offer something different. They want to offer a shared space that blends working, living, playing, learning, and sleeping through Kafnu, the only shared space for entrepreneurs and creators located inside Kerry Hotel, a luxury hotel in Hong Kong. “The space provides everything you need to work, dine, live, play, learn, and rest — so it’s much more than just a co-working space,” said Morris Sim, chief marketing officer of Next Story Group, which is behind Kafnu. He explained that their mission with Kafnu is to connect and support entrepreneurially minded people who create new value, with the space providing them an ideal creative environment to succeed. Kafnu will be officially launched in September. 10


Hot desks have sea and garden views

The reception area

Multi-function lounge

Communal table



CLSA anticipates overall Chinese tourists overseas spending to reach US$429b in 2021.

Retail sector seen to recover as Chinese tourists become more sophisticated


etailers — from luxury to fast consumer goods — and hospitality players in Hong Kong are in for a sweet treat as activities in these sectors are expected to experience an upswing. Tourist arrivals from mainland China are expected to recover following two consecutive years of decline. Hong Kong’s overall inbound tourism is projected to rise from 57 million in 2016 to 66 million in 2020, according to a report by CLSA, with the number of mainland tourists increasing by around 3.7% annually. A new rail line linking Hong Kong to the vast tourist market of mainland China as well as the increasing number of events-based tourism are helping this tourism rebound — seen as a much-needed boost for Hong Kong’s struggling luxury retail sector. Nielsen revealed that mainland Chinese travellers currently account for 75% of tourist arrivals in Hong Kong, contributing 35% of the city’s total retail sales.

Source: Instaoffices



Hong Kong’s enduring charm Of the tens of millions of mainland Chinese tourists visiting Hong Kong every year, Nielsen noted that around 37% of these holiday makers stay in the city for more than a day — spending an average of 2.7 nights in Hong Kong’s various hotels and inns They also spend at least US$2,900

Hong Kong’s overall inbound tourism is projected to rise from 57 million in 2016 to 66 million in 2020.

on each visit on the city’s world-class offerings of food, entertainment, luxury goods, and other services. Notably, a select 23% of mainland tourists — dubbed as “super mainlanders” — make up more than 54% of all mainland traveller purchases, according to Nielsen. Frequent purchases of these “super mainlanders”, which are 50% more likely to make unplanned buys, include cosmetics, clothing, jewellery, handbags, and electronics. CLSA anticipates Chinese tourists overseas spending to reach US$429b in 2021. Yuan depreciation and stricter customs checks are amongst the factors weighing on overseas shopping, but as Chinese travellers become more sophisticated, shopping will take a back seat, with gaming, cosmetics, luxury, and online sectors featuring more prominently.

Luxury brands are back in business

Source: CLSA

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Valoot wants to get rid of hidden mark ups in foreign purchases


hen former banker Ovi Olea travelled abroad, he went on a shopping spree and swiped his credit card, but he gave up figuring out the exact foreign exchange (FX) rates that would be applied to his purchase – an experience that deeply frustrated him since it made him feel helpless. “There is no visibility and control,” says Olea. “The foreign exchange rates used for the conversion seem to be at best random, and sometimes can be really unfavourable.” With this pain point in mind, Olea founded the

Hong Kong-based financial technology startup Valoot Technologies and developed a solution that lets people lock in competitive FX rates for their purchases abroad. Consumers can choose their own payment currency before using their credit cards and also know the FX rate in advance straight from the market, enabling them to sidestep hidden markups and commissions to eventually pay 3 percentage points less. Valoot earns by charging a “very small” fee for the service. A few months after establishing the company, he brought on board Bei Zhou as COO and Nik Tang as CTO, two other key co-founders. But deep cross-functional expertise between the founders has helped propel Valoot forward, securing pre-series A funding earlier this year with First Eastern Investment Group. The deal not only provides investment, but also access and network that the startup would need to grow exponentially. The amount of investment was undisclosed, but it was sufficient enough move the company to pursue its core activities.

Oddup secures US$6m in new funding

Two-year old Hong Kong startup Oddup, a rating and research platform, recently secured US$6m in Series A funding to help it expand into India. The Times Group, India’s largest media conglomerate, led the funding along with the existing 500Startups, Click Ventures, and the new investors, Silicon Valley-based Moneta Ventures and White Capital. Following the funding, Oddup launched in the major startup hubs of Mumbai, Bangalore, and New Delhi in July this year. Oddup is a data-driven research platform founded in 2015 which provides investment statistics using data and analysis. Widely known as “The



Startup Rating System,” Oddup gives trends as well as current and expected future valuations of startups. Oddup rates startups with a rating score from 1-100. It is based on the combination of analyst viewpoints and the computed algorithm, the Oddup Score. The startup rating scores are then offered as views: Buy, Hold, Sell with expectation metrics and valuations. “India has one of largest startup ecosystems in the world. Our core aim is to help investors find the right startup to invest in and, at the same time, startups in India now have the chance to be seen by international investors who are using Oddup to assist them in their due diligence,” said Jackie Lam, co-founder of Oddup. Lam shared that they are very proud to have The Times Group as a key strategic partner of Oddup. She added that the Indian media giant’s distribution networks and coverage will be instrumental to Oddup’s growth.

Find out why Kami offers better customer service than chatbots

When banking and financial firms look to leverage artificial intelligence (AI) in customer service, often in pursuit of lower costs and faster responses, there is often an uncomfortable pause when this question is raised: “Can robots really do this job as well as, if not better, than humans?” CEO Alex Cheung says that the problem with existing chatbot platforms is that they rarely solve the problems of companies since their AI has not been designed to adapt to individual preferences amongst users either through nonexistent or poorly prioritised data tracking. This is where has stepped in. Through its patented AI technologies, the startup has created a conversational platform that puts emphasis on machine reasoning. Firms that use the platform can then automate customer service with highly engaging messages and form better-informed decisions through insights generated from ongoing customer interactions.“Kami aims to transform chats into intelligent conversations and into critical insights,” says Cheung. Kami is leapfrogging other chatbot platforms by presenting what the company calls as a conversational platform, which is powered by a dynamic memory network architecture that basically digests conversations and learns from them faster. Through this conversational platform, users of Kami then reap three key competitive advantages: Banking and financial firms can remember customers better, know customers better, and obtain visualised intelligence that lets them act with more accurate customer information. From chatbot to conversational platform “Most of the existing chatbot platforms fail in tracking the context or remembering the important information from user conversation which makes them fail in giving highly relevant suggestions to the customers,” says Cheung. “And when it comes to service-oriented businesses, relevancy is the key to success.” “We believe pure algorithms and data won’t bring AI anywhere. The success of an AI company largely relies on how easy the technology can be applied,” says Cheung about Kami’s future. This June, Kami won the “Best Startup” award in the ARM Demo Day in Shanghai and was also one of 15 finalists in the Bosch Venture Forum in Germany participated by 130 startups worldwide. Kami has also attracted the interest of notable investors, which now include the chief marketing officer of Hanson Robotics, an ex-marketing director from Apple, and a venture capital firm with 50 listed companies.

economy watch

How can Hong Kong maintain its growth momentum?

Why the recent economic surge is unsustainable Hong Kong is indeed riding a strong wave of growth, but it will be short-lived as the territory grapples with risks.


hen the economy expanded in the first quarter of the year, posting its strongest performance in more than half a decade, the growth was soon dampened by a sovereign downgrade from Moody’s Moody’s — and for many analysts, such pessimism amidst upbeat numbers is well warranted. Hong Kong is indeed riding a strong wave of growth, but it will be short-lived as the territory grapples with risks such as negative chain effects from mainland China’s economic and debt woes, an overheating property sector, and US interest rates’ normalisation. Natixis chief economist for APAC Alicia Garcia Herrero said it will be hard for the Hong Kong economy to keep its growth momentum beyond a few quarters, with Moody’s recent sovereign downgrade showing that the road ahead is still bumpy. Moody’s downgraded Hong Kong’s local currency and foreign currency issuer ratings to Aa2 from Aa1 in late May, following a downgrade of China’s rating to A1.“The downgrade in Hong Kong’s rating reflects Moody’s view that 16


Structural issues such as an ageing population and rising mainland competition on key sectors will make it hard for Hong Kong to sustain its pace of economic expansion.

credit trends in China will continue to have a significant impact on Hong Kong’s credit profile due to close and tightening economic, financial, and political linkages with the mainland,” explained the credit ratings agency. Herrero reckons structural issues such as an ageing population and rising mainland competition on key sectors will make it hard for Hong Kong to sustain its pace of economic expansion, which has been bolstered by pickups in trade and tourism. Hong Kong’s fortunes are inextricably linked to trade, and recent quarters have been kinder to the small and open economy with a recovery in mainland China

lifting the territory’s external trade, wholesale, and construction sectors from their lacklustre performance in the first half of 2016. But whilst the past quarters have shown the boons of Hong Kong’s increasingly linked economic ties with the mainland, it also comes with risks that will pose a palpable threat to future growth. “The strengthened inter-linkage with the mainland expands growth potentials for the [Hong Kong] economy but also builds up [its] risk level,” Herrero said. She further elaborated that lending to the mainland, especially to state-owned enterprises, has been more and more prevalent in the past three years, which may not be a wise idea for banks to excessively expand their business to China given the already high levels of corporate debts among the old economy sectors there. “Moreover, financial and professional services sectors that highly depend on the Chinese economy are also experiencing huge exposures to risks from their mainland clients,” Herrero added. “The professional and business services sector is losing degrees of competitive advantages to the mainland where wages are lower.” Did growth peak in Q1? The pace of Hong Kong economic growth may have peaked in the first quarter of 2017, as there are persistent risks to the outlook, said Kelvin Lam, economist, Greater China at HSBC. He expressed concern that a potentially more hawkish US Federal Reserve and a stronger Hong Kong dollar could derail the tourism recovery that helped power the rebound. Hong Kong tourist arrivals

Growth momentum improved further in Q1

Source: Source: CEIC, HSBC

economy watch Retail sales have shown signs of stabilisation

Source: CEIC, HSBC

from mainland China have shown a modest resurgence in recent months. On a 3 million rolling basis, overall tourist arrivals turned positive in December 2016, ending 17 straight months of decline. It also grew by 2.6% yoy in April this year. Although the absolute number of mainland tourists has recovered somewhat, it is still below the peak level reached in 2014. Sustaining the uptick in mainland tourists in the first half of the year will be crucial to reviving retail consumption. Mainland tourists were the highest spenders in 2015, noted Lam, so retailers should be happy that this group is starting to return to the territory with slightly more open wallets. Lam shared that anecdotal reports from the industry suggests that sales of luxury items and cosmetic goods — which together account for around a third of total sales values — have passed its worst on the back of improving tourism activity. The impact of China’s stabilisation He also explained that whilst retail sales value in April showed a muted 0.1% yoy increase, down from 3.0% in March, the data was distorted by the timing of Easter season and changes to the tax incentive scheme for electric cars which came into effect that month. “In all, April’s weakerthan-expected data did not change our view of further stabilisation in the retail sector, supported by stronger local demand and a modest revival in inbound tourism,” noted Lam. The increase in mainland Chinese tourists can be traced to rising confidence in spending as the

Tourist arrivals from China show signs of a mild recovery

Source: CEIC, HSBC

Chinese economy regains its growth bearings. The HSBC economist reckoned that the stabilisation in China’s economy in the run-up to the 19th party congress should help support growth in Hong Kong, although, they remain cautiously optimistic in their economic outlook. Herrero echoed this sentiment, saying that China’s recent stabilisation is largely behind the story that boosted retail spending and supported Hong Kong’s exports in the first half of the year, with GDP growth exceeding market expectations. Although she added that in the longer term, they are less optimistic in terms of outlook. Housing market’s risk to growth One factor souring the outlook on Hong Kong’s economic growth is the fresh set of property cooling measures from the Hong Kong Monetary Authority (HKMA). As property prices continue to climb, Lam reckoned that HKMA issued the new guidelines on mortgage lending to strengthen banks’ risk management and resilience. These measures include lowering the debt-servicing ratio limit for borrowers whose income mainly came from outside of Hong Kong, lowering the loan-tovalue for buy-to-let mortgages and raising the risk-weighted floor to 25% for new mortgages by banks. “We believe that the housing market remains an overarching risk to the growth outlook,” said Lam. But the normalisation of US interest rates, the HSBC economist added, will eventually raise the mortgage burden of Hong Kong borrowers, posing risks to the fragile recovery

in consumption and economic sentiment.” Whilst Hong Kong’s economic growth is widely expected to come down from its recent high due to an array of risks ahead, there will be a bright spot in resilient domestic demand. Thomas Shik

Alicia Garcia Herrero

Main growth driver “The stronger growth in the first quarter of this year, and throughout the second half of 2016 more generally, was a continuation of the recovery since the low point in first quarter of 2016, led primarily by stronger domestic demand,” explained Lam. UOB reckoned domestic demand has been a key growth driver since the second half of 2016 as the property market continued to boom and consumer spending stayed steady. Domestic demand rose by 5.5% year-on-year, the strongest performance since the third quarter of 2011. Capital investment has notably led the expansion of domestic demand in recent quarters, rising 6.4% in the first quarter of 2017 and 6.2% in the one before that. Hang Seng Bank acting chief economist Thomas Shik said that they expect consumer spending will remain as a main growth driver for the Hong Kong economy, further explaining that a strong labour market and favourable financial market conditions will spur on private consumption. He forecasts a 2.8% full-year Hong Kong GDP growth, up from 2% recorded last year., although uncertainties linger in global trade policy, international fund flows, and the ongoing economic transition in mainland China. HONG KONG BUSINESS | SEPTEMBER 2017



Deal #1: The biggest IPO deal in Hong Kong is the listing of financial services company Guotai Junan Securities for $2.2b on the Hong Kong Exchange in April.

Deal #2: The sale of PCCW’s $1.1b stake in telecommunications unit HKT Trust & HKT is the largest block trade done in the first quarter of the year.

Why IPO volume could reach record highs Hong Kong will remain as the region’s leading international fundraising hub, as the special administrative region’s initial public offerings (IPOs) and equities landscape remain bullish with 72 new listings.


ong Kong’s IPO market remained active in the first half of 2017, achieving increases in both number of listings and funds raised. A vibrant market in small to medium-sized IPOs contributed to more-than-double listings and funds raised on the Growth Enterprise Market (GEM) board of the Hong Kong stock exchange. This is despite the economic and political uncertainties around the world. PwC Capital Markets service partner for Hong Kong Eddie Wong shared in a statement that they saw significant growth in the IPO market in the first half of 2017, comparing year on year, credited to improving market sentiment and economic conditions, which has also enhanced the quality of Hong Kong’s capital markets. He added that the segmentation of IPOs was more evenly distributed and that they are pleased to see companies from different industries and geographies all proactively looking for listing opportunities in Hong Kong. Overall pricing and P/E ratios, Wong said, are improving, which indicates that investors are relatively optimistic about the future. PwC data suggested that in the first half of 2017, there were a total of 72 new listings in Hong Kong — an 80% increase on the same period last year. Total funds raised reached HK$53.6b, increasing 23% year on year. The trend is the same for GEM board, with 35 IPO deals amounting to HK$2.6b in total fundraising, a 133% increase in



Total funds raised reached HK$53.6b, increasing 23% year on year. The trend is the same for GEM board, with 35 IPO deals amounting to HK$2.6b in total fundraising.

number of firms and 136% in terms of funds raised. There were also 37 new listings on the main board within the period, with total funds raised standing at HK$51b, which is a 48% increase in IPOs and a 20% increase in funds raised. Companies seeing IPOs are mainly from these sectors: industrial, retail, consumer goods, and services. “Hong Kong listed Equity volume is up year on year with $16.7b raised via 229 deals in [the first half of 2017] compared to $13b via 179 deals in [the same period] in 2016,” said Trafford Blekinsopp, APAC head of equity capital markets at Dealogic. Major statistics Hong Kong’s close proximity — both in the cultural and geographical sense — to mainland China is proving to be a boon to the IPO and equities sectors. Some of the biggest deals in the first half of 2017 have ties, one way or another, to firms or financial institutions from the mainland. The biggest IPO deal for Hong Kong was the listing of financial services company Guotai Junan Securities for $2.2b on the Hong Kong Exchange (HKEX) in April. There was also the largest block trade done by Goldman Sachs with the sale of billionaire Richard Li’s PCCW Limited’s $1.1b stake in telecommunications unit HKT Trust & HKT Limited in the first quarter of this year. In the whole region, the largest IPO deal for the first half of 2017 was that of technology firm Netmarble games,

FINANCIAL INSIGHT: IPO South Korea’s largest mobile games maker, raising $2.3b in the Korea Exchange (KRX). Average deal size — excluding companies that raised funds of more than HK$10b — however, declined 17% in the first half of 2017 compared to the same period last year at HK$1 billion, according to data from PwC. Industries comprising the majority of new listings to the main board of HKEX for the first half of 2017 include industrial products (49%); retail, consumer goods, and services (30%); financial services (13%); information technology and telecommunications (5%); as well as energy and mining related (3%). For the GEM board of HKEX, majority of industries comprising new listings for the first half of the year include industrial products (37%); retail, consumer goods, and services (37%); financial services (14%); information technology and telecommunications (9%); as well as energy and mining related (3%). Boost factor Asia Pacific, with its size and the stellar economic growth of its countries over the past few years, remains the biggest and most significant region in terms of growth and development in the IPO and equities markets in the first half of 2017. With the region headlining the strongest first half rally in nearly a decade, the global IPO market saw proceeds reach $83.4b — a 90% rise from the same period last year — with the number of deals also rising significantly by 70% to 772 registered IPOs compared to the first half of 2016, according to data by Ernst & Young. Of this record figure, the Asia-Pacific region accounted for 61% or 468 of IPO deals and 44% or $37b of all proceeds of the global IPO market — this is the highest first half of activity for the region since 2002. This is a remarkable development despite the continuous uncertainty in the global economic landscape. EY ASEAN and Singapore managing partner Max Loh said that the Asia Pacific region’s position as the leading centre of IPO activity is unlikely to be challenged throughout the remainder of 2017 with Greater China leading the way. He also added that the region’s sustained growth and development momentum underpinned by stable fundamentals have continuously painted a positive economic and financial outlook over the years. The influence and boost by mainland China to Hong Kong’s IPO and equities growth was also highlighted by Top exchanges for cross-border IPOs

Source: Baker McKenzie

David Holland, Asia Pacific head of capital markets at Baker McKenzie. “The biggest influence on overall crossborder capital markets activity in Asia Pacific are Chinese companies listing on the Hong Kong exchange, which fell in the first half of 2017. Benson Wong

David Holland

Eddie Wong

Winnie Chan

Trafford Blenkinsopp

Outlook Whilst the number of transactions increased from the low base in 2016, transactional activity hasn’t tracked the strong equity markets across the region,” he said. “Looking forward, we think we will see a modest increase in transactional activity overall across the region. Capital flows out of China continue to represent the biggest area of uncertainty in capital markets in Asia Pacific.” Experts agree that outlook for Hong Kong’s IPO and equities sector for the rest of the year is upbeat. PwC forecasts a vibrant IPO market for Hong Kong driven by small and medium-sized enterprises that could result in a record-breaking 150 IPOs over the course of the year. There is still also a chance for some mega-sized IPOs before year-end, making Hong Kong one of the three strongest markets globally, with total fundraising of HK$220b. This is echoed by findings and analysis of Baker & McKenzie saying that the Stock Exchange of Hong Kong surpasses London (both Mainboard and AIM), the New York Stock Exchange, and the NASDAQ as the preferred hub for cross-border listings globally. “The second half of 2017 could be more challenging. Market sentiment may be affected by economic and political risk factors around the world,” said PwC Hong Kong entrepreneur group leader Benson Wong in a statement, adding that geopolitical issues, slow global economic recovery, and Brexit can dampen business sentiment. He also expects a slowdown in IPO activity in mainland China after a spurt of listings in the first half of the year. Wong explained, however, that with the Chinese economy still maintaining mid to high-growth, this is “encouraging the development of Chinese companies and increasing demand for fundraising.” The Chinese government’s One Belt, One Road Initiative will also likely to play a big boon to Hong Kong’s economy in general. Hong IPOs to hit record high Norton Rose Fulbright partner Winnie Chan said that they are positive on the Hong Kong IPO market in 2017. “Going forward with the Belt and Road Initiative, it is anticipated that more overseas companies are expected to see Hong Kong as their funding choice and seek listings here, she explained. “Besides, the Hong Kong Stock Exchange’s recent public consultation on the proposal to launch a New Board, or the so-called Third Board — on top of the main board and the Growth Enterprise Market (for growth companies that do not fulfill the requirements of profitability or track record) — may introduce more flexible rules to attract technology firms.” Chan added that it is believed that the ability of Hong HONG KONG BUSINESS | SEPTEMBER 2017


FINANCIAL INSIGHT: IPO Kong to allow dual-class shares companies and attract technology firms are the key issues for Hong Kong’s IPO market in the future. In terms of deals for the rest of the year, an expected IPO for Zhongyuan Bank Company Limited will be the biggest for Hong Kong at $1.1b. Regionally, it will be China Tower’s $10b IPO valuation expected to be completed by the third or fourth quarter of this year, according to Dealogic’s Blekinsopp. According to PwC analysis, the number of IPOs in 2017 could reach a record high of 160 whilst the fund to be raised will depend on whether large-sized IPOs can succeed as scheduled. An expected market trend of companies and investors focusing more on GEM Board paints a positive view of an emphasis of good performance in the second half of 2017. Hong Kong’s upper hand Experts and observers all over Asia Pacific are in consensus that there will be greater competition for stock markets and listings in the region. And being the region’s leader in financial and commercial activities, Hong Kong will be at the heart of it all. PwC analysis suggested that Hong Kong continues to be the most popular market for fund raising, attracting more overseas and mainland companies to get listed. This is echoed by experts around the region. Deloitte Singapore deputy managing partner for markets Ernest Kan said that they are witnessing a development — that of companies in Singapore going for Hong Kong listings. “There is the perception that Hong Kong listings ensure better valuations and liquidity. However, the valuation of a stock is a reflection of the company’s earnings and business performance,” he shared. An example is that of Osim International’s decision — which operates 172 stores in mainland China, 35 in Hong Kong, and 26 stores in Singapore — to launch an IPO in Hong Kong as V3 Group, described as an Asian luxury group in the lifestyle and wellness markets after officially delisting from the Singapore Stock Exchange in April. Tham Tuck Seng, capital markets leader of PwC Singapore, shared that Hong Kong is already proving to be a stiff competition for Singapore and other Southeast Asian economies in terms of IPOs for companies originating from those markets. Hong Kong doesn’t seem to plan on resting on its laurels. PwC analysis suggested that there are reforms put forward by HKEX to clarify and strengthen the function of both mainboard and GEM board to respond to market demand and help attract more companies of various types and categories (e.g. startups, “new economy” companies, etc.) to get listed in Hong Kong. “The proposal clearly defines the functionality of the different boards … [as] it addresses the funding needs of different kinds of companies and helps them to source and match appropriate investors. It also clears the obstacles to the development of the city’s capital markets,” said PwC’s Wong in a statement. He concluded that these suggestions could help “attract a certain amount of startups, ‘new economy’ companies, and Chinese companies listed overseas, to relocate their listing to Hong Kong.” 20


Singapore view

Why 2017 could be a blockbuster

Max Loh

Tham Tuck Seng

Ernest Kan

Singapore’s IPOs for the first half of this year raised $450m (US$329m), according to the latest data and figures from PwC Singapore. The volume of IPO funds raised by the end of 2017 is also projected to surpass 2016 levels with a number of IPO deals expected to be closed in the coming months (before the end of the calendar year). There were nine IPO deals — for both domestic and overseas stock markets — closed in the first half of this year, including one business trust transaction. If including one registration and three lodgements made in the first six months of 2017, IPO fund-raising is expected to hit $3.03b during the period, according to data from Deloitte. This is the highest figure since 2013 for Singapore IPOs. “We are seeing a great start to the IPO activity this year,” said Dr Ernest Kan, deputy managing partner (markets) for Deloitte Singapore. “If we take into consideration the one registration and three lodgements as of 30 June, we are seeing unprecedented level of funds raised since 2013. This performance reinforces positive investor sentiments for Singapore’s equity market.” For the two main SGX Mainboard listings, the largest IPO was HRnetGroup Limited with the highest funds raised at $174m and market capitalisation of $867m, followed by Dasin Retail Trust which raised $154m with a market capitalisation of $440m. Fibre network owner NetLink NBN Trust announced its initial public offering (IPO) price at $0.81 per unit. The offering price values the market capitalisation of the trust at about $3b. The $2.3b IPO is also the biggest in Singapore since 2011 when Hutchison Port Holdings Trust raised $7.6b, and the second largest IPO in Asia this year after the listing of Netmarble Games Corp in South Korea. PwC’s analysis suggests that rising sectors such as consumer and professional services will continue the uptrend with Singapore’s position as one of the main business and financial services centres in the region. Healthcare is also expected to maintain its position as a strong contributor to Singapore IPO. The nine IPOs in the first six months of 2017 have a total approximate capitalisation of $2.14b, according to data from Deloitte. Eight company IPOs raised $310m with $1.7b market capitalisation, whilst the one Business Trust transaction on the SGX mainboard raised $154m in proceeds and $440m in market capitalisation. In comparison, despite 2016 having only seven IPOs in its first half, in terms of overall value, the first six months of last year had a bigger market capitalisation of $2.24b.

Amount raised in 2016 H1 and 2017 H1

Source: Deloitte

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Mercedes-Benz S-Class: Trailblazer in comfort, efficiency, and technology The new Mercedes-Benz S-Class is raising the bar when it comes to comfort and efficiency in luxury automobiles with a host of new technologies and innovations to blaze through market expectations.


ercedes-Benz is going at full throttle once again in redefining comfort and efficiency in luxury automobiles with the unveiling of the new S-Class this month, maintaining its place as the undisputed leader in the premium car segment. Engineers and designers at Mercedes-Benz have put their heart and soul into every detail to make the new S-Class. The ground-breaking technology and design in the latest iteration of Mercedes-Benz’s flagship saloon includes numerous industry leading innovations, including touch-sensitive control buttons on the steering wheel, road surface scan, safety-enhancing driver assistance systems, wireless charging as well as the world’s first ENERGISING comfort control, among many others. These market-defining innovations not only make the new S-Class the safest, most comfortable, and most intelligent luxury car in the market today — surpassing the most demanding expectations of the most discerning luxury car aficionados — but also solidify its hold as the world’s bestselling luxury saloon in 2016 (300,000 units have been sold since 2013). Mercedes-Benz is all about staying true to the timeless elegance and beauty of its cars, but while the new S-Class is no exception to this rule, it achieves so much more. The new S-Class also features three torches of light as an exclusive exterior design feature. MULTIBEAM LED headlamps are available with ULTRA RANGE high beams. Via 84 individually contrallable LEDs, the light is always switched on exactly where it is needed. The new S-Class’ dashboard provides a flair of the future with 22


high-tech materials and innovative features, such as the addition of two new 12.3 inches high-definition displays under a shared glass cover to sport a seamless look while providing full customisability — Classic, Sporty, or Progressive display styles. The touch-sensitive control buttons on the steering wheel also allow drivers full control of the infotainment system which can be operated by voice control through LINGUATRONIC without compromising safety and security. World class comfort in style The interior of the new S-Class is as beautiful as ever with authentic materials, including open-pore woods as well as leather-trimmed door linings and waistlines, to complete a timeless design. One of the biggest features of the new S-Class is the world premiere of the ENERGIZING comfort control which improves wellness while driving. This optional feature links all the various comfort systems — from music, lighting, to air conditioning — in the vehicle together to tailor the mood and need of the driver and passengers. Six of the programmes, which run for 10 minutes, include Freshness, Warmth, Vitality, Joy, Comfort, and Training (muscle relaxation, muscle activation, and balance), assuring everyone of an

“With a whole series of new features and functions, the new S-Class remains the technological pioneeR”

MOTORING REPORT epicurean riding experience. The new S-Class is not just about elegance technological innovation, and functionality — it also excels at road performance and engine efficiency. A completely new range of highly efficient engines, including a V8 biturbo with cylinder shutoff, is having its world debut in the new S-Class. This also marks the world premiere of ground-breaking technologies such as the 48-volt Integrated Starter Generator and the electric booster compressor. The technologies help the new S-Class models become more cost-effective through fuel efficiency as well as more environmentally friendly with less carbon emissions — truly setting the new S-Class apart from

anything else in the market today. Safety has been an utmost priority in making the new S-Class more reliable on the road. Some of the features under the Intelligent Drive system of the new S-Class include Active Distance Control DISTRONIC and Active Speed Limit Assist for better navigation and speed control. In the automobile world, it takes a world of difference to stand out and excel. But with the new S-Class, Mercedes-Benz has given customers a one-of-a-kind luxury car that not only focuses on elegance and performance, but also on comfort, innovation, and sustainability. When it comes to the best choice for a luxury premium saloon, there is the new S-Class — and no other.




HSBC developed HSBCnet, its digital banking platform for SMEs in Guangdong

How banks are leveraging cross-border capabilities Hong Kong’s connection with the mainland may be its best asset yet.


ong Kong’s banking scene has been replete with people movements over the course of the last year, with quite a number of large banks reducing headcount. The Bank of East Asia Ltd, Hang Seng Bank, and Citi Hong Kong, for instance, cut their talent pools by 14%, 6.85%, and 6.87% respectively, in the midst of massive digital disruptions entering the financial landscape of the city. However, the total number of employees in Hong Kong’s twenty largest banks has increased by a significant number as well, owing to HSBC’s expansion of its talent pool by 37% from last year in a move to dominate the financial services industry and find more ways to collaborate with non-traditional players. The only bank with a significant increase in talent, HSBC remains on top of the digital game, trailblazing in areas such as robotics, artificial intelligence, and blockchain. As the mainland develops into a major fintech hub, Hong Kong’s top banks are leveraging their capabilities, pouring in greater investment, and expanding their digital spaces to accommodate new 24


Chinese enterprises are increasingly going global and banks can tap into this opportunity to strengthen their cross-border and cross-business initiatives.

technology and transform their talent pool’s compositions. Raymond Ch’ien, chairman, Hang Seng Bank, said that the upward trend in the global economy brought greater stability to Hong Kong’s operating environment over the past months. For Hang Seng, and probably for other banks with the same reach and coverage, future international trade flows, the evolving credit conditions, and the impact of the ongoing economic transition on the mainland will continue to create challenges and cast uncertainties. Capitalising on cross-border Hong Kong’s major banks remain glued to China and hinge even greater portions of their business to the mainland by tightening cross-border relationships and increasing the number of services being exchanged. Banks in the city are fully aware of their significant and privileged position, given Hong Kong’s role as an economic bridge between China and the rest of the world. The city is also trying to move with the times as regulators loosen up and find ways to ensure that policy does not hinder development in the highly

competitive Hong Kong market. Chinese enterprises are increasingly going global and banks can tap into this opportunity to strengthen their cross-border and cross-business initiatives. Recently, HSBC and BOC launched cross-border SME financing and payment services in order to speed up exchanges between Hong Kong and China and eventually, other parts of the world. According to Yi Huiman, chairman of ICBC, the cross-border financial business is set to become an important development direction of the banking industry for Hong Kong, especially for Chinese banks. HSBC developed HSBCnet, its digital banking platform for SMEs in Guangdong, allowing faster payment services with Hong Kong. BOCHK, on the other hand, supports “BOC Global SME Cross-Border Investment Matching Service”, a platform that aims to promote investment, technology exchange, and trade cooperation among SMEs in the mainland, Hong Kong and overseas.The platform helps SMEs tap into business opportunities arising from the China’s Belt & Road national strategy. “ICBC has captured the development opportunities presented by burgeoning crossborder business to become the first commercial bank able to offer around-the-clock RMB clearing and trading services in Asia, Europe, and the United States and created the cross-border products,” Yi added. China’s implementation of the Belt & Road initiative is its way of building closer economic, trade, and investment relationships with countries and regions along the route. Yi said that the scale of the capital and trading-related cross-border financial business and level of business will expand and deepen as a result of these developments. “With Hong Kong’s role as the ‘super-connector’ bridging countries along the Belt and Road route and Mainland China, massive cross-border financial business can be processed via the Hong

RANKING: BANKS stronger crossborder connections and expanding businesses, banks are pushed to increase their investments in the digital space in order to speed up their services. Lags have hounded developments in Hong Kong’s digital banking industry primarily due to regulation, and yet banks have not failed to come up with innovative solutions tailored to meet the needs of its clients.

With stronger cross-border connections and expanding businesses, banks are pushed to increase their investments in the digital space in order to speed up their services.

customer base in Hong Kong by 25% over the course of one year. Stuart Gulliver, group chief executive of HSBC added they launched a research and development lab in partnership with the Hong Kong government to promote technology development for the financial sector. Areas of focus include biometrics, data analytics, cybersecurity and internet finance. “Separately, we are developing a mobile application to help retail customers manage all of their finances more effectively through a single interface,” Gulliver said. As banks explore the evolving world of digital, they are also looking for ways to bring innovation to every customer possible. ICBC (Asia) recently launched My Life, its local e-Commerce platform which serves to provide a more diverse sales channel and services to local enterprises. ICBC (Asia) felt it was strategic to begin with the launch of the “Pet” section, which connects local petrelated merchants and consumers. According to Wu Xiang Jiang, head of the electronic banking department, My Life is a comprehensive local e-Commerce platform facing all the customers in Hong Kong by targeting specific markets with personalized services. “ICBC will assist the enterprises to bloom in the “Internet Plus” era and is committed to making contributions to promoting Hong Kong’s economic development, the improvement of people’s livelihood and society,” Wu said.

The demands of digital “We continued to upgrade our digital banking services with the aim of delivering a more efficient and user friendly experience. We revamped our Business Internet Banking platform to expand our ability to provide a wide range of time-to-market products. Through In April, Hang Seng launched our Business Banking mobile its first public fund app, customers can now upload documentation for loan and card Kong market and financial services applications. We have also extended platform,” Yi added. HSBC is also auto-enrolled SMS notification growing its business around the services on inward/outward Belt and Road route, and has inked remittance telegraphic transfers to energy sector deals linking China Mainland and overseas customers,” to Malaysia and Egypt. Meanwhile, Chi’en said. Chi’en added that Hang Seng’s Hong Kong’s banks are also strong cross-border and crossexploring the much talked about business connectivity remained key world of business analytics. For competitive advantages in capturing instance, Hang Seng has leveraged its new business and ensuring that the bank is well-positioned for sustainable customer segmentation strategy to long-term growth. Despite tightening deepen customer relationships based interest margins due to the rise in the on needs-based selling. By engaging cost of renminbi funding, Hang Seng its customers and ensuring that their needs are met, Hang Seng has China recorded solid growth in its driven business growth and grown its balance sheet and maintained good cost control. “Initiatives to strengthen our mainland investment services proposition were reflected in increased sales of retail investment funds. We also began manufacturing funds on the Mainland. In April, Hang Seng Qianhai Fund Management Company Limited, our foreign majority-owned joint venture fund management company, launched its first public fund. With the growth in net operating income outpacing the increase in operating expenses, we recorded a 2.9-percentage-point improvement in our cost efficiency ratio which, at 29.8%, is one of the lowest in the banking industry in BOC launched cross-border SME financing to speed up exchanges between Hong Kong and China Hong Kong,” Chi’en added. With



RANKING: banks 2017



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interior design architecture 連續十一年榮獲Hong Kong Business頒發

傑出室內設計獎2006–2016 Outstanding Interior Design Award 2006–2016

20年設計經驗及專業資格 20年公司商譽及誠信表現

誠信.準時.不超支 屢獲 名人客戶多次推薦本公司 (註1) 連續30個工程準時完工及精準預算 (註2) 20 years of professional experience 20 years of credible reputation

Integrity.Punctuality.Budget control Prestigious clients recommend us on multiple occasions (*1) 30 projects have been completed with precise budget continuously within the provided timeline (*2)

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Legal briefing

Hong Kong moves to toughen up AML/CTF Legal experts advise TCSPs and DNFBPs to start preparing by enhancing their customer due diligence processes.


hen the Securities and Futures Commission (SFC) slapped a HK$15 million fine against BOCOM International (Asia) for sponsor failures related to a Chinese company’s listing application, it was seen as a rebuke to critics that claim Hong Kong’s regulatory bark was woefully stronger than its bite. It is in this climate of increasing enforcement vigilance, especially with an international peer review of Hong Kong’s regulatory regime next year, that proposed changes to the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO) are being pushed. Legal experts advise trust or company service providers (TCSPs) and designated non-financial businesses and professions (DNFBPs) to start preparing for the proposed changes by enhancing their customer due diligence (CDD) processes and control frameworks. What are the proposed changes to the AMLO? Baker & McKenzie senior tax partner Richard Weisman said that there are two main proposals: the first is to introduce a licensing regime for trust and corporate service providers, and the second is to expand the scope of the (AMLO) to cover all DNFBPs. Weisman has occupied various leadership positions, including as head of the firm’s global tax practice group and as a member of its global executive committee. All TCSPs would be required to be licensed within 90 days of a date to be determined. The AMLO would be amended to prescribe statutory CDD and record-keeping requirements applicable to solicitors, accountants, real estate agents, and for TCSPs when these professionals engage in specified transactions.

EN M I C E SP Two significant developments in Hong Kong’s AML/CTF regime are underway

Grace Forbes

Karen Anderson

“The AMLO would be amended to prescribe statutory CDD and recordkeeping requirements applicable to solicitors, accountants, real estate agents, and for TCSPs when these professionals engage in specified transactions.“ What will be the impact of these proposals? Weisman said DNFBPs will be expected to carry out an array of CDD actions, including identifying the customer or any person purporting to act on behalf of the customer; verifying the customer’s identity using documents, data, or information from a reliable, independent source; identifying a beneficial owner; and verifying the identity of the beneficial owner. The AMLO would also be amended to introduce a licensing regime for TCSPs for the purpose of overseeing their compliance with AntiMoney Laundering/Counter-Terrorist Financing (AML/ CTF) requirements. This will require TCSPs to apply for 28


Richard Weisman

Urszula McCormack

a licence from the Registrar of Companies and satisfy a “fit-and-proper” test before they provide trust or company service as a business for the public. These proposals are meant to ensure that Hong Kong’s regime passes with flying colors when it undergoes a mutual evaluation by other members of the Financial Action Task Force, which sets international standards for AML/CTF regulation. Herbert Smith Freehills partner Karen Anderson said that the government is keen to ensure that Hong Kong’s rating is not adversely affected, and that it is proceeding with proposed changes to bring Hong Kong’s regulatory regime in line with FATF’s standards in time for its mutual assessment. “These legislative proposals should be read against the backdrop of increased enforcement in respect of AML/CTF compliance in the territory,” she added, noting that the SFC and the Hong Kong Monetary Authority have collectively taken disciplinary actions against five regulated entities and an individual relating to breaches of AML/CTF requirements. What actions should affected firms take? Critical action points include obtaining early senior management buy-in, building a strong control framework supported by clear policies and procedures, creating efficient and user-friendly systems, and strengthening vendor support like in producing due diligence reports and implementing technological tools, said Urszula McCormack, a partner in Hong Kong banking & finance team at King & Wood Mallesons, a firm specialising in financial services regulation and banking. “In anticipation of a sea-change, bodies likely to affected may be wise to begin preparing,” said Grace Forbes, a tenant specialising in criminal defence at 2 Hare Court. “For lawyers practising in Hong Kong, it may be helpful to refresh on the existing guidance set out in Practice Direction. All bodies under the DNFBP umbrella should also look out for ‘sector specific guidelines’, due to be issued by their own regulatory authorities, a provision which will be included in any amendment to the AMLO.”

Co-published corporate profile

The Terrace on 7/F, Panda Hotel

Panda Hotel: A meeting and conference oasis

Panda Hotel offers many excellent venues to cater for all events.


ocated in the bustling heart of Tsuen Wan, Panda Hotel is renowned as the first sizeable hotel in the district and one of the city’s largest. With over 900 wellappointed guestrooms and suites, coupled with four dining outlets, guests can enjoy a memorable stay and hold one of its many events and conferences with us. The Hotel has recently been awarded the “MICE Hotel of the Year” of Golden

Panda Grand Ballroom on 5/F, Panda Hotel

Pearl Award by GHM Hotel General Managers Society for four consecutive years, proving its position as an all-inclusive MICE destination and hotel with excellent facilities and amenities. Excellent Event Venues for All Occasions Panda Hotel offers a selection of excellent venues to cater for all events, including the Panda Grand Ballroom, the CRYSTAL and The Terrace, our classic yet modern venues. Among the many well-appointed venues at Panda Hotel, the CRYSTAL is acclaimed for its elegant ambience and high flexibility. The 5,742 ft2 function room is designed by award-winning architect Philip Liao, and showcases its unique, colour-changing LED crystal wall, which is also the signature icon of this elegant space. In addition to the glamorous interior, the CRYSTAL is also well equipped with cuttingedge technology including professional audio-visual facilities, and discreet catering services, which all ensure a flawless and professional event for guests from start to finish. Custom-designed for guests’ needs, from a lavish wedding, an intimate dinner, a business meeting to a large-scale seminar, all can be hosted at this resplendent place. The Terrace located on the 7th floor provides the perfect setting for intimate gatherings including wedding banquets and

the CRYSTAL on M3/F, Panda Hotel

cocktail events. Featuring an extensive, open-air space with natural green walls and sofa benches, The Terrace presents an exclusive and cosy ambience for all celebrations. Guests will savour the graceful and romantic atmosphere at day or night, indulging in the most delightful and memorable experience. About Panda Hotel Adjacent to the hub of Tsuen Wan, Panda Hotel is highly accessible within walking distances from Tsuen Wan or Tai Wo Hau MTR stations, and only 20 to 25 minutes’ drive from the Kowloonbay International Trade & Exhibition Centre, the Hong Kong International Airport and AsiaWorld-Expo respectively. The Hotel houses over 900 guest rooms and suites coupled with four dining outlets namely the Michelinrecommended Chinese restaurant YinYue, the GHM Cordons Bleus recommended European style Balcony, the all-day dining Panda Café and the Sports Bar to cater to the various needs of diners. Equipped with an outdoor swimming pool, a Health Club, a Business Centre and an Executive Lounge, the Hotel is a perfect place for both vacation and business stay.

“The Hotel received the ‘MICE Hotel of the Year’ of Golden Pearl Award by GHM Hotel General Managers Society.” HONG KONG BUSINESS | SEPTEMBER 2017


marketing Briefing

The viability of modern viral marketing Sudden, short and sweet: Viral marketing is now all the rage, and here’s why it works.


or the longest time, successful advertising and marketing campaigns were borne out of strategic planning and development, with details from initial audience testing down to execution being meticulously considered. Businesses devoted much of their time and efforts to significantly planning their advertising and marketing. But in recent years, the trend has been skewing towards a different marketing, one that relies heavily on the rapid exposure of advertising materials through ‘likes’ ‘shares’ and internet analytics — “viral” marketing. An ROI-rich tactic? Clara Low, marketing manager of on-demand logistics startup Quorier, explained that viral marketing creates an intense buzz and hype for a short period of time within the digital realm, further noting that for any material to go viral, its content has to be creative, in-depth, and, ultimately, emotional to resonate with its audience. According to Low, despite the abbreviated period associated with it, viral marketing — if implemented correctly — is able to effectively compete with traditional marketing, and to some extent, even prove to be cheaper. A critical factor in the success of viral marketing is essentially the spontaneity factor — how spontaneous can an activity or occurrence get, and how a business is quick enough to exploit this event. What drives virality? “Spontaneity drives the ‘virality’ of marketing content, and by the nature of being spontaneous (and authentic), there is only so much accountability that businesses should peg to these serendipitous occurrences,” said Marcus Loh, vice president, marketing and corporate communication at PSB Academy and director at Star Education Group. Loh advised that as a rule of thumb for measuring return on investment, what businesses need is to have a clear perspective of the outputs, outcomes, and impact that is expected of any marketing initiative. Because of the spontaneity factor, viral marketing can also result in a backlash for businesses if not harnessed

WeChat will be increasingly important for viral marketing



Benny Chow

properly. Loh explained that viral marketing is often a double-edged sword in today’s fast moving digital age. Brands that hop blindly onto the bandwagon without conducting ample homework with regard to concept, public sensitivity, and timeliness can often backfire otherwise good natured intentions. Messaging remains a critical factor to the success of viral marketing campaigns. Low noted that companies should always ensure the message intent is strongly aligned with their brand image and values of the company whilst having fun. Meanwhile, as businesses embrace viral marketing, it is important for other teams and departments to offer adequate support and backing in order for campaigns to run smoothly. “This period can be overwhelming, thus, support from public relations, sales, and other relevant departments is crucial in ensuring good, and, more importantly, sustained ROI,” Low emphasised.

“Messaging remains a critical factor to the success of viral marketing campaigns.” Clara Low

Marcus Loh

Roy Ang

How is viral marketing expected to play out? Benny Chow, chief marketing officer and co-founder of local photo studio Firefly Photography, advised that all marketers should start working with brand managers to start developing authentic viral marketing efforts that tap into the message of the brand and efforts that evoke emotions in short multimedia products. Moving forward, how is viral marketing expected to play out? Experts agree that the playing field can only get bigger and better given the rapid expansion of the latest technology, thus, accelerating the growth of viral marketing. “In my opinion, especially in the professional services sector, there will be increased use of videos and visual content in campaigns as the use of mobile platforms continues to grow,” said marketing and business manager Roy Ang. “Information or messages will need to be visually captivating and easy to understand on the limited screen size of mobile phones and tablets.” Social media messaging applications, in particular, will prove to be attractive channels. Ang noted that there will also be increased use of platforms like WeChat, the most popular messaging app developed in China. “With China being a huge market for many industries, platforms like WeChat, which has a strong reach of Chinese consumers, will be increasingly important for viral marketing,” Ang added. Quorier’s Low echoed this statement, saying that the landscape will get more intense and exciting with the advancement on many digital platforms. “Proliferation of message will be faster, and I anticipate improved algorithms will allow marketers like myself to be even more precise in reaching the right audience based on deeper classification on user’s demographic and behavior profile,” she concluded.


Over the past 20 years, the structure of Hong Kong’s economy has not changed much

Twenty years after the handover, shaping a new Hong Kong Colliers International provides a 360 degree view of the world’s freest economy, and the roadblocks that it faces on the way to retain its global status in the future.


ong Kong retains its status as the world’s freest economy for the 23rd consecutive year as ranked by the Heritage Foundation, and it has been ranked as the most competitive economy by the Institute for Management Development (IMD) in 2017. Over the past 20 years, the structure of Hong Kong’s economy has not changed much given that the four major pillars - financial services, tourism, trading and logistics and professional services – were still dominant and constituted 57.2% of the total GDP in 2015, according to the Census and Statistics Department. Notably, the proportion of financial services has increased to 17.6% in 2015 compared to 10.6% in 1995. On the other hand, the shifting of the mainland’s export manufacturing capacity away from Guangdong province and the improving infrastructure and operation efficiency at ports in Shenzhen and Guangzhou have lowered the share of China’s trade handled by Hong Kong. This has put the local trade and logistics sector under pressure. Despite the fact that Hong Kong’s financial sector has become very well developed, highly sophisticated and stable, Hong Kong is facing new challenges over how to incorporate new technology and innovation into its economy to retain its global status in the future.



Hong Kong is facing new challenges over how to incorporate new technology and innovation into its economy to retain its global status.

For example, according to the report Fintech and the Evolving Landscape: Landing points for the industry structure (April 2016) by the consultancy Accenture, total global investments in fintech marked an eleven-fold increase from 2010 to 2015. However, Hong Kong has only started to see more investment in fintech since 2016, a few years behind other global financial centres, such as New York, London and Singapore. In addition, Hong Kong has been lagging behind in R&D investment. Total R&D investment in Hong Kong only accounted for 0.8% of domestic GDP in 2015, well below the levels of 2.4% in Singapore and 4.2% in Shenzhen. Singapore has repositioned itself as a high-tech hub and successfully outpaced Hong Kong in terms of real GDP per capita, from US$7,110 in 1995 to US$15,700 in 2015. The growth of Shenzhen and Shanghai, two of the tier-one cities in China, also highlights the importance of technology in economic growth. Although both grew much faster than Hong Kong in the last 20 years, 5.0 times for Shenzhen and 3.5 times for Shanghai, the growth rate of Shenzhen, “China’s Silicon Valley”, has been much faster than Shanghai, China’s top financial centre, especially since 2010. Hong Kong needs to be more involved in the technology based “New

ANALYSIS: HONG kong’s 20th ANNIVERSARY Economy”; otherwise, it will fall further behind other leading cities in digital competitiveness. Since 1997, Hong Kong’s services sector has relied heavily on surging demand from mainland China in areas including business, legal and financial services. As Hong Kong’s economy has become more integrated with China, so the influence of Chinese companies and capitals in Hong Kong has been on the rise. In the context of RMB internationalisation, Hong Kong has the largest RMB liquidity pool outside mainland China totalling RMB1.15t in 2015, and RMB trade settlement handled by banks in Hong Kong amounted to RMB6.8t in 2015, according to the Hong Kong Monetary Authority. According to SWIFT, Hong Kong currently handles about 76% of the global RMB payments. Given the Chinese renminbi’s rise to seventh place in the list of the world’s most common payment currencies as of April 2017, versus 35th place in October 2010, Hong Kong’s financial sector has benefited from the increasing exports of financial services. Chinese Capital gains influence in Hong Kong In 1993, the Hong Kong market was opened up to fundraising by China-incorporated companies, listings known as H-shares. In addition to H-shares, “red chips”, or companies controlled by the Chinese state incorporated in Hong Kong, are also traded on the SEHK. Encouraged by the QDII scheme implemented in 2006, the listing of the Industrial and Commercial Bank of China raised US$19b in October 2006; this was the world’s largest initial public offering (IPO) until the record was broken in 2010. In 2016, the Postal Savings Bank of China raised about US$7.4b in Hong Kong. Driven in part by the Shanghai-Hong Kong Stock Connect, in 2015 PRC enterprises accounted for 62% of total market capitalisation of the Hong Kong Stock Exchange, compared to only 39% a decade ago in 2005. Benefiting from the increasing fund raising needs of Chinese companies in Hong Kong, Bloomberg has reported that nine of the ten leading underwriters of IPOs are mainland Chinese companies in 2017, whereas the list was made up of local and global firms 20 years ago. In the early 2000s, Hong Kong-based enterprises invested heavily in mainland China. Hong Kong’s outward investment was also artificially boosted by “round-tripping”, whereby mainland Chinese entities took money to Hong Kong Share of GDP by four pillar industries

Source: Census and Statistics Department

According to SWIFT, Hong Kong currently handles about 76% of the global RMB payments.

in order to reinvest it in China and so gain the tax advantages granted to foreign investors. However, China’s President Xi Jinping has further reinforced internationalisation policies such as the “Going Out” policy and Belt and Road Initiative. Chinese entities are now increasingly directing their capital overseas instead of reinvesting into China. As the closest foreign market, Hong Kong has witnessed heavy inflows of Chinese capital. According to RCA data, Hong Kong surpassed Sydney as the second most popular destination for Chinese outbound property investment after New York in 2016, with en bloc office buildings and residential development sites being the most popular assets for Chinese investors and developers. Challenges in commercial property Hong Kong’s CBD has been well-established since the 1980s and 1990s. Due to the completion of Two IFC in 2003 and the outbreak of SARS at the same time, the vacancy level in Central jumped to 18.1% in July 2003. Prior to the Global Financial Crisis (GFC) of 2008-09, rents in Central were growing strongly: between 2003 and 2008 a total surge of 423% was recorded, fuelled by active expansion by large banks and MNCs. During the GFC, by contrast, expansion by financial occupiers gave way to heavy retrenchment, and rents declined. In recent years, PRC companies have become a new driver for office space demand in Central, partly triggered by the launch of the Shanghai-Hong Kong Stock Connect system. Hong Kong’s CBD, now known as the most expensive office market globally, has led even certain traditionally CBD-based tenants (notably banks for their middle office operations and a few law firms) to decentralise their offices and to adopt flexible workspace solutions to lower their operational real estate costs. Multinational companies have been using serviced offices, predominantly located in core and fringe CBD areas, in order to achieve flexibility and proximity to clients. Meanwhile, co-working space has become increasingly popular due to the rise of the millennial workforce. WeWork, the world’s largest coworking space operator, expanded its footprint in Asia last year, including Hong Kong. HSBC leased almost 400 desks from WeWork’s facility in Causeway Bay in September 2016, marking a key point in the expansion of this sector. At the same time, several business centres which used to provide only traditional serviced offices and meeting rooms have started a new business line, offering coworking space to absorb growing needs from tenants. Changes in retail market Thanks to the Individual Visit Scheme enforced in 2003 and the “multiple-entry” visa policy for Shenzhen travellers in 2009, according to government data, Hong Kong retail sales value soared from HKD234.9 billion (US$30.2 billion) in 1997 to HKD436.6 billion (US$56.3 billion) in 2016, reflecting the strong purchasing power of mainland Chinese visitors. In 2014, mainland Chinese visitors’ spending HONG KONG BUSINESS | SEPTEMBER 2017


ANALYSIS: HONG kong’s 20th ANNIVERSARY the tight supply and strong demand in the industrial market, growth in industrial rents seems highly probable.

Hong Kong Retail Sales

Source: Hong Kong Tourism Board; Colliers

accounted for 38% of total retail sales, compared to only 9% in 2002. During the same period, rents of high-street shops surged 249%. However, structural changes in China have put an end to the golden age of Hong Kong’s retail market. By the end of 2016, retail rent had fallen back to 2009’s level while retail sales value declined to just below the 2012 level. Hong Kong’s value of total retail sales has started to recover in 1H 2017 following a five-year decline. The positive development in the retail market supported by the return of Chinese tourists to Hong Kong has yet translated into higher retail rent for high street shops. With an increasing number of shops renewed their lease with lower rents, the average rent of street-level shops should gradually stabilise and a moderate rebound in 2018 at the earliest. Newer brands have taken advantage of the current rental market and moved into first tier locations in prime shopping districts. Shortage of industrial supply Against the backdrop of decreasing manufacturing activity, which currently accounts for only 1% of local GDP, the government has rezoned 31.9 million sq ft of “Industrial” zones for business and other uses since 2001. Flatted factories have lost a total of 13 million sq ft of stock over two decades. Despite the fact that decreasing stock drove rents up by about 35% from end- 2001 to end-2008, the government put further pressure on supply by introducing the revitalisation scheme for industrial buildings in October 2009, allowing owners to convert their building usage without paying a land premium. This scheme was terminated in March 2016. Looking ahead, the manifesto of Carrie Lam, the elected Chief Executive, proposed the “Re-industrialisation” of Hong Kong by promoting the adoption of innovation and technology for the high-end and innovative production. Mrs Lam also proposed further relaxations on the usage limits of certain industrial buildings to encourage creative industries and co-working space. Existing government policy has encouraged industrial buildings to be redeveloped or refurbished for nonindustrial uses and has resulted in a reduction of total industrial building supply. However, the “reindustrialisation” policy, if successfully implemented, could further increase demand for industrial space. Given 34


With an increasing number of shops renewed their lease with lower rents, the average rent of street-level shops should gradually stabilise and a moderate rebound in 2018 at the earliest.

Most expensive homes In 1997, when a housing bubble burst during the Asian Financial Crisis, Hong Kong’s home buyers were defaulting on their mortgages from overleveraging. According to government data, the affordability ratio (repayment to income ratio1 ) deteriorated to 93% in that year - a level which has not been surpassed since then. Amid the adjustment of abnormal growth driven by speculative activity, the former Chief Executive Tung Chee-Hwa proposed during his first Policy Address to build 85,000 residential units per year starting from 1999. While this statement hit home prices further, the worst was to come in 2003 when Hong Kong experienced recession and the crisis caused by the SARS epidemic. The former Secretary of Housing, Planning and Lands, Mr Michael Suen, believed that oversupply was one of the key reasons for the slump in home prices and announced a batch of nine stimulus measures including suspension of regular land sales in 2002. These remained in force until 2011. 1 The ratio of mortgage payment for a 45 sq m flat (assuming 70% loan-to-value ratio and tenure of 20 years) to median income of households (excluding those living in public housing). These stimulus measures helped fuel investment demand. Demand proved so strong that home prices increased 460% between the trough in July 2003 and today. Concerned about another housing bubble, the government has started to intervene in the market by setting higher stamp duties and lower loan ratios for buyers. Thanks to the cooling measures, transactions involving resale within 24 months remained low at 0.7% of total transactions in Q1 2017, well below the monthly average of 2,661 cases or 20.0% in January to November 2010 before the introduction of Special Stamp Duty. We consider the continuing growth in Hong Kong home prices to be healthier than in the past, since it is driven more by the shortage of supply than by speculation. The residential market has been driven by speculative activity which accounted for around 15-25% of total transactions until several cooling measures were launched in late 2010 according to government’s data. The number of households and median household income of private housing have increased 62% and 52%, respectively, over

Office rental index

Source: Colliers

ANALYSIS: HONG kong’s 20th ANNIVERSARY the past 20 years. Monetary inflation has strengthened buyers’ purchasing power, with M3 money supply increasing to HKD13.0 billion by the end of 2016, compared to HKD2.9 billion in 1997. According to the government, Hong Kong homes could be considered more affordable now than in 1997, with an affordability ratio of 27% lower than during the peak in 1997. However, the proportion of owner-occupiers of private households has fallen to a record low of 64%. For most years in which the repayment-income ratio was below 45%, the proportion of household owner-occupiers was around 70%. However, in 2001 and 2003 the number of negative equity cases surged to a record high. Belt and Road initiative and Greater Bay Area plan The implementation of these two Chinese national agendas will determine Hong Kong’s role in the coming decades as they will expand Hong Kong’s influence on both the international and domestic fronts. On a global scale, Hong Kong has to polish its “super-connecter” role between China and the Belt and Road countries, a new geo-political structure led by China. The finance and professional services sector will have plenty of room to grow with Hong Kong acting as the new financial centre for the Belt and Road region, which comprises 65% of the world’s population and one-third of its GDP. At a regional level, further integration with nearby cities in the Pearl River Delta under the Greater Bay Area plan will further expand Hong Kong’s economic hinterland with the addition of 58 million wealthy inhabitants. The Greater Bay Area is one of the most dynamic economic regions in the world. Increasing cross-border flows of people, capital and business should enhance Hong Kong’s role as the prominent financial centre for PRD residents and mainland Chinese companies as more will use Hong Kong to diversify their portfolios and to facilitate global expansion of their businesses. The constant shortage of developable space has restrained Hong Kong’s development and the city needs to expand its capacities in terms of infrastructure, business districts, high-tech parks, cultural facilities and tourism attractions in order to cater for new demands in addition to the supply of residential land. High business operating costs and living costs have hindered the development of new economies. The government needs to expedite the development of a wider transportation network and the creation of new developable land. New investment opportunities on city fringe We anticipate that the development focus of Hong Kong will shift from the urban core surrounding Victoria Harbour to the fringe areas adjacent to key border crossings and along new infrastructure corridors. Hong Kong will transform itself into a multi-polar urban framework with key investment opportunities emerging in the New Territories, especially in areas with close proximity to future border crossings: 1. Aerotropolis in North Lantau - the expansion of Hong Kong International Airport, the upcoming completion of

According to the government’s 2030+ plan, by 2046 more than 326,000 private residential units will be over 70 years old.

Hong Kong-Zhuhai-Macau Bridge, and the Tung Chung New Town extension have the potential to create a new economic hub focusing on regional business integration. 2. Lok Ma Chau Loop in Northern New Territories is intended to be developed into a future high-tech hub for Hong Kong and Shenzhen. Promoted by the government, the project should create spill-over effects and generate new residential and commercial demand to be accommodated in the surrounding areas. 3. New development areas in Northwest New Territories identified by the government, such as Yuen Long South, Hung Shui Kiu, Kwu Tung North, and Fanling North, will be the focus of future new town developments. Re-energising the urban core On the other hand, we foresee more investment will be involved in urban-core redevelopment, which is required to maintain a vibrant urban centre. After 50 years of rapid development, Hong Kong’s existing buildings are aging fast. According to the government’s 2030+ plan, by 2046 more than 326,000 private residential units will be over 70 years old. Together with the current office and industrial building stock, the extent of the number of aged buildings will hinder future economic development in Hong Kong. Successful urban redevelopment projects, such as Langham Place in Mongkok, the Avenue in Wan Chai, and the ongoing Taikoo Place redevelopment have been effective in re-energising the older community structure by bringing in new business activities and a growing millennial community. Source: Collier’s International, Shaping a New Hong Kong, Hong Kong Special

Hong Kong’s existing buildings are aging fast

Source:Colliers International

Reinventing Hong Kong to become a global city

Source: Data from City Governments




Price-to-income ratio is a poor indicator of housing affordability in Hong Kong

Up, up and away: The rise and rise of Hong Kong’s residential market Housing prices have surged by 20% over the past year and are now back at all-time highs.


ong Kong residential housing prices continue to drift skywards, despite the government’s efforts to keep the property balloon closer to the ground. Market watchers have seen no slowdown in the upward trend, but have started looking for the top of the market. Despite the government pulling on the regulatory Residential sales volume

Source: Land Registry



Hong Kong’s price-to-income ratio which stands at 17.3 is the world’s least affordable housing market.

tether, housing prices have surged by 20% over the past year and are now back at all-time highs. Yet, rising interest rates, geopolitical risks, and increasing supply are adding to fears that the market may crash back down. Demand from owner-occupiers, however, remains strong and whilst affordability has deteriorated, we estimate that at least half of all households still have the financial strength to participate in the private housing market. Moreover, the deadlock in the secondary market continues to funnel buyers into the primary market, which in turn, further supports prices. We believe that prices may potentially increase a further 15% over the next two and a half years, and the top of the market is still higher in the clouds. Our analysis shows that over the past 25 years, Hong Kong’s housing prices have correlated more

strongly with the performance of the underlying business cycle than any other macro-economic indicator, including interest rates. Affordability remains grounded Any discussion about Hong Kong’s housing market inevitably circles around the issue of affordability. Hong Kong’s current price-to-income ratio, which stands at just 17.3, ranks the city as the world’s least affordable housing market. According to Demographia, a ratio of 3.0 or less is deemed affordable while a ratio above 5.0 is severely unaffordable. Yet, we believe that the price-to-income ratio is a poor indicator of housing affordability in Hong Kong. Save for a brief period between the bursting of the bubble and SARS outbreak (20002003), when the housing market approached levels of affordability on Demographia’s scale, Hong Kong’s

Analysis: PROPERTY Affordability in terms of price and mortgage payment

Source: JLL

price-to-income ratio has always been high. Over the past 25 years, the ratio has averaged 11.5. In our opinion, a more meaningful measure of affordability is the Debt Servicing Ratio (DSR), or the amount of monthly household income apportioned to servicing mortgage repayments. At present, we estimate the DSR for new mortgagees to be at about 47%, which is just above the long-term average of 46%. In comparison, the levels recorded just prior to the Asian Financial Crisis in 1997 were over 100%. The current DSR level, which we believe is tolerable, is largely a result of the lower maximum LTV ratios and DSR lending caps imposed by the HKMA in recent years. Since 2010, borrowers have also been subject to a stress test against a 300 basis point increase in the mortgage rate, where the DSR cannot exceed 60%. Moreover, latest data from the HKMA shows that the actual DSR for all outstanding mortgages is closer to 33%, which is significantly lower than our estimates. Given these factors, it seems unlikely that any initial interest rate hikes will have a meaningful effect on the housing market. Still plenty of buyers Despite the strong run-up in prices, we argue that there is still an adequate number of households that can afford to participate in the private housing market. Using the HKMA’s stress test limits for interest rates and maximum DSR levels for first-time homebuyers, we estimate that households need an income of at least HKD 28,000 per month to be able to get on the housing ladder. Our analysis assumes that the buyer

will save half of their household income for a period of no more than five years to use as a downpayment and takes into account the various LTV ratios that apply for different price points in the market. For properties priced under HKD 6 million, homebuyers can finance as much as 80% of the property’s value: 60% through a primary mortgage and 20% from the Hong Kong Mortgage Corporation. For properties priced over HKD 6 million, we assume a maximum LTV ratio of 70%, where 50-60% of the property’s value will be financed through a primary mortgage, subject to the HKMA’s maximum LTV ratios, and the balance will be financed through a non-bank financial institution. China factor Doomsayers typically reference what happened at the 1997 peak as a model for what’s next in today’s market, but there are many differences between the housing market and economy then and now. The growth of China’s economy relative to the local economy cannot be understated. In 1997, the size of Hong Kong’s economy was equivalent to 19% of the mainland’s. Today, this has fallen to 3%. Given China’s increased economic clout, it will likely exert a greater influence on the local property market. Many of the government’s recent demand suppression measures primarily target mainland Chinese buyers. While there are no official figures available on mainland Chinese buyers in the local housing market, an estimate of their participation can be derived from government statistics on transactions involving BSD. These

The ability of buyers to borrow sustainably will ensure that prices will not only hold up but increase a further 15% from current levels.

suggest that they have accounted for less than 5% of transactions in recent years. Yet mainland Chinese buyers continue to dominate transactions at the top end of the residential market. Even the prospect of a 30% upfront stamp duty levy has failed to dampen their enthusiasm. Of the five most expensive residential properties transacted in the city (in terms of lump size), three have involved mainland buyers. Look for a further 15% rise A growing economy, strong pent-up demand, and the ability of buyers to borrow sustainably will ensure that prices will not only hold up but increase a further 15% from current levels over the next two and a half years. The pace of growth, however, is likely to slow and may become lumpy as the normalisation ofinterest rates continues. For first-time homebuyers looking to get on the housing ladder, the primary market will continue to provide the most opportunities, especially with developers now becoming more willing to provide financing. The best value is likely to be found in areas where more new supply is expected to be completed. With the government tightening its grip on the market, it is likely only to be palatable for those taking a long view. We believe that the property price balloon will not burst, but rather will continue to weather any market turbulence to rise slowly and bumpily upwards over the near term. From “Up, Up and Away The Rise and Rise of Hong Kong’s Residential Market, JLL

Top 5 growing housing districts

Source: Buildings Department, Market Sources, JLL



ANALYSIS: SME quarter. The most recent survey was conducted in the second half of June 2017, and managers of 844 SMEs across nine industries were interviewed. The survey contains nine standard questions to determine the changes SME managers expect in various aspects of their business in the coming quarter.

The latest reading is still the second highest in seven quarters

SMEs enter Q3 with caution SME sentiment tracker eases after a strong bounce in Q2.


ike the rest of the world, Hong Kong enjoyed a good start to 2017, but now faces a risk of moderating growth in H2. Headwinds may persist, including geopolitical uncertainty in the region and beyond, global monetary tightening, and a likely resumption of China’s slowdown. It is therefore not surprising to see weakening sentiment among Hong Kong SMEs after a strong Q2 bounce, confirming their lingering cautiousness. The Standard Chartered Hong Kong SME Leading Business Index (SMEI), released jointly by Standard Chartered Bank and the Hong Kong Productivity Council, eased to 44.3 in Q3-2017 from 45.6 in Q2-2017 (50 = neutral). All five main index components contributed to the 3% m/m headline drop That said, the latest reading is still the second highest in seven quarters, indicating little risk that the economy will slip back to 2016’s trough levels. The sub-indices for ‘sales’, ‘profit margin’ and ‘global economic outlook’ in Q3 are still 3.6pts, 2.8pts and 16.9pts higher, respectively, than a year earlier. An otherwise weaker set of industry sub-indices also showed some silver linings. Indices for two of the three main industries – ‘manufacturing’ and ‘retail’, which together accounted



All five main index components contributed to the 3% m/m headline drop

for 27% of all respondents – have actually risen in Q3, albeit from weak levels. The fact that China ended Q2 on a high note, reporting strong production activity, bodes well for our manufacturing respondents The breakdown for retailers was also encouraging as it was not driven only by ‘sales’ and ‘profit margin’, which are coincident in nature, but also by ‘hiring’ and ‘investment’, which indicates longterm confidence, giving Hong Kong a much-needed cushion in case of an external shock. The SME Index was created – and the surveys are conducted – by the Hong Kong Productivity Council, sponsored by Standard Chartered Bank (Hong Kong) Limited. It is forward-looking in that it measures companies’ sentiment for the coming

Weakening sentiment The 3% m/m drop in the headline SME Index needs to be put into perspective. The Q3-2017 reading is still the second highest since Q42015 and is c.10% off the record low in Q2-2016; this means that Hong Kong’s economy is far from slipping back to last year’s trough levels. The y/y changes in coincident indicators are particularly telling –the ‘sales’, ‘profit margin’ and ‘global economic outlook’ subindices are still 3.6pts, 2.8pts and 16.9pts higher, respectively, than a year ago. This confirms a genuine improvement in the macroeconomic backdrop since 2016. That said, our SME respondents are still generally pessimistic. All but one main index sub-components remain below the 50 neutral mark. ‘Hiring’ is the exception at 50.9, down 0.2pts y/y, indicating that YTD cyclical economic and business improvements have yet to translate into long-term confidence. Only two of the nine main industry sub-indices rose in Q3. The good news is that these two are ‘manufacturing’ and ‘retail’, which together account for 27% of the survey respondents. Moreover, all nine industry sub-indices are higher now than a year earlier. From Kelvin Lau, Senior Economist, Greater China Standard Chartered Bank (HK)

SMEI readings are still materially better than in 2016

Sources: Hong Kong Productivity Council, Standard Chartered Research


Major overseas destinations for Chinese commercial property and development investments in 2016 were the US (43%), Hong Kong (18%), and Australia (12%)

Why China’s capital controls matter to global property markets Chinese companies have acquired 80% of Hong Kong residential land in 2017 YTD.


ince 2013, China’s acquisition and development of global commercial real estate has accelerated, spurred by domestic FX concerns and diminishing returns in domestic markets. Late last year, policymakers spoke out against “irrational” overseas investment in the “negative list” of sectors perceived as a means of moving wealth offshore.

Chinese companies invested US$4.3b in Hong Kong real estate market.

Breakdown of China’s overseas property investments (2016)

Source: Real Capital Analytics, Morgan Stanley Research. *Include commercial real estate and development sites



Over the past month, pressure has intensified, with the China Banking Regulatory Commission (CBRC) reportedly cutting off funding for some overseas acquisitions. On July 20, the government urged the business community to allocate financial resources to the One Belt, One Road (OBOR) initiative instead of outbound activities that “blindly chase after profit.” We expect outbound direct investment (ODI) in property to slow from US$10.6b in 2016 to US$1.7b (-84% YoY) in 2017 and US$1.4b in 2018. Offshore-financed investment will likely also decline under closer scrutiny, with offshore USD senior note issuance a key indicator we are watching. We see a drop in Chinese demand pressuring real estate transaction volumes near term and potentially creating headwinds for prices over the medium term. According to Real Capital Analytics,

the major overseas destinations for Chinese commercial property and development investments in 2016 were the US (43%), Hong Kong (18%), and Australia (12%), while pending deals have mainly accumulated in the UK (34% of total amount) and the US (7%) over the past six months. Office property is most exposed, with Manhattan, central London and Hong Kong markets of focus. Global property markets In United States, China was the largest foreign investor in 2016 and the second largest in 2017. Office and hotel properties in gateway cities – New York, San Francisco, Chicago, and Los Angeles – have attracted nearly 80% of Chinese investment in 2017, dominated by the New York City metro area. In Manhattan, China has ~30% share of total YTD transaction volumes. US sales

Analysis: GLOBAL PROPERTY MARKETS Chinese companies has acquired 80% of HK residential public sites

Source: Lands Department MTRC, URA, HKET, HKETJ, Morgan Stanley Research estimate

volumes are down ~9% YoY in 1H17 and -55% YoY in Manhattan as a disconnect between sellers and buyers has emerged. When sellers return, the absence of one of the largest investors in recent years could exacerbate pressure on the CRE market, where we argue prices have peaked. This reinforces our cautious view on Office REITs exposed to NYC. In United Kingdom, sterling weakness has been the key driver of Chinese real estate investment in the UK. Chinese capital accounted for 25% of all central London commercial property acquisitions in 2016 (vs. 1% in 2006), and has had a significant impact on residential housing prices. Marginal demand matters, and we think central London property values – both commercial and residential – are likely to be the most exposed to a sharp slowdown in Chinese activity, even without a reversal of capital flows. In Australia, China was the largest foreign investor in Australian real estate in 2015/16 at ~A$32b, nearly 4 times the US (#2). We estimate A$20b of residential transactions related to Chinese investors, hence the impact of slowing Chinese demand on residential will be the most significant. Within CRE, Office could be most exposed, given that Chinese investors have accounted for 12-25% of transaction value over the last 2-3 years. Chinese footprints in Hong Kong According to property consultancy firms (Knight Frank, Colliers, JLL, C&W), such outbound investment into HK property market surged to US$5.6b in 2016, more than triple from 2014 and more than quadruple from 2012/13 level. In

1Q17, Chinese companies invested US$4.3b in Hong Kong real estate market. This is already tracking 77% of full year 2016 amount Office was the most popular investment type before 2016: Before 2016, most of the Chinese investment, excluding individual buyers, in Hong Kong real estate market was mainly for office acquisitions. Colliers said that Chinese investors have spent US$6.5b in buying offices during 20122016, which is around 50% of the overall Chinese investment amount, according to our estimate. A switch of acquisition appetite from office to development land sites: Since 2H16, Hong Kong witnessed an influx of capital from the Mainland into the land market. In 1Q17, 95% of the US$4b Chinese investment in Hong Kong real estate market was spent on land acquisition. Despite decline in China investment in 2Q17, 85% of the capital was investment in Hong Kong development land sites. Implication for residential market While China’s capital inflow in residential market is limited (only 4% of transaction volume in last twelve months , the impact could be on the land market and gradually affect the sentiment on residential prices. Chinese corporates have won 80% of residential land tenders in 2017 YTD, and have been aggressive in offering land prices. High land prices boosted the residential market sentiment and hence prices. Chinese companies have acquired 80% of Hong Kong residential land in 2017 YTD: Total land premium of US$6b spent by Chinese companies is already 65% higher than full year 2016 levels (US$3.7b). Chinese

The major overseas destinations for Chinese commercial property and development investments in 2016 were the US (43%), Hong Kong (18%), and Australia (12%).

companies were generally aggressive in land bidding. For instance, the land prices offered by HNA (Chinese conglomerate) for Kai Tak residential sites in 4Q16 was double the prices offered by the previous land tenders in the area in 2014 while residential prices only rose 20% during the period. Chinese favor residential sites Chinese companies generally participated in residential land tenders and were less interested in commercial land. This could be because of faster asset turn and higher IRR as companies can sell the completed residential units after completion in four years, while disposing commercial properties could be more difficult. Chinese companies tend to favor urban residential sites than suburban ones. But we are now seeing increased participation for a recent suburban site tender. As discussed earlier, Chinese companies used to acquire physical assets, in particular office buildings, rather than development sites. The peak time was probably during 4Q15 to 3Q16. However, the level of intensity declined from 2H16 onward. We believe this could be because: (1) sellers were asking even higher prices (for instance, a market report suggests Champion REIT aims to sell Langham Office Tower at US$3.1b or 1.2% gross cap rate); and (2) Chinese corporates find it difficult to transfer money offshore. From Morgan Stanley’s Why China’s Capital Controls Matter to Global Property Markets

Rising number of pending deals

Source: Real Capital Analytics, Morgan Stanley Research. *Include commercial real estates and development sites




The Internet of Things is enabling machines to perform at speeds and levels of complexity beyond human capability

How job automation will reshape corporate office demand in Asia Pacific Robotics and artificial intelligence are expected to have a profound impact on jobs and the nature of work.


echnology has long been a major driver and disruptor of workplace and workforce change. During the Industrial Revolution in the 18th and 19th centuries, the creation of the factory system, which used powered machinery and centralised workplaces to mass-produce goods, rendered many craft workers obsolete. At the same time, however, it made products cheaper for general households and created new job opportunities in the manufacturing sector. In Asia Pacific, rapid industrialisation and urbanisation has transformed the composition of the regional workforce over the past 40 years. Employment in primary industry has fallen from 64% of total employment in 1980 to 32% in 2016. The latest wave of technological evolution, which includes robotics and artificial intelligence, is expected to have a far more profound impact on jobs and the nature of work. New advances have led to the development of intelligent machines and enabled computers to selfimprove by deep learning. The Internet of Things – the interconnection via the Internet of computing devices embedded in everyday objects – is enabling machines to perform a greater variety and number of tasks, at speeds and levels of complexity far beyond human capability. That said, the ability of 42


In 2016, US$24.7b globally and US$8.6 billion in Asia were invested in new tech for finance.

a computer to truly think ‘freely’ or to have a creative approach to work is still many years away, if it ever proves possible at all. The coming years will see the rapid automation of manual labour and customer service jobs, forcing millions to learn new skills or change roles entirely. A 2013 study by Oxford University estimated that 47% of total jobs in the U.S. are at risk of at least partial automation. While many of these roles will be blue collar jobs, officebased employment, ranging from non-professional administrative functions to higher value and more complex roles such as lawyers, fund managers and sales managers, will also be affected. Taken at face value, the automation of a large number of office jobs implies that companies will require fewer employees and, consequently, smaller office space. However, the reality is more nuanced and complex, and will likely see most jobs evolve in different ways to harness the respective strengths of humans and technology Automation will not only impact blue-collar employment; the adoption of digitisation and use of artificial intelligence will have a strong bearing on the future of office jobs across a number of different sectors. In 2016, US$24.7b globally and US$8.6b in Asia were invested in new tech for finance. However, the so called

ANALYSIS: ROBOTICS AND AUTOMATION Office jobs at risk of being automated

Source: The future of employment: How Suspectible are jobs to computerisation?, Oxford University

FinTech sector is not the only one being disrupted; InsurTech and Regulatory Tech (RegTech) are also experiencing a phase of rapid development and seeing increasing levels of automation. Office jobs at risk of being automated That said, the degree to which jobs may change as a result of this investment are wholly dependent on the tasks being automated. Artificial intelligence is already being used to reduce the number of employees required to process insurance claims. Within the financial sector, retail banking is expected to see the adoption of automation in the form of robo-advisors, automated investing and complex algorithms that can determine a customer’s credit, all of which could replace human beings. Recent innovations include DBS’s virtual assistant which can answer customer enquiries on online messaging platforms. Front-line staff in banks and asset management companies are also under growing pressure as more companies adopt robo-advisors to replace human employees. In 2017, Blackrock, the world’s largest asset management company, announced it would replace 40 portfolio managers with algorithms and artificial intelligence programmes. In the legal sector, international law firms are utilising artificial intelligence systems to complete tasks traditionally performed by associates and paralegals, such as organising, discovering and summarising documents for use as evidence in litigation, legal research and due diligence. Similar job functions in the insurance sector, such as reading medical certificates and survey records, have also begun to be performed by robots. Artificial intelligence can also create content. In the media sector, automation software is being used to generate basic news articles based on statistical figures, such as company earnings and weather reports. Other examples of automation include artificial intelligence programmes being used to create online advertisements, thereby reducing the need for human designers. As corporations strive to remain competitive, they are looking to leverage the latest technology by allocating more investment, setting up innovation labs and hiring more in-house IT talent. Employment growth in the information and technology sector is consequently expected to surge in the coming years. There will be a greater number of opportunities in the

In 2017, Blackrock, the world’s largest asset management company, announced it would replace 40 portfolio managers with algorithms and artificial intelligence programmes.

creative side of the IT sector, especially involving the analysis and interpretation of the vast amounts of data that are being made available. However, the growth in employment derived from the increased focus on technology is unlikely to fully offset the large number of jobs in the broader employment market expected to be lost as a result of automation, particularly in administrative roles, many of which take up a large volume of office space. CBRE Research expects automation to have an especially strong impact on the offshoring industry in Asia Pacific, as many jobs in the sector involve lowvalue administrative work. India and the Philippines, the two main Business Process Outsourcing (BPO) markets, are already bracing for a slowdown in job growth. In November 2016, the India National Association of Software and Services Companies (NASSCOM) reduced its 2017 growth projections for the IT sector from 10-12% to 8-10%. In response, the BPO industry is planning to upgrade the skills of its workers and shift to providing higher level services, which it hopes will lead to job creation and dilute the effect of reduction of old processing jobs. In spite of the trend towards automation, existing technology is only capable of replacing some functions of a job and very few occupations can be entirely replaced by machines. McKinsey’s recent A Future that Works: Automation, Employment and Productivity report concluded that only 5% of occupations could be entirely replaced by current technology. Business processes will redefined In future, staff will allocate less time to basic tasks such as inputting, checking and validating data, and more time on new initiatives, meeting clients and collaboration. This will necessitate not only more people able to think more creatively, but also a structure that will facilitate such an approach. Instead of having a stagnant hierarchy, companies’ organisational structure will evolve and flatten out. The workforce will be organised into various project teams, each with their own distinct area of focus, surrounding a management team in the core. In order to stay relevant, middle managers will need to reposition Change in employment structure in Asia Pacific

Source: Oxford Economics, June 2017



ANALYSIS: ROBOTICS AND AUTOMATION themselves as brand custodians responsible for shaping the corporate vision and making major decisions. While back-office operations will be most affected by automation, the need to swiftly adapt to market changes means that companies will need to maintain a workforce that can adapt over time. The impact of automation on corporate office demand In the U.S., CBRE Research has estimated that automation will put demand for approximately 18% of existing office stock at risk6 and have a varied impact on the office job market. Major office markets will be relatively immune to automation as space is predominantly occupied by jobs that are the least vulnerable. However, the ultimate effect on overall office demand is still an unknown as professions will evolve and new types of jobs will emerge. The adoption of mobile working enabled by technology and activity based working will reduce office space requirements. The use of cloud computing solutions will also lower the need for servers and storage space. Back-offices hit the hardest: Job automation will have the strongest impact on administrative jobs. Since such roles are often housed in backoffices in nonCBD areas, or have already been outsourced to countries such as India and the Philippines where labour is cheaper, such locations are likely to see weaker growth in office demand. However, these impacts could partly be offset by cost-saving relocations facilitated by increased job mobility. Job automation will have a limited impact on the CBD areas of core office markets, as space in such locations is predominantly utilised for front-office and client facing positions, which cannot be automated or computerised. Stronger demand for data centres and innovation laboratories: Corporate investment in technology will drive the establishment of innovation laboratories to house research and development teams. Many multinationals are already locating staff in innovation centres or co-working centres to facilitate collaboration and expose them to new ideas. The adoption of cloud computing is spurring demand for data centres at the expense of space for servers and data storage within corporate offices. There is an ongoing debate about whether the best approach is to develop new technology in-house or to put in place a process to review and implement early stage developments from ‘experts’ in a particular field. While the automation of jobs will not cause mass unemployment, technology is likely to play a role in ensuring overall demand for pure office space moderates in the coming years. However, regional job growth remains brisk on the back of higher economic growth and the transition to the services industry. Asia Pacific office-based job growth is forecast to weaken slightly from the annual rate of 3.1% over the past five years to 2.6% over the next.The growth in the number of technology jobs, as well as the greater number of jobs that will be enabled by technology, will require buildings to have higher quality IT infrastructure. Older buildings, or those properties not meeting 44


Asia Pacific office-based job growth is forecast to weaken slightly from the annual rate of 3.1% over the past five years to 2.6% over the next.

corporate IT infrastructure requirements, will be less competitive and are likely to struggle to attract and retain tenants. The positive outlook for high value sales and management jobs will ensure stable demand for offices in CBDs or core areas. However, workplace transformation will continue as companies adopt workplace strategy to foster innovation and collaboration across different disciplines and business units. Greater competition among landlords seeking to attract and retain quality tenants will prompt developers to adopt a more holistic view towards the design and operation of office buildings. This will drive a stronger focus on placemaking – defined by CBRE Research as “integrating design, amenity and community to create a unique space where people want to be” –in office buildings and encourage the adoption of smart building technology, F&B, end-oftrip and wellness facilities. Advances in all forms of technology have the power to disrupt the way business operates. Disruption, however, brings great opportunity. By harnessing the power of artificial intelligence and machine learning, it frees people to spend their time more creatively and to use the knowledge gained in a different way. To do this successfully, companies must review their organisation and structure to ensure they do not blindly rely on outdated approaches to doing business. While core areas of major office markets in Asia Pacific are likely to remain resilient, job automation is set to have a far reaching - albeit nuanced - impact on corporate real estate demand in the coming years. From CBRE’s How job automation will reshape corporate office demand in Asia Pacific by Ada Choi, Senior Director for Research

Automation leaves one in five concerned about job security

Source: Randstad Employer Brand Research

Employment outlook by job family (compound growth rate, 2015 - 2020, %)

Source: Future of jobs survey, world economic forum

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tim hamlett

What is a Hong Kong identity? tim hamlett Former Editor of Sunday Standard and Associate Professor of Journalism


his question has lately become so mainstream that social scientists and politicians are weighing in. Unfortunately much of the discussion has been along rather crude lines. The matter in dispute is whether Hong Kong youngsters consider their identity to be Chinese, and if not, is this a problem? Mr C Y Leung’s offering on the subject was, like so much that falls from that particular pair of lips, difficult to square with reality. Governments, he said, would regard you as Chinese if you had a Chinese name and face, whatever passport you held. This is, to put it politely, not the way it usually works. A passport is an official document issued by a government, and governments are of all possibilities the one most likely to take it seriously. Indeed those comfortable countries whose passports are regarded as most attractive often make a point of disregarding the ethnic origin of their citizens, and many of them have laws against discrimination on that basis. I wondered, actually, if Mr Leung’s remarks had been distorted in translation and he had actually meant “the government”, rather than governments in general. For there is one government of which Mr Leung’s observation is palpably true: the PRC regards all ethnic Chinese as subject to its control, wherever they may be and whatever passport they carry. Such people can be kidnapped in foreign countries and carted back to the People’s Paradise, to face charges relating to “crimes” which were not offences in the place where they were committed. In the eyes of their government Chinese people are not served, they are owned. Possibly sensing that his master’s voice had been enjoying one of its less lucid moments, Michael Chugani repeated the point, but with a subtle difference. In Mr Chugani’s version it was not governments which would refuse to recognise a different national identity from that of your face, but “other people”. Apparently Mr Chugani’s fellowAmericans often insist that he is “really” Indian because he looks that way. This seemed rather a poor argument for recognising yourself as Chinese rather than a Hong Konger. After all many Americans are lamentably misinformed about “abroad”. One gets used to explaining that Hong Kong is not in Japan. Also it is generally considered that the main determinant of a person’s identity should be that person’s choice, and other people’s failure to recognise that choice should be resisted rather than appeased. But this is all rather unsubtle. It assumes that identity is something unitary, logically consistent and permanent. This seems rather unlikely. In tolerant countries, after all, one person does not have one identity. He or she has a variety of identities in different contexts. Someone who is born and raised in London, and spent most of his life there, will certainly identify himself as a Londoner. That does not mean he is a traitor or a seeker of independence. In the World Cup he supports England, in the Olympics he 46


supports Great Britain, and in the Ryder Cup he supports Europe. Besides this geographical onion, she may have other loyalties or memberships. Some of these are within national boundaries, like the National Trust or the Boy Scouts of America, while some of them cross it, like the Catholic Church or the Freemasons. In Hong Kong this is still allowed. It is an arrangement we rarely think about. We have multiple identities which are not mutually exclusive. Someone who thinks he is a Hong Konger may also consider himself Chinese, Muslim, and a member of Amnesty International. Asking people which identity they prefer is asking for trouble. The answer depends on the time and the context. Consequently we should not draw too many conclusions from it. A young Hong Konger who considers Hong Kong her most important identity is not necessarily rejecting all the alternatives out of hand. In fairness to Messrs Leung and Chugani we should perhaps note that ethnic identities have a unique characteristic: they are the first thing people see. If you met President Obama in the street the first thing that would register would be that he is black, more or less. A man interviewing potential students is deceiving himself if he thinks he does not notice that some of the ladies are pretty. This initial impression quickly fades into the background as you get to know other things about the person concerned. Your first unconscious thought may be “This kid is Chinese”. Of course there are people for whom it remains a problem. No matter how well they know the person the ethnic category still obliterates everything else. This is known as racism and it should be opposed, not accepted as an unavoidable fact of life.

What does it truly mean to be a Hong Konger?



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Has Buggle lost his mind?


uggle Lau, the Hong Kong media’s most reliable quote-provider on property issues, works for a real-estate agency. He therefore usually cheerfully proclaims that every day is a good day to buy an apartment or three. This suits the newspapers, which depend on developers, developer-run conglomerates and mortgage-providing banks for much of their advertising, and whose tycoon proprietors are best buddies with the land-owning families. So it comes as a shock to find Buggle blurting out something along the lines that you would be nuts to buy a home in Hong Kong at these prices… The obvious explanation is that the poor guy has ingested hallucinogenic mushrooms and has no idea what he is saying. Another is that the property intermediaries are suffering from low transaction volumes and calculate that business might pick up if prices fell. Former Chief Executive CY Leung’s policies, ostensibly to cool the housing market, just so happened to reduce turnover of second-hand properties while pushing buyers into bidding up prices of new-build apartments with easy financing from the developers. The prices making headlines today are high because (among the other distortions) there is an artificial premium attached to the primary market, and much of the secondary market is ‘missing’. Even by Hong Kong standards, it is a perverse situation where the crappiest, most overpriced products (brand-new flats) seem the most affordable, or at least accessibleTo state the obvious: as soon as a brand-new apartment is sold, it becomes second-hand and thus instantly loses some of its supposed value. Buggle and his colleagues would benefit from a more liquid second-hand market, and – happily – they can perform a socially useful service by warning suckers away from the developers’ lures. Farewell to Sammy’s Like most people who for decades valued it as a landmark as much as a treasure of urban aesthetics, I lamented the disappearance of the famous Sammy’s Kitchen cow sign (OK, bull) a couple of years back. Now, the venerable Hong Kong-style-Western-style restaurant founded in 1969 looks set to go the same way, as a new landlord has doubled the rent. The neon bovine signage will eventually appear at the new M+ Museum at West Kowloon Culture Hub Zone. As a weekend visit confirmed, you could make a good case for preserving the whole interior as a historic monument. This is authentic 70s-80s Dingy-Formica 48


by hemlock Email:

ambience, where everything is a shade of yellowishHong Kong’s overpriced brown. The uninitiated might want the full secret homes sauce/borscht-with-everything experience, otherwise a peach melba will do – you probably wouldn’t come here for the food. You have until mid-September, apparently. The odd thing is, this stretch of Western still retains many of the traditional retailers – dried goods, houseware, groceries and cheap eating places. But assuming gentrification is inevitable. Perhaps it will become a branch of Under Armour Ugly Clothes for people who think everyone else wants to see the contours of their buttocks. Or maybe one of those peculiar stores selling vast shiny PVC tubs of protein powder to inadequate pervert body-builders too dim to find protein in actual food. Or the artisanal organic bespoke hand-crafted cupcake emporiums might start creeping in from Kennedy Town in search of gritty integrity and lower rents. In some neighbourhoods, the landlord would subdivide the property into 20 cubicles all selling an identical range of iPhone covers. But here, he might be banking on a shift into Sai Wan of the Korean tourist influx that has inexplicably inundated Central, pushing up demand for fakegenuine Olde Worlde Hong Kong stuff like egg tarts, milky bean-gloop drinks and retro steak houses.

Hong Kong Business (August - September 2017)  
Hong Kong Business (August - September 2017)