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As part of our annual tradition, we bring you investment ideas to welcome the new year. For the Year of the Rooster, we rounded up ten ‘golden eggs’ you can choose from but must take with a grain of salt. We also dove into what’s happening with private equity houses and what the outlook is for 2017. With recent policy shifts and the domestic economy slowing down, PE firms in Hong Kong are teaming up with Chinese corporate investors to hunt for overseas deals. In this issue we looked at what’s going on in the property sector, with Hong Kong widening its lead over New York and London in having the most expensive office spaces. We also introduce you to three startups that are changing the game in the wearables market as well as in personal wellness. Enjoy!

Tim Charlton

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Cover story 10 investment eggs to hatch in 2017

FIRST 06 07 08 10

Credit cards lose charm A long line of homebuyers Increasing HK investments ‘Super-connector’ Hong Kong reaps one country, two systems advantage

12 Hong Kong’s concrete jungle gets costlier

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 | JANUARY 2017 262 Des Voeux Road Central, Hong Kong

40 REGULAR 20 Financial Insight 24 Economy Watch 34 CMO Briefing

Ranking Major IPOs to keep HK’s accounting firms busy in 2017

analysis What are Chinese firms buying overseas?

OPINION 44 Eric Mayer: Genuine startups and entrepreneurs being turned away by HK banks

46 Tim Hamlett: Judicial review: a hasty pudding

48 Hemlock: HK heading back to the 60s

For the latest business news from Hong Kong visit the website

News from Daily news from Hong Kong most read




1 in 2 investors worried over RMB currency risk: survey

Here are Hong Kong’s top talent trends for 2017

Only 1 in 2 HK millenials are content with their offices’ design

The Investor Education Centre (IEC) has published its survey on investors’ view and interest on mutual stock market access between mainland China and Hong Kong (MainlandHong Kong Stock Connect). According to a release from the IEC, whilst 83% of respondents have experience in Hong Kong stock investment, the majority had no experience trading in mainland stocks.

Hong Kong’s job market will continue to grapple with severe skill shortages in 2017 as the fast changing business landscape ushers in a rising number of new positions in areas of digital marketing and cyber security, according to recruitment firm Hays. This will lead to fierce competition for candidates who will feel confident asking for increased pay and benefit packages.

CBRE has released research into the economic impact of millennial lifestyles and aspirations on residential, commercial, and retail real estate sectors. According to a research note from CBRE, less than 50% of millennials say they are satisfied with their current office design and layout, aspiring instead to work in the newest, highest-grade office buildings.

How the age of digital disruption is transforming the employment landscape in Asia BY DION GROENEWEG According to a recent IDC survey commissioned by Workday, only 28% of Hong Kong workers said they found their work engaging and satisfactory. That compares with 59% in the Philippines and India, and 42% in Australia. In today’s climate of readily accessible information, employees expect more than just a download of information.

Creativity, innovation, and fun make tech giants the most popular places to work in Hong Kong BY JUSTIN YIU Google, Apple, and Facebook top the tables in the latest jobsDB Top Ten Companies report. But big local players like MTR, Cathay Pacific, and HSBC are also proving popular for other reasons. They say that money talks. But it looks like creativity, innovation, and a fun working environment might shout a bit louder when it comes to building an employer brand.

MOST READ COMMENTARY Here’s why Hong Konglisted companies should play catch-up on ESG reporting BY TONY WONG Since the Hong Kong Stock Exchange announced the upgrade of Environmental, Social, and Governance (ESG) disclosure requirement, Alaya Consulting has been following the reporting trend in Hong Kong closely and has recently conducted a research looking at how well listed companies are doing in terms of meeting the disclosure requirements set out by the HKEX.


FIRST demand for loyalty programmes

It is indeed harder now to woo consumers in Hong Kong. According to a survey by marketing agency ICLP, only 1% of local consumers are devoted to their preferred retail brands. The firm surveyed 750 consumers in Hong Kong and had them rate their brand relationships. The firm says given the paltry 1% of devoted consumers, retailers need to find ways on how to deepen their relationships with their customers. ICLP found out that loyalty programmes are a major factor in driving spending, with 75% of consumers saying they would shop more frequently with a specific brand if it had a loyalty programme. “The survey results also suggest that loyalty programmes are more significant than traditional pointsbased reward programmes. These more loyal consumer groups shop more frequently, spend more, and are better advocates for retail brands,” the study notes. Stronger programmes The study suggests that to inspire more devoted customers, retailers should create stronger rewards programmes. This emphasises the drawing power of personalised rewards that ‘surprise and delight’ customers as a way to move them towards a more ‘devoted’ state. More so, the survey reveals that 69% of consumers would buy more if retailers used their data to better understand shoppers’ needs. Communication is also a key, as 60% of shoppers would most likely consume more if retailers relayed their messages better through their brands. University of Rochester professor Ron Rogge says most of the respondents approached their relationships with favourite brands in a very similar way to their close personal relationships. 6 HONG KONG BUSINESS | JANUARY 2017

Hong Kong consumers shy away from using credit cards

Credit cards lose charm


t would seem like Hong Kongers are getting increasingly spooked by credit card use, if the recent Global Payments Report 2016 is anything to go by. Despite credit cards being the most popular online payment method in 2016 with a 53% market share amongst consumers, it was found out that credit card payments are predicted to decline by 9.3% come 2020. Hong Kong consumers are becoming more credit wary, as other modes of payment which give them greater control over their finances such as EPS cards, debit cards, and bank transfers are expected to rise. The predicted decline in credit card use can be blamed on a number of factors. Phil Pomford, general manager Asia Pacific, Global eCom at Worldpay says that the International Monetary Fund predicts that China’s economic growth will slow to around 5.8% by 2021, with Hong Kongers already feeling the pressure of record retail declines as mainland Chinese shoppers choose to shop at home. “This atmosphere of sluggish spending and financial uncertainty may be spurring Hong Kong shoppers to refrain from riskier, credit-based spending and instead choose debit payment options,” he explains.

Prepaid cards and e-wallets will see incremental rises, with e-wallets jumping from 11% market share in 2016 to 12% in 2020.

In 2015, Hong Kong consumers swiped their debit cards for 126m transactions and resulted to a whopping US$273b spend on retail and bill payments. The report also adds that debit card usage is predicted to jump by 5 percentage points over the next few years. It will eat up 12% of Hong Kong’s total online payment market share by 2020. Online shoppers were also found to be more comfortable paying for their purchases via bank transfers. This mode of payment is predicted to reach 17% of the market share in Hong Kong, according to the report. Prepaid cards and e-wallets will see incremental rises as well, with e-wallets jumping from 11% market share in 2016 to 12% in 2020, equalling that of debit cards. Debit cards over credit cards Pomford points to convenience as a factor in consumers shying away from swiping credit cards and choosing debit cards instead. For instance, with an EPS ATM card, consumers can pay bills and taxes at convenience stores. “EPS cards are growing in popularity due to their ease-of-use and frequent, enticing promotions, so it’s a natural progression to bring the EPS debit payment method online,” he explains. Hong Kong’s e-commerce market is predicted to be affected as e-tailers struggle to attract cautious customers and adopt the right payment technology. The report forecasts that Hong Kong’s e-commerce segment will grow by just 10% in the next few years, hitting US$13.8b in 2020, and making the country a laggard as China and India grow by 15% and 28% per year respectively.

E-commerce mix by payment methods

Source: Global Payments Report 2016 by Worldpay

FIRST Property market revival prompted new round of government cooling measures

Source: CEIC, Citi Research

Can you afford a house in Hong Kong?

A long line of homebuyers


hen home prices in Hong Kong rose for six consecutive months in 2016, the government knew it had to step in and try to curb the longstanding issue of home affordability in the territory. The stamp duty for all residential transactions was then raised to 15% from the previous range of 1.5% to 8.5%, except for first-time local buyers. Citi expected an immediate drop in transaction activities and cooling of home price rise for the next few months following the cooling measure, but the takeup rate of recent launches proved otherwise.

Alto Residences in Tseung Kwan O sold 77% of its 100 units, having launched just two days after the announcement of the stamp duty raise, according to CLSA analyst Nicole Wong. Hang Lung’s Long Beach launched 62 units in late November, with a 4-12% price raise since April. Wong adds that a long line of people turned up on a rainy day and the developer received over 4,000 subscriptions. SHKP has introduced a 23% price cut – for a handful of HK$30m-plus units in the 90%-plus sold Tuen Mun project of Century Gateway. Wong notes that some upgraders

Our forecasts for 2017 residential prices to correct by 7% and 2018 prices to correct by 5% look quite conservative given evidence so far.

may find it difficult to afford the 15% stamp duty that needs to be paid first before the refund upon sale of their first property. These buyers will likely be attracted by the mezzanine financing provided by the cash-rich developer. “Our forecasts for 2017 residential prices to correct by 7% and 2018 prices to correct by 5% look quite conservative given evidence so far,” says Wong. Citi notes that the 15% stamp duty increase was the first demand side measure that the government has announced in almost two years. “During the period, the government has dedicated efforts to address supply issues (for both land and public housing supply). The property market trend, as summarised by the Centa-City Leading Index, saw notable cooling between September 2015 and March 2016. However since the trough in March 2016 the Centa-City Leading Index rose 12.6% by October 2016,” adds Citi.

The Chartist: F&B remains a healthy spot in Hong Kong retail sector The total retail sales in Hong Kong have registered a downward trend every month since late 2014, with sales of luxury items recording a double-digit fall for 22 out of the past 30 months. But there is hope, as CBRE points out, being a necessity, food & beverage recorded resilient sales during economic downturns. “In addition, unlike general retail trades, the F&B sector in Hong Kong is less dependent on tourists, with meals outside hotels consistently accounting for just 12% of total visitor spending,” CBRE argues. The firm furthers that tourists’ spending on consumption goods registered a significant increase during the “Golden Decade” of Hong Kong retail between 2004 and 2014.

The “retail golden decade” has gone

Sources: JCensus and statistics, HKSAR, CBRE research, Q3 2016

F&B spending is relatively inelastic

Sources: Hong Kong Tourism Board and Statistics department, HKSAR, CBRE research estimates, Q3 2016



Increasing HK investments


Honey, we’re bankrupt


ne reason for executives to shy away from investing in a country is the expected sluggish growth in its economy. However despite skeptical views in the near term economic performance in Hong Kong and China where business leaders expect growth to be less than 5%, more than two in four executives still plan to expand their investment over the next year in the said country. This was revealed in a study conducted by PwC, which surveyed over 1,100 CEOs and business leaders across APEC’s 21 economies. The study notes that 43% of other APEC members with a footprint in China are planning to increase their investments despite the predicted economic slowdown. Surprisingly, the survey also points out that almost three in four executives are confident about prospects for revenue growth for their businesses over the next year. PwC Greater China chairman Raymund Chao says APEC business leaders looked beyond a slowdown in the long term. “Its scale and skills mean concerns about its slower economic growth are not enough to put business leaders off investment and expansion. China remains a powerhouse of potential for APEC businesses for new products and partnerships,” Chao notes.

To invest or not to invest?

However there are also indications of bottomline pressure building. Only 15% of China and Hong Kong executives say that they are more confident today than they were a year ago in increasing profit from domestic operations. This compares with 21% who reported being more confident in 2015, and 41% in 2014. This may very well be due to the increasing competition and evolving consumer preferences, which also gave rise to three strategies in response to China’s new market regulations, including building strong brands in digitally-driven value chains, deepening collaboration with local partners for access to innovation, and expanding inland to capture untapped growth opportunities.

43% of other APEC members with a footprint in China are planning to increase their investments.

Mobile App Watch

The doctor is in: FindDoc lets you book with just a click


indDoc, Hong Kong’s first multilingual, centralised online healthcare information and appointment platform, has been creating a comprehensive system since 2012. The booking app has the function of real-time appointment booking, providing users convenient and flexible access to professional medical information. FindDoc CEO and founder Ivan Ng says aside from a database of 6,000 medical practitioners, FindDoc has over 400 videos made in collaboration with more than a hundred healthcare professionals on its video platform FindDocTV. It is a partner of the Hong Kong Sanatorium & Hospital and offers free faecal occult blood tests to users aged 45-65. FindDoc is also working closely with Silence, a non-profit organisation that serves the hearing impaired.


FindDoc team

Ivan Ng, FindDoc CEO and founder

It is definitely not a fairytale ending for Hong Kong couples as they face the worst nightmare: financial hangovers. After passing by the honeymoon avenue, couples are brought back to reality. According to a survey by Investor Education Centre, a significant number of couples in Hong Kong failed to budget thoroughly for their wedding, whilst almost 60% overspent on their big day. In terms of financing the big day, the study found out that 22% of the couples depended on their parents for support, whilst 5% and 3% said they would take out wedding loans from banks or financial institutions and use credit lines respectively. Splurging on weddings According to the data from ESDlife’s Wedding Spending Survey 2016, Hong Kong couples spent an average of HK$302,226 on their weddings, indicating a a 4% drop in comparison to the previous year. Though couples were more cautious now in their spending, three in five still went over budget. For those who overspent, nearly six in ten said they were over budget by 10% to 29%, whilst a quarter overspent by 30% to 49%. IEC general manager David Kneebone says on the average, about half of the couples spent one to less than three years saving up for their wedding. “When it comes to weddings, couples naturally want to create unforgettable memories and hence may be tempted to splurge or are reluctant to compromise to keep within budget. However making smart decisions and necessary trade-offs can help prevent newlyweds from having to start their marriage burdened with debt,” he says.


‘Super-connector’ Hong Kong reaps one country, two systems advantage


t was described as a significant breakthrough in a decade. Officially launched in early December, Shenzhen Hong Kong Stock Connect will facilitate the mainland’s capital markets reforms and help promote the internalisation of renminbi. Giving his remarks during the launch ceremony at Hong Kong Exchanges & Clearing, chief executive CY Leung said the Shenzhen-Hong Kong Stock Connect is exemplary of Hong Kong’s combined advantages of one country, two systems. “We are the world’s China financial capital, and at the same time China’s international financial capital. We are, indeed, a ‘superconnector’ between the rest of China and the rest of the world,” he says. Rebecca Thorpe, head of Asia at financial services regulatory consultancy Bovill, welcomes the development. “The Shenzhen-Hong Kong Stock Connect is a significant breakthrough in a decadelong attempt to open up China’s financial markets. The move will further expose Chinese firms to international practices and regulations but also boost Hong Kong’s global competitiveness,” she says. Thorpe believes the launch is exciting for foreign investors who will now have access to 880 stocks on one of the world’s

busiest exchanges. “The new opportunities will come with a number of regulatory challenges as China’s financial markets experience more growth. Moving forward, it is critical for policymakers to communicate with regulators and businesses to ensure that the new connect is successful,” she notes. Share trading According to Leung, Hong Kong and overseas institutional and individual investors can trade eligible A-shares listed in Shenzhen directly through the stock market, whilst qualified mainland investors can trade eligible shares listed in Hong Kong through the new platform. The advantage for Hong Kong, he says, is bolstering its position as an international financial centre and a global offshore renminbi business hub. Meanwhile, Rakesh Patel, head of equities, Asia Pacific at HSBC, shares their observations: “With the groundwork already laid by Shanghai-Hong Kong Stock Connect, we were anticipating a smooth launch and were not disappointed. The link worked well and our clients were pleased with the efficiency of the system. The Northbound Shenzhen Trading Link gives


Garage Collective recreates an old warehouse In its pursuit to cater to the new work-life integrated generation, Garage Collective turned an old warehouse in Sai Ying Pun into an enjoyable workspace. Inside the 8,000 sq ft. property are 14 private offices, 21 private desks, and 30 hot desks. Yet it still has room for pop-up shop facilities, an in-house vegetarian restaurant, and an impressive event space. “The space is four connecting warehouseconverted-shops, so we have a very long stripe of facade as well as a unique structure from an old warehouse — loading bay, mezzanine floor, and a loft floor,” explains Elaine Tsung, founder of Garage Society. Being an old warehouse, the ground floor comes with a 6m high ceiling and interesting features like an exposed brick wall and an old roller gate. A mural by artist Zoie of Zlism gave the space a creative twist. The Garage Collective workspace was a team effort by designers from Studio Adjective. 10 HONG KONG BUSINESS | JANUARY 2017

Financial markets are opening up

our global institutional client base the opportunity to buy stocks unavailable in Hong Kong and Shanghai, and hence get a wider exposure to China’s future growth.” For Thorpe, the development has been a long time coming. She says authorities in Asia must continue to look ahead to future innovation and expansion. Meanwhile, JLL says the launch of Shenzhen-Hong Kong Stock Connect is expected to further support demand from PRC financial services firms in Central. “Along with a tight vacancy environment, this will help Central buck the trend to be the only office submarket to record rental growth in 2017,” notes JLL in its year-end Property Review 2016. Ben Dickinson, head of leasing at JLL, says, “We expect leasing demand will moderate in 2017 owing to the modest growth forecasted for the local economy.”


interpersonal and brand relationships

Hong Kong prime office space are the world’s priciest

Hong Kong’s concrete jungle gets costlier


ven the sky is no limit for Hong Kong’s premium office rents as costs hit US$302psf per year in Central and US$108psf per year in Island East. According to JLL, these rates are the world’s highest and a far cry from London’s US$197psf per year in West End and New York’s US$194psf per year in Midtown. What’s more striking is the widened gap between costs as rates for premium office space are now 50% more expensive in Hong Kong than in either London or New York at US$262psf a year ago. Surprisingly, despite the super high rents, vacancy rates in grade A office spaces in Hong Kong are just at 1.5% versus New York Plaza District’s vacancy at 8.7%, Shanghai’s Pudong at 6.5%, London’s West End at 4%, and Tokyo’s Marunouchi at 1.9%. Hong Kong’s Central District has seen robust growth in premium rents over the past 12 months on the back of demand from mainland Chinese firms and very limited supply. Alternative locations JLL says affordability and lack of available space are concerns that are likely to accelerate decentralisation to nearby growing core districts that offer more than 50% discounts to premium rents in Hong Kong Central, a trend supported by significant infrastructure works. 12 HONG KONG BUSINESS | JANUARY 2017

“This low vacancy rate despite high rents is due to the opportunity for Central tenants to capture significant rental savings in nearby established districts,” says Alex Barnes, head of HK markets at JLL. “Hong Kong is unique in its office offering and pricing. Savings of 60-80% can be found in nearby and increasingly accessible locations such as Wong Chuk Hang, Quarry Bay, and Kowloon East,” he adds. Megan Walters, head of research, Asia Pacific, JLL, also notes the Central district is shifting as western banks and financial firms downsize or move out. “Mainland Chinese wealth and asset companies are moving in as they seek to boost their presence in Hong Kong. The market is also set to get more fragmented since the initial requirement from these companies is usually less than 5,000 sq ft. This could prove challenging for both tenants and landlords for the long term.”

Despite the super high rents, vacancy rates in grade A space offices in Hong Kong are just at 1.5%.

Premium office occupancy costs in key gateway cities

Source: JLL Global Premium Office Rent Tracker Q4 2016

Source: ICLP


Smart cup startup is transforming the way people stay hydrated


ith sensor and data collection technology, you can now track your daily water and coffee intake. Focused on empowering people to look after their personal well-being, tech startup Groking Lab created the Ozmo Cup series. The smart cup and its corresponding app track daily water and coffee intake by taking into consideration the users’ body type, activities, location, as well as goals. “Ozmo, part of The Internet of Things” wearable industry ecosystem, works with activity trackers to coach people in staying hydrated before,

during, and after exercise. Health institutes, providers, trainers, family, and caregivers can manage their clients and loved ones’ water intake accurately and remotely,” explains Serena Pau, chief executive of Groking Lab. Pau says their product offers a jump-off point for a healthier lifestyle. “There are many products today which promote working out and diets, whilst hydration is an area which has been ignored.” In terms of funding, they started with local angel investors and then moved on to a successful Kickstarter Campaign. The Ozmo Kickstarter raised over US$31,000, exceeding their US$25,000 goal. The startup currently has over US$500,000 in funding. Noting the importance of proper hydration, Pau notes that over time, failure to drink enough water compounds health complications such as fatigue, joint pain, weight gain, and headaches. “Kidney stone developments have been traced to lack of hydration. Dehydration has an increased health risk to aging adults, those battling illness, and individuals who have nutrition challenges,” she adds.

Orii changes the game of the wearable market was his visually impaired father. Wong hoped to create a product for visually impaired people so they can operate their phone through voice assistance. Orii is a current Cyberport on-site incubatee of the Cyberport Incubation Programme. According to Wong, Orii is the first device to ever use bone conduction in a ring to transfer high quality sound into the user’s ear. “Orii changes the way we interact with our devices,” he notes. “Orii breaks us away from our A smart wireless wearable voice screens: almost all our interactions assisting ring invented by Origami with technology involve a screen. Lab, Orii uses bone conduction technology. With the the help of your We are screen addicts, distracting smartphone’s voice assistant such as us from our environment and Siri or Google Now, Orii enables users from people around us. Orii is the first device to deliver screen-free to make and take phone calls, send text messages, and handle daily tasks technology in a wearable,” comments Wong. He says this is the right time just by touching their ear. “It is the only wearable that puts the power of for Orii to enter the market. Other co-founders are Marcus the smartphone on your finger,” says Leung-Shea, chief operating officer Kevin Johan Wong, co-founder and of Origami Group, and Yan Shun Li CEO of Origami Group Limited. who is the chief technology officer. The inspiration for the product 14 HONG KONG BUSINESS | JANUARY 2017

Clim8 makes intelligent clothing a reality in Hong Kong

With clim8’s intelligent garment, wearers achieve regulated body temperatures whilst doing whatever activity in any weather condition. The start-up’s wearable ensures thermal consistency and users’ comfort even during extreme weather. Florian Miguet, chief executive and co-founder of clim8, says they saw a tremendous need for intelligent clothing in the market. “It’s been evident from the beginning of human civilisation that people need to be warm when it’s cold and cooler when it’s hot. So here we are.” Miguet believed that supported with some key strategic talents in the team they could make intelligent clothing a reality, much like what happened to the auto industry in the 1980s wherein cars began implementing electronics and sensors into their engines. “That one industrious idea drastically improved reliability, fuel efficiency, and engine lifecycles. Therefore, our team of accomplished engineers, textile experts, and scientists understood we had to implement electronics, digital experience, and edge textile construction into everyday garments.” A revolutionary new garment It is said that amongst activewear and sports brands, the insulation/thermal categories generate the most revenue. Yet despite heavy consumer demand, these garments still cannot monitor, activate, or regulate temperature for the wearer. “With this in mind, we intend at clim8 to disrupt these categories with a revolutionary new garment that can truly respond to the wearer’s specific needs,” says Miguet. Pierre Mouette, chief technology officer of clim8, is an electronic engineer with ten years of experience in Hong Kong and Shenzhen. Meanwhile, clim8 R&D director Julien Guéritée has a PhD in Human Thermal Physiology and over seven years of experience in developing thermal solutions on clothing. Miguet, on the other hand, has 15 years of experience in technical outdoor brands. They are currently working on a new generation of clim8 intelligent clothing with lighter and smaller battery. There is a corresponding app for both iOS and Android that allows wearers to set their preferences. clim8 is a Cyberport off-site incubatee of the Cyberport Incubation Programme and received financial assistance of up to $330,000.

economy watch: currency risks

N E M I C E P S 2017 is likely to be as soft as this year

All eyes on currency risks as Hong Kong enters 2017 Monetary conditions in HK have tightened from effective HK$ appreciation and rising US rates expectations since 2015.


he last quarter of 2016 was a soft one for Hong Kong’s economy and unless there are dramatic changes to either China’s economy or the US$ exchange rate, 2017 may continue to be soft, economists argue. UBS economist Duncan Wooldridge notes that Hong Kong’s macro outlook is driven by two key moving parts: monetary conditions – the function of domestic interest rates and HK$ exchange rate (which is pegged to the US$ at

Growth is likely to remain subdued and chug along an L-shaped path in 2017/18.

HK$ REER has moved sideways since 2Q16

Source: CEIC, BIC and UBS calculations. The REER index is compiled by the BIS


a fixed rate) – and the global macro backdrop, particularly relating to China. “Monetary conditions in HK have tightened from effective HK$ appreciation and rising US rates expectations since 2015. This, plus heightened concerns on China in 2H15, had until late 2Q16 caused domestic growth to visibly slow and property prices to drop. But the stabilisation in monetary conditions since 2H16 has allowed the city to temporarily muddle through. Strong US$ (and thus HK) has been the biggest headwind since 2015 by undermining HK’s cost competitiveness,” he says. Impact of currency strength Rising US interest rates would also likely see the US$ strengthen which would also strengthen the HK$. Hong Kong has high private debt and is sensitive to interest rates so growth is likely to remain subdued and chug along an L-shaped path in 2017/18, argues Wooldridge. “The

retail and hospitality sectors, being the most cost-sensitive, have been the hardest hit since 2015, so some might expect these sectors to recover and contribute the biggest delta to any growth improvement going forward. We doubt that will be the case. Whilst these sectors are indeed finding a floor, as the supply sides become more favourable (lower domestic costs and a less distorted structure) and the relative HK$ appreciation pauses, any recovery thereafter still critically hinges on better enddemand,” he says. A strong HK$ also hurts Hong Kong’s competitiveness as a shopping destination of luxury goods. A weaker pound following the Brexit vote has had the unintended consequence of driving sales of Swiss watches in the UK in the post-Brexit months. Outlets of luxury watch brands in London have reported double-digit yoy increase in sales in July and according to the Federation of the Swiss Watch Industry, exports of Swiss watches to the UK rose by 13.4% yoy in July, the highest figure since November 2015. This compares with the 33% yoy decline in exports of Swiss watches to Hong Kong. Property-durables connection A soft property market continues to reduce residents’ purchases of consumer durable goods, notes Wooldridge. “Taking into account the weaker-than-expected growth in the last three months and the impact of Brexit on luxury good sales, we have adjusted our outlook for retail sales growth from three months ago. We have revised the 2016 retail sales growth estimate down to -8% from -5% and the 2017 forecast to -1.8% from -0.5%.” CLSA economist Ines Lam also says all eyes should be on property prices to forecast how the Hong Kong economy may fare in 2017, noting that apart from the wealth effect, there is one more channel through which the property market affects private consumption. “There is a 70% correlation between the yoy growth of real spending on consumer durables and that of secondary residential prices, indicated by the Centa City Leading Index (CCLI),” notes Lam.

analysis: wealth in 2016, a growth of 5.5%, owning US$715b. The number of millionaires is forecast to grow by 6.2% per annum to 156,000 in 2021.

Who wants to be a millionaire?

HK’s household wealth grows 8.1% to US$1.2t in 2016 There are now close to 1,800 ultra-high-net-worth individuals and around 115,000 millionaires in Hong Kong, according to Credit Suisse.


he Credit Suisse Research Institute (CSRI) published its seventh annual Global Wealth Report. According to the publication, the overall growth in global wealth remained limited in 2016, continuing the trend that emerged in 2013 and contrasting sharply with the doubledigit growth rates witnessed before the global financial crisis of 2008. In the mid-term, only moderate acceleration is expected. The report finds currency movement caused noticeable differences in the growth of household wealth in China and Hong Kong. Due to adverse currency movements, China’s household wealth fell by 2.8% to US$23t in 2016. In local currency terms, wealth increased by 4.1%. China’s total household wealth in US$ terms is currently third globally, behind the US and Japan. Despite the slowdown in growth, China’s wealth will likely remain on 18 HONG KONG BUSINESS | JANUARY 2017

Hong Kong has an estimated 115,000 millionaires in 2016, a growth of 5.5%, owning US$715b.

a strong upward trajectory in the next five years at a rate of 9.2% annually, to reach US$36t in 2021, though growth rate is expected to be lower than the 11% from 2000-2016. In contrast, Hong Kong’s household wealth grew by an estimated 8.1% in 2016 to reach US$1.2t, partially thanks to the currency link to the US$. It is projected to increase by 5.9% per year in the next five years to reach US$1.5t in 2021. Ultra-rich in Hong Kong However both China and Hong Kong saw strong growth in wealth amongst the ultra-high-net-worth individuals. China has the second highest number of ultra-high-net-worth individuals globally after the US, having grown by 6.2% to 11,000 in 2016, representing a 100-fold rise since 2000, whilst in Hong Kong, there are close to 1,800 ultra-high-net-worth individuals, a growth of 14.7% in 2016. Hong Kong has an estimated 115,000 millionaires

Limited growth in global wealth Total global wealth in 2016 edged upwards by 1.4% or US$3.5t to a total of US$256t, a rise in line with the increase in the world’s adult population. Accordingly, average wealth per adult of US$52,800 remains unchanged. Whilst total global wealth increased by 3% if exchange rates are held constant, growth rate has been decelerating in recent years. The report highlights the impact of adverse currency movements, which caused wealth to fall in every region except Asia Pacific. In addition, the downward movement in equity prices and market capitalisation also led to the relatively small increase in household financial wealth. Amongst individual countries, Japan achieved the highest growth in total wealth of US$3.9t to US$24t, followed by a US$1.7t rise in the US to US$85t. The UK suffered a significant drop in wealth of US$1.5t in response to the Brexit vote which triggered a sharp decline in exchange rates and the stock market. Affluence in Asia Asia Pacific in 2016 saw wealth increase by 4.5% or US$3.4t to nearly US$80t. This was largely due to a large expansion in Japan of 19% due to currency appreciation against US$. However in yen terms, total wealth in Japan remained flat, representing slowdown relative to the progress seen in the preceding five years. China and India were hit by adverse currency movements, and as a result household wealth fell by 2.8% and 0.8% to US$23t and US$3t respectively, whilst in local currency terms, wealth in China and India increased by 4.1% and 5.1%. Amongst other major economies in the region, wealth in Australia remained largely unchanged at -0.2%. By the Credit Suisse Research Institute

co-published Corporate profile

Mercedes me: The journey in a fast lane

Andreas Binder, President and CEO of Mercedes-Benz Hong Kong Limited talks about how the expectations for the Mercedes me Store have been exceeded by 200%.


Benz Hong Kong Limited, Andreas Binder, t is said that if yesterday is history and proclaims, “Our expectations for Mercedes me tomorrow is a mystery than today must be Store have been exceeded by 200%!” Binder a gift, because it is the present. Enjoying continues, “Looking back when we decided the journey and not only the destination on locations for Mercedes me Store which should be the aim. The destination: The aptly was a brand new concept, we were all very named Entertainment building in Central will certain that Hong Kong was a perfect urban be home to what could only be described location as one of the pilot markets for the as a new marketing concept in advanced Mercedes me concept. We have been proven brand awareness. The forward thinking right.” The first and innovative Mercedes me Store, “The Mercedes me Store twelve months has not only excelled of operation the isn’t about cars though, as counter- as a lifestyle venue for Mercedes me Store has hosted over intuitive as that may business and casual 50,000 guests and sound, this store dining but is also a showcased 12 cars, is about a lifestyle, venue for luxury brand mostly concept the Mercedes and lifestyle events.” cars, special models lifestyle experience; from race cars and it’s about bringing high performance cars. people together and experiencing what their Gottlieb Daimler’s maxim over 100 years brand means. Did we mention their À la carte ago and re-installed as Mercedes-Benz’ menu? guiding principle: “Das Beste oder nichts” At the celebration held on the 5th of or “The Best or Nothing“gives one a sense October 2016 commemorating the first of the pride that Mercedes-Benz holds in anniversary of the opening of the Mercedes the perfection of engineering and also the me Store, President and CEO of Mercedes-


tailoring of something of beauty, which has been the cornerstone of the values that have been held for over 100 years. Where luxury is a key component in the Mercedes experience, also the forward thinking in their technology makes Mercedes-Benz one of the most technologically advanced car brands. However, unlike their dedicated showrooms in Causeway Bay and Hung Hom, where focus is placed on the Mercedes products, Mercedes me Store is an entrée to a world of luxury and the feeling this evokes. A luxury brand The Mercedes me Store has not only excelled as a lifestyle venue for business and casual dining but is also a venue for luxury brand and lifestyle events, servicing a stellar line-up including Hugo Boss, IWC Schaffhausen, DeBeers, and Wellendorf, while also hosting its own Mercedes-Benz’ events such as new product launches and Formula One race screenings on a regular basis. As the benchmark to other Mercedes me Stores in Hamburg, Milan, Tokyo and Beijing, the Mercedes me Hong Kong Store

co-published Corporate profile

Mr. Andreas Binder, President and CEO of Mercedes-Benz Hong Kong Limited, delivered welcome speech at Mercedes me Store 1st Anniversary

incorporates a fine dining component through Maximal Concepts. “Maximal Concepts is our exclusive culinary partner, chosen because of their expertise in high end cuisine,” adds Binder. “We want to offer more than adding another restaurant in Hong Kong, our culinary experts have selected the finest ingredients available and prepared them inspired by influences of Spain, Japan and Peru! My favorites are the starters namely the sea bass and Hamachi as they are unique in Hong Kong, I also can’t refuse to have our Wagyu Beef and I would recommend them to all. When it comes to technology, it can be a challenge explaining the details of something so intangible, Binder explains, “When it comes to touch and feel, when we talk of Mercedes me Store as a lifestyle platform, we don’t want to rule out technology and we want to be a brand that people can touch

brand ambassador who can, in the style of and feel. We have visualisation and interactive fine bespoke tailoring, present color panels, tools, and customers can learn more about carpeting, and leather samples as well as the our technology when they have a cup of visualisation of the latest technologies. The coffee with friends. This is the future that we dining area is understated comfort in the envisage, bringing together all the senses, not Mercedes style with only technology “when we talk of wood and but also what Mercedes me Store as a natural leather featured comes with it, lifestyle platform, we while memorabilia giving people don’t want to rule out quietly infuse the the feeling that when I am in technology and we want atmosphere with Mercedes me to be a brand that people the heritage of Mercedes-Benz. Store I feel can touch and feel.” “Without a doubt comfortable Mercedes me Store is a very popular spot to and relaxed.” be seen and to go,” Binder continues. The venue features over four hundred See, feel, touch and taste. The Journey, the square meters of space and a fully supported Destination, the Lifestyle. Bringing together AV system. The entrance features a single car all the senses for all the people. The Mercedes surrounded by interactive touch screens for me Store has Nothing.” automotive technophiles to be guided by a



The search goes beyond the local market

Deal search toughens for PE firms

Private equity firms in Hong Kong are finding it harder to come by deals with remarkable returns, resulting to some doubling down on overseas bets as the competition intensifies.


ong Kong and Singapore might be rivals to become Asia’s top private equity (PE) hub, but they are also brothers facing a common dilemma: an increasing shortage of attractive deals. Analysts reckon the market still presents fantastic, if fewer, opportunities. This has pushed PE firms in HK to partner with Chinese investors and lock down more lucrative deals overseas. “It seems harder to find attractive deals of the right size and investment returns,” says Mark Chan, managing partner of HM Chan & Co in association with Taylor Wessing. “As such, some PE firms may find it tough to keep their investors happy. Having said that, there are still very good, albeit fewer, opportunities in the market.” Overseas deals HK has been one of the largest PE centres in Asia for decades, providing an investment channel for overseas investors into mainland China. But with the domestic economy slowing down and recent policy shifts, HKmanaged PE houses are teaming up with Chinese corporate investors to hunt for overseas deals. “An increasing number of corporate investors are looking for overseas opportunities with a main focus in real estate, including construction, hospitality, and infrastructure for sound capital gain and stable rental return,” says Danny Po, AP & China M&A tax leader at Deloitte China. Recent transactions in the PE market reflect this


Mainland Chinese investors are also developing a bigger appetite for overseas assets diversification following the launch of the ShenzhenHong Kong Stock Connect.

appetite for foreign investments, a trend which has been encouraged by China’s national strategy of outbound investment. Po cites a notable deal involving a Chinese consortium led by a state-backed developer. Together with other PE investors, the consortium invested in a biotech industrial park in South San Francisco to enhance cooperation between China and the United States on biotech research and development. The largest residential development In another major transaction, an Australian investment group backed by a Chinese provincial government and private equity fund proposed a multibillion dollar residential development project near Sydney Olympic Park. Po says that instead of developing small apartment projects, the investor had the ambition to create a community with apartment complexes, a town centre, a school, and parklands. The project is expected to become the largest residential development by a Chinese mainland group in Australia. Mainland Chinese investors are also developing a bigger appetite for overseas assets diversification following the launch of the Shenzhen-Hong Kong Stock Connect. “From recent transactions in the PE market, it is noted that both foreign and Chinese PE funds managed in Hong Kong are partnering with Chinese corporate investors to look for overseas investments which could provide

FINANCIAL INSIGHT: Private Equity cooperation and synergies across industries, and allow China to export ‘soft power’, culture, and self-developed technology to the world. It is expected that this would be the next investment focus under the framework of ‘One Belt, One Road,’” says Po. The One Belt, One Road policy – designed to stimulate the slowing domestic economy through increased exports – will require improved trade and relations with nearby regions, particularly Europe, Central Asia, and Southeast Asia. It should be noted though that PE houses in HK that hope to target Southeast Asia will have to compete with PE houses in Singapore, which are putting more focus on the fast-growing region especially emerging hotspots like the Philippines. “This market is definitely receiving greater PE attention than it has in the past and is likely to keep PE houses very busy for the foreseeable future,” says Tan Choon Leng, head of private wealth practice at RHTLaw Taylor Wessing LLP about the Philippines, citing Baring Asia PE’s US$137m investment in Telus International. The Philippine economy expanded at its quickest pace in three years, growing 7.1% in the third quarter of 2016, according to the Philippine Statistics Authority, making it one of the fastest growing economies in Asia. Tan reckons there a lot of reasons for optimism in the Southeast Asian PE and mergers and acquisitions industry. Not only are the US elections and its destabilising effects over, but the Southeast Asian market will look relatively more attractive than Europe, which will face continued uncertainty and relatively low growth rates. Singapore shortage PE houses in Singapore are likewise facing a shortage in attractive deals, according to regional analysts, but many believe the short-term pain is worth the long-term gain. The region is primed for an upswing in PE activity in the coming decades as fast-growing markets like the Philippines and Indonesia become flush with investment opportunities, and a presence in the Singapore hub will ensure they can pounce on those lucrative deals. But, for now, PE firms are rolling with the punches and focussing on a few key plays, from privatisation of listed companies to technology acquisitions. “On a year-on-year basis there has been a marked slowdown both in terms of number of deals that get to completion as well as the number of new deals that PE

The Southeast Asian market will be more attractive than Europe

Mark Chan

Danny Po

Asia-based private equity & venture capital fund manager views on the key challenges facing the industry in the next 12 months Tan Choon Leng

Source:Preqin KPMG Fund Manager Survey, June 2016 Source:

Bill Jamieson

houses are looking at,” says Tan. “A near universal grouse that we hear from PE houses is the lack of appropriate targets and investee companies, especially in the healthcare and consumer sectors in Southeast Asia.” Tan reckons there has also been a perception of growing instability in the region, citing developments such as Thailand’s succession issue and Malaysia’s financial scandal involving 1MDB, which makes it trickier for PE houses to pick the right deals. There is a lot of “dry powder” in the industry – EY estimating around US$526.6b in September 2016 – but attractive deals providing healthy yields are harder to come by, says Bill Jamieson, partner, head, funds, and financial services practice group at Colin Ng & Partners LLP. In fact, funds raised for Singapore had been increasing for years, notwithstanding a reverse in the first half of 2016, with many PE funds targetting Southeast Asia and using Singapore as a base for their business. “Despite the strong showing for funds raised, the challenge for many funds is finding the right investments in Singapore,” says Marcus Chow, partner at Bird & Bird ATMD LLP. “Funds are sitting on dry powder but the challenge is nonetheless in finding good internal rate of return (IRR) projects. Going private transactions and delistings from the Singapore Exchange (SGX) remain a growing trend for Singapore. We are acting on one such transaction now,” adds Chow. Singapore has seen a spurt of privatisation deals. This year, UOB Ventures backed the S$269m privatisation of Eu Yan Sang, which specialises in traditional Chinese medicine. Other recent headliners include Northstar’s S$331m privatisation of Innovalues, and the Warburg Pincus-backed S$1.78b privatisation of ARA Asset Management. “These are examples of classic PE plays on profitable but undervalued companies,” says Tan. “So long as the wider stock market remains relatively undervalued, it is likely that more such privatisation attempts will follow. An increasing number of listed companies in Singapore are warming up to the idea of delisting due to taxing requirements and lower valuations, says Evelyn HONG KONG BUSINESS | JANUARY 2017 23

FINANCIAL INSIGHT: Private Equity Asia-based private equity & venture capital investors by location

Source: Preqin Private Equity Online

Ang, senior partner at Dentons Rodyk & Davidson LLP. “Singapore listed companies are subject to public scrutiny and are required to comply with numerous listing requirements including rules on public disclosure of material information, requirements for shareholders’ approvals for certain types of transactions, and obligations to provide quarterly or half yearly reports to investors,” she says. HK advantage As the competition for deals intensifies, HK provides certain advantages that can assist PE investors as they search for overseas opportunities: a well-established legal system, free flow of capital and information, comprehensive financial services, and competitive tax system pertinent to PE investment. “HK would continue to have a distinguished competitive advantage in providing an attractive investment channel and platform for outbound investment for both foreign and Chinese PE investors,” says Po. Alongside the rise in appetite for overseas deals, investments in PRC companies still dominate the PE market in HK. But there is growing concern amongst analysts over the recent dearth of IPO exits. “From the Hong Kong side, we have not seen lot of IPO exits,” says Enoch Wong, corporate partner at Dentons Hong Kong. “In the past few months we have seen a couple of IPO exits on the Hong Kong bourse, but secondary buyout may continue to be a growing trend given the sluggish market.” One of the IPO exits was that of China Resources Pharmaceutical Group Ltd, which raised US$1.8b last October and became one of the biggest HK IPOs in 2016. “Due to the volatility of the HK financial market, it is increasingly difficult for PE firms to rely solely on an exit via a public listing and trade sales may become more common,” says Wong. He also warns of regulatory considerations, especially for investors who intended for an NYSE/NASDAQ IPO exit but ended up seeking to list in HK. “PE funds are now used to the requirements under Stock Exchange listing decisions and are normally able to devise a structure that will not require substantial amendments of the investor’s rights before a listing application is submitted,” explains Wong. “The pre-IPO investment agreements must be reviewed carefully against the Listing Decisions and guidance letters to make sure none of the provisions will contravene the prohibitions promulgated by the HK Stock Exchange,” he says. 24 HONG KONG BUSINESS | JANUARY 2017

Marcus Chow

Evelyn Ang

singapore view

What is fuelling investments? Given the increased spending power of the growing middle class in the region, analysts identified key sectors driving activity in PE. These are infrastructure, healthcare, retail and e-commerce, financial technology (fintech), and food & beverage (F&B). The larger ticket transactions were in the traditional engineering, manufacturing, F&B, and logistics industries, including large ticket real property plays, notably in the acquisition of Asia Square Tower 1 by Qatar Investment Authority from Blackrock, says Sheela Moorthy, partner in the Singapore office of Norton Rose Fulbright. F&B businesses continue to receive interest amongst PE firms, notes Doris Yee, director at Singapore Venture Capital & Private Equity Association, as shown in Standard Chartered Private Equity’s investment into Phoon Huat, a family-owned business and leader in the baking ingredients sector. Similarly, PAG’s investment into Paradise Group, a homegrown restaurant chain with restaurants across Southeast Asia, is expected to help it expand into China. Bill Jamieson, partner, head, funds, and financial services practice group at Colin Ng & Partners LLP, adds that there has been a trend towards picking undervalued F&B companies with potential for regional growth such as Viz Branz, F&N, and Super Group. A notable transaction was the investment by Hera Capital and DSG Consumer Partners into Salad Stop!, a local F&B chain with fastgrowing regional franchises, and there will likely be more F&B transactions in the local market based on current valuations. Southeast Asia’s burgeoning consumer market is also fuelling investments into the e-commerce and fintech sectors. Regional e-commerce retailer Lazada received a US$500m investment from Alibaba, which also bought additional stakes worth the same amount from early investors, including Rocket Internet. On the technology front, meanwhile, there was buzz around the acquisition of Singapore-headquartered and micro-optics and optical sensing leader Heptagon by Austria’s global sensor manufacturer AMS. Valued at approximately US$570m, with a potential earn-out of up to US$285m based on certain 2017 targets, the investment attracted the likes of Vertex, Granite Global Ventures, and Credence.

Estimated dry powder of Asia-based private equity & venture capital fund managers

Source: Preqin Private Equity Online

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analysis: banks

China’s economic shift threatens Hong Kong’s stability

HK banks bear the brunt of China’s crisis

Analysts remain bearish amidst weak growth in China and plans of further monetary tightening in the US.


ong Kong’s growing links with the mainland are exposing it to a possible financial contagion amongst China’s closest trade partners. Hong Kong remained stable over the past several years despite recent financial crises that have crippled other economic hubs within Europe and the Americas. Now, Hong Kong’s stability is threatened by China’s rocky economic shift, stretched property prices, and high private sector leverage. Investors have taken a wait-andsee approach towards the volatile environment. Outside of China, the US Federal Reserve has yet to outline its monetary policy decisions, leaving the Hong Kong financial sector in grim uncertainty. Meanwhile, banks’ increasing exposure to China are leading to greater loan delinquency pressures and higher borrowing costs. Recent economic reports show marked slowdowns in export of goods and tourism and retail sales activities,


Banks’ increasing exposure to China are leading to greater loan delinquency pressures and higher borrowing costs.

which in turn reflect weak external demand, in particular, from mainland China. “Nowadays, the global economy is extremely complicated and financial markets fluctuate more wildly. Some companies have operational difficulties which are structural in nature. In such circumstances, I think the banks in Hong Kong are facing a number of major challenges, namely: how to enhance the capability to control asset quality and withstand risks; how to raise the standards of business management and how to strengthen the overall capability to serve customers,” says Jiang Yisheng, executive director and chief executive officer of ICBC (Asia). The China connection Paul McSheaffrey, partner, head of banking, Hong Kong at KPMG China, says that banks in Hong Kong will be keeping a watchful eye on China’s growth. Alongside this major challenge are the implications of Brexit concerns and the US elections

last November. Analysts expect that the bleak outlook will persist in the next few years and will be exacerbated by deteriorating loan quality in mainland China and the expectation that the US will begin another ratehike cycle. The territory cannot easily pull away as mainland firms and banks snap up local assets and set up shop in the city. It is in fact a willing party, as it was the most significant transporter of exports and imports from China. The slowdown in the mainland’s economy has thus impaired trade numbers in the city. “The subsidiaries and branches of mainland banks continue to take market share in Hong Kong and the interconnectedness between their parent banks and their weaker intrinsic strength adds confidencerisk to the system. We believe high volatility in CNH interbank interest rates, due to the less developed nature of this market, raises the perceived risks,” says Ivan Lin, associate director, financial institutions, Fitch

ANALYSIS: BANKS Ratings. Despite the challenges posed by China’s slowdown, Hong Kong believes that it can keep the connection going, especially with regard to the fintech market. Banks in the city continue to forge partnerships with fintech companies, accelerators, and incubators in view of innovation demands and the overall goal for Hong Kong become a leader in the fintech space. “With regard to the link to the mainland, Hong Kong’s Secretary for Financial Services and the Treasury recently signed an agreement with the Shanghai Municipal People’s Government to deepen our financial cooperation. One of the priority areas we are trying to work more closely together is in fintech. Regulators on both sides can openly exchange experience and views on regulatory issues, and the government will also facilitate local and foreign fintech companies based in Hong Kong to explore the mainland market, and vice versa,” says Kent Yau, head, research office, Financial Services and the Treasury Bureau. Property pains After a peak in late 2015, Hong Kong’s property market prices have begun falling. Average residential prices are now at 11% below their peaks in September 2015. However current rental yields remain at multiyear lows. Sherry Zhang, analyst at Moody’s Investors Service, says that these prices could come down further on the current sluggish labour market outlook and an increasing supply pipeline. It must be noted that an accelerated fall in property prices could further discourage private sector demands and erode the banks’ collateral buffer.

Zhang further notes that mortgages do not necessarily represent a central risk in the baseline scenario due to the macroprudential measures that the Hong Kong Monetary Authority has implemented in recent years. However if property prices fall sharply, mortgages could be exposed to higher delinquencies and foreclosures, especially on loans where the borrowers have added to their overall leverage by remortgaging their properties or taking out second-lien mortgages. “The first half of 2016 saw an increase in the non-performing loans of some of the city’s major banks. Problem loans will continue to rise with the combined effects of a slower Hong Kong economy and the possibility of higher interest rates, thereby adding pressure to loan delinquency,” says Yisheng. Capital buffers Despite the largely gloomy outlook for Hong Kong’s economy, analysts have identified one bright spot which can keep the territory afloat for a while. Hong Kong banks will continue to maintain good capital buffers over the next 12 to 18 months, in preparation for more stringent regulatory requirements and despite the looming rise in non-performing loans. Fitch adds that Hong Kong banks’ general loan reserves and the phase-in of a 2.5% countercyclical capital buffer give banks a significant cushion against loan deterioration. “The system’s common equity tier 1 ratio (CET1) improved to 14.6% at end-March 2016 from 13.7% at end2014. Likewise, its total capital ratio rose to 18.2% at end-March 2016, up from 16.8% at end-2014. These ratios

Hong Kong banks’ general loan reserves and the phasein of a 2.5% countercyclical capital buffer give banks a significant cushion against loan deterioration.

are well above the Basel III minimum requirement. In addition, the banks started to report Basel III leverage ratios in 2015, which are also well above the regulatory minimum of 3%,” Zhang says. Liquidity risks will also be wellmanaged, as banks enjoy large liquid assets and funding structures. Zhang adds that the banks’ sound liquidity positions will continue to support their balance sheet strength and credit profiles, despite economic pressures. She adds that on a global scale, Hong Kong banks have amongst the highest baseline credit assessments (BCAs) on a weighted average basis, which in turn support their high ratings. Hong Kong banks are also awaiting the implementation of a resolution regime that would allow creditor bail-in. Zhang believes that the government’s intention to minimise the use of public funds to resolve failing financial institutions implies a lower likelihood of government support for the banks. Authorities are then enabled to take earlier resolution actions, which will likely better preserve the value of the banks’ assets when compared with disorderly liquidations.

High volatilities in Yuan rates

Source: Bloomberg

Hong Kong’s GDP performance (year-on-year % change)

Non-bank mainland China exposure

Source: Moody’s Investors Service

Source: Extracted from individual banks’ financial and public statements



Investors will be roused into action by the crow of several investment opportunities

10 investment eggs to hatch in 2017 Don’t be caught sleeping this Year of the Rooster and start sitting on these golden investment eggs; but as with any investment idea, these eggs are best taken with a grain of salt.


ith global growth set to accelerate in 2017 and the new United States administration looking to embark on an infrastructure binge, investors will be roused into action by the crow of several investment opportunities. Hong Kong Business rounded up the most promising of the bunch based on investor outlooks, including key sectors like biotechnology that promise solid earnings potential and currency plays that anticipate a stronger US dollar. 1. Healthcare and technology stocks For stock market investors, the healthcare and technology sectors are promising bets in 2017. Most indices climbed higher following the outcome of the US elections, and there is limited potential for indices in aggregate to appreciate further, says Christian Nolting, global chief investment officer at Deutsche Bank Wealth Management. This presents an opportunity to concentrate on income strategies and sector themes. “The earnings outlook remains positive ahead,” he says, noting that Deutsche Bank has upgraded the global healthcare sectors to overweight. “As expected, S&P 500 quarterly earnings are now growing again for the first time on a year-on-year basis since the third quarter of 2015, and the outlook remains positive – although we still believe consensus estimates for 2017 may be too high.” 28 HONG KONG BUSINESS | JANUARY 2017

Don’t be tempted to change your asset allocation if your investment goal or risk tolerance has not changed.

Investors should start loading their baskets with biotechnology stocks, says Nolting. The fundamentals of this subsector remain intact as research and development spending continues to grow. Healthy cash positions and positive earnings will also support biotechnology stocks. Technology stocks can also be great picks in the face of stronger global growth and fiscal spending into infrastructure, which should drive demand, earnings, and stock prices across the sector. 2. US infrastructure sector US infrastructure will be another hot sector in 2017 due to a renewed focus to boost infrastructure spending as outlined in the proposals of president-elect Donald Trump. “We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals,” said Trump in his acceptance speech. “We’re going to rebuild our infrastructure – which will become, by the way, second to none. And we will put millions of our people to work as we rebuild it,” he remarked. Nolting reckons the US needs an estimated infrastructure spending of US$3.6t until 2020, and the markets will be rallying behind this growth story. “Markets are starved for growth,” says Charles Himmelberg, head of global credit strategy at Goldman Sachs. “This is plainly visible in the eagerness with which

COVER STORY markets seized on Trump’s growth-focussed message.” He adds, “It is also our sense that Trump does intend to prioritise an aggressively pro-growth fiscal agenda of tax cuts, deregulation, infrastructure spending, and defense spending.” Goldman Sachs sees the US fiscal stimulus as a welcome growth and reflationary impulse, especially in a weak global growth environment where the scope for lowering real policy rates remains constrained by low inflation and the zero lower bound on nominal rates. 3. US corporate sector With signs of recovery from a severe revenue slump and expectations of a stronger performance in 2017, the US corporate sector may re-enter the radar of more investors. “We expect 2017 to confirm that the US corporate sector has emerged from its recent ‘revenue recession’,” says Himmelberg. In 2016, the sector had already seen a bounce in the % yoy growth of real quarterly revenue. This is after US corporate revenue fell sharply in the fourth quarter of 2015, following the collapse of oil prices, which alone accounted for roughly half of the model-predicted 6.7% yoy drop in quarterly revenues for the said period. A weaker dollar and sluggish industrial production also contributed to that decline. “Although still negative, it is a meaningful improvement from the 9.1% decline in 2015, and the realised % yoy growth rate for Q3 came in over 2% higher than its forecast,” says Himmelberg of the 2016 bounce. “Whilst not much stronger than the recovery in US GDP more generally, it does at least appear that the revenue recovery from the oil shock is underway.” 2016 saw the negative contribution from all three factors – falling oil prices, weaker dollar, and lacklustre industrial production – diminished significantly, whilst employment growth remained stable. This suggests that the worst of the revenue recession is over, according to Goldman Sachs, and modest improvements in the macroeconomic

Christian Nolting

James Martielli

Trade relations with China (and to a lesser degree Mexico) will receive heavy scrutiny under Trump

Sources: UNCTAD, Goldman Sachs Global Investment Research

backdrop will help lift S&P 500 operating earnings per share by 10% to $116 in 2017. “We expect two issues to drive the earnings discussion [in 2017],” says Himmelberg. “For one, we expect the US economy to remain on the same slow growth trend trajectory that has characterised the past 10 years. Owing in part to demographic headwinds and lower productivity growth, trend growth rates of gross domestic product (GDP) have fallen for most emerging markets (EM) and developed market (DM) economies.” Goldman Sachs economists estimate that the trend growth of GDP for the US – the DM economy on which the firm is arguably most bullish – has fallen to around 1.75%, down from 2.50-2.75% in the pre-crisis period. “Second, S&P 500 margins remain at historically high levels. Whilst we expect margins to increase slightly next year (primarily owing to improvements in the energy sector), the scope for upside margin expansion would appear limited.” As a point of comparison, better corporate earnings are also expected in EM markets. The main drivers will be companies outside of commodity and financial sectors. “Companies that are cyclically geared to rebound in domestic growth should see the largest improvements.” 4. Buy US$ over EUR and JPY The US$ is gathering strength and will continue to rise against both the euro (EUR) and Japanese yen (JPY) in 2017 as the US domestic growth accelerates, opening a chance for US$ investors. “We see further US$ strengthening. We expect the US$ to reach parity against EUR by end 2017 and US$-JPY 115,” says Nolting. “This is in part due to monetary policy divergence.” The US$ has been rising against the EUR since Trump won the US elections, and many analysts say the two currencies could be trading one-for-one in 2017. Nolting reckons the Fed is expected to move “low and slow” with a maximum of three hikes (25bps each) by the end of 2017 to achieve inflation target and “full” employment. Meanwhile, the ECB is anticipated to extend quantitative easing until September 2017, and to announce gradual tapering around mid-2017. Nolting reckons US growth will continue to outstrip European growth. In Japan, the next 12 months will likely see 10bps cut in the policy rate and a further increase in the Quantitative and Qualitative Easing programme. “Diverging growth fundamentals will also drive divergent exchange rates via increasing rate differentials,” says Nolting. 5. Position for strong US$, US growth Whilst strong economic growth will be a positive for US equities, not all sectors are expected to outperform in this environment. Devitre expects cyclical sectors such as financials to shine brighter than defensives such as food and tobacco. He also points to domestically-focussed companies that sell most of their goods in the US to do better than their export-oriented peers. The strengthening US$ will create greater profit headwinds for such exporters. “Given the likelihood of increased infrastructure HONG KONG BUSINESS | JANUARY 2017 29

COVER STORY spending paired with corporate and individual tax cuts, we are likely to see a medium-term boost to US economic growth,” says Devitre. “This economic growth should drive corporate earnings in the United States.” 6. Selective IG bonds for US, Europe, and EM Investment grade (IG) bonds on both sides of the Atlantic and emerging markets (EM) will also draw attention due to their convincing valuations and strong demand. Nolting says the outlook on European IG credit is positive as the corporate sector purchase programme remains a major driver for tighter spreads. Investors are now focussed on volatility in rates and macro risk instead of concerns about the European banking system. “We are also constructive on US IG credit, as spreads are expected to tighten despite possible periods of increased volatility,” says Nolting. “Demand is exceeding supply and valuations remain compelling.” He also retains a constructive view on EM credit given improved EM growth outlook, stabilising commodity prices, positive reform climates in several countries, and a favourable demand-supply picture. 7. Japan equities With modest economic growth in the cards in 2017 and notable improvements in consumer and business sentiments as well as labour market conditions, Japanese equities are starting to become attractive for investors. More importantly, in the near term, a weaker JPY is likely to support Japanese equities, says Nolting, and the economic outlook is brightening due to improving industrial production in the third quarter of 2016 which was slightly better compared to the first half of 2016 and the year of 2015. “Note also that the Japanese economy could prove resilient to US anti-free trade rhetoric: exports to the US account for just 3.4% of GDP. We think that the Bank of Japan (BoJ) will continue with its yield curve management strategy for two implicit objectives – to increase inflation and to provide relief to financial sector earnings,” he explains. Meanwhile, a Bank of America Merrill Lynch report says the sustained JPY weakness is likely to lift US$/ JPY to 120. The investment bank maintains its view that weaker JPY bodes well for equities. 8. EM equities EM asset prices fell after the US election proclaimed Trump’s victory, one of the many effects of the so-called “Trump tantrum”. EM asset prices slid in the face of downside risks to EM economies should president-elect Trump push through with the policies, especially in US trade, he has been advocating. But the global investment firm argues that parts of EM may end up benefiting from Trump’s overall policy mix should it lead to stronger US growth and inflation, and increased commodity prices. “We have consistently found that when stronger US growth accompanies higher US rates, EM assets can prosper, especially EM equities and spreads,” says Himmelberg. “Hence, whilst we expect a bumpier ride as EM markets adjust to higher US rates, we nonetheless see 30 HONG KONG BUSINESS | JANUARY 2017

EM as a beneficiary of better US growth.” “On net, we think EM assets are poised to perform once the current move in core rate moves begins to stabilise,” he adds. Goldman Sachs also believes concerns on the incremental risk of US protectionism on EM markets are overdone, but investors do need to be wary of aggressive public rhetoric around trade negotiations weighing on EM sentiment. “Whilst the rhetoric around trade negotiations seems certain to grow louder, we are tentatively of the view that Trump, and especially the Republican Congress, are the free-traders they claim to be.” EM economies also have a lot more going for them: stronger external balances, higher real carry, better valuations, and more encouraging signs of an improving growth outlook. “All these factors should help support the ‘good carry’ stories in EM – such as the Brazilian Real, Russian Ruble, and Indian Rupee – that are less heavily positioned and less exposed to US trade and demand, and hence less exposed to the risk of a ‘Trump trade tantrum’,” says Himmelberg. Meanwhile, a Bank of America Merrill Lynch report notes, “Modest economic growth of 4.7% is expected in emerging markets, up from 4.1 percent, which is better than in the US and the rest of the developed world. India is expected to lead, with GDP rising 7.6%, whilst China’s bellwether economy expands by 6.6%. Overall, emerging Asia should grow by 6.2 percent, and Eastern Europe, the Middle East, and Africa (EEMEA) should rise 1.9%.” 9. Hedge with RMB Alongside positioning for a stronger US$, investors should also prepare for a weaker Chinese renminbi (RMB) in 2017, according to Goldman Sachs. “Our forecasts – US$/ CNY at 7.30 in 12 months – call for a depreciation that is well beyond forward market pricing, thereby implying positive gains even accounting for the negative carry. And beyond the usual reasons for wanting to hedge exposure to

Stocks in the healthcare and technology sectors are promising bets in 2017

COVER STORY repealing North American Free Trade Agreement (NAFTA), which we see as unlikely. Moreover, in contrast to the large bilateral trade deficit that the US runs with China, trade is nearly balanced with Mexico,” says Himmelberg. “We think tariffs on Chinese imports represent the clearest risk of Trump’s trade policy, and we prefer to use the RMB to hedge this risk.”

Higher fixings still run the risk of encouraging capital outflows

‘China risk’, we think it will also hedge the risk of a ‘Trump trade tantrum,’” says Himmelberg. Three main factors will convince investors to hedge with RMB, foremost of which is how China’s management of its currency remains vulnerable to the destabilising effect of sharp devaluations against the US$. “Whilst the Chinese authorities have clearly communicated a shift in focus to a trade-weighted currency basket, thus de-emphasising the signal, it is still the case that the only signal that matters is US$/CNY,” he says. “We think higher fixings still run the risk of encouraging capital outflows as households and firms anticipate a faster pace of depreciation,” explains Himmelberg. “Whilst the shift to a trade-weighted regime makes sense, China has historically had a bilateral exchange rate, which means that fixing US$/CNY weaker is not as easy as it sounds,” he adds. A second factor is that RMB has a “bias to depreciate,” with Goldman Sachs research pointing to an asymmetry in the response of the US$/CNY fix to the dollar. Since March, the US$/CNY fix has risen 0.60% for every 1% rise in the dollar, whilst the US$/CNY fix has fallen only 0.38% for every 1% drop in the dollar. “There is therefore clear evidence of asymmetry in how the RMB responds to dollar moves, which in our minds is evidence of an underlying bias to weaken the currency and supports our bearish view on the RMB,” says Himmelberg. Finally, investors could choose RMB in their quest to find an effective hedge against the key downside risk to the Trump administration, namely if the aggressive effort to renegotiate US tariff and trade agreements ends badly. “Whilst we think Trump will most likely pursue trade agreements that are less radical than his protectionist rhetoric, we nonetheless acknowledge that his negotiations could be more aggressive and hence more risky. China is likely to be a primary focus of these efforts,” he adds. “For one, levying tariffs on Mexico would require

10. ETFs For investors that are looking to build a low-cost, broadly diversified portfolio, exchange-traded funds (ETFs) may be the simplest way to go, says James Martielli, head of portfolio review, Asia at Vanguard. “Many of these products are low cost, offer broad diversification, and are easily accessible with a brokerage account on an exchange,” he says. “As our founder John C. ‘Jack’ Bogle often said, instead of trying to find the needle in the haystack, just buy the whole haystack instead,” adds Martielli. Providing a more general investment strategy, he reckons that predicting which stock, sector, or currency will outperform is always a difficult task since markets are often surprising and unpredictable over the course of a short-term period like a year. But following four timeless principles – goals, balance, cost, and discipline – improves the chance for investment success. “First, start by aligning your asset allocation with your investment goals. As a rule of thumb, the longer your time horizon, the more you should be able to allocate to riskier assets like stocks,” explains Martielli. He says the next thing they do is encourage investors to maintain balance in their portfolio by having a diversified mix of stocks, sectors, countries, and asset classes. Martielli adds, “Costs is one of the few things in investing that you can control. The less you pay, the more of the investment return you keep.” “Finally, maintaining discipline is easy to say, but harder to do in practice,” stresses Martielli. Here is his advice to investors: “Do not be tempted to change your asset allocation if your investment goal or risk tolerance has not changed.” We forecast continued depreciation of RMB against US$

Sources: Bloomberg, various news sources; annotated by Goldman Sachs Global Investment Research

HONG KONG’s 25 Largest Accounting Firms

PwC is still the largest accounting firm with 3,900 staff in 2016

Major IPOs to keep HK’s accounting firms busy in 2017 Hong Kong was the world’s leading exchange by capital raised with 19% of the global total, ahead of Shanghai with 12% in 2016.


ong Kong’s major accounting firms will be busy in the coming year as they work on more deals in the world’s largest market for new listings. Despite heightened global political and economic uncertainty, Hong Kong – HKEx’s main board and Growth Enterprise Market (GEM) – was the world’s leading exchange by capital raised with 19% of the global total, ahead of Shanghai (SSE) with 12%. By volume, Shenzhen (SME board and ChiNext) ranked first with 121 IPOs (11.5% of the global total), slightly ahead of Hong Kong (main board and GEM), which ranked second with 117 IPOs (11.1%), ahead of Shanghai (SSE) in third place with 104 (9.9%). Greater China exchanges hosted four of the ten largest IPOs globally by proceeds in 2016, including the largest deal of the year of Postal Savings Bank of China


By volume, Shenzhen (SME board and ChiNext) ranked first with 121 IPOs (11.5% of the global total), slightly ahead of Hong Kong.

Co. Ltd., which raised US$7.6b on HKEx in September. “After a period of uncertainty in the latter part of 2015, confidence and stability have returned to the Greater China IPO market, with the number of deals steadily increasing quarter-by-quarter throughout the year. In terms of stock exchange in Greater China, due to a slow-moving first six months, there were 360 IPOs in 2016 (2015:360) raising US$48.3b in capital, down 17% on 2015,” says Ringo Choi, EY Asia-Pacific IPO leader. Market stability EY adds that the capital markets in Greater China returned to stability this year with its stock exchanges topping the global exchanges leader board in terms of both IPO volume and capital raised. “The CSRC has started to accelerate the IPO approval process and we expect this trend to continue in the coming months.

Moreover, the launch of the Shenzhen-Hong Kong Connect program would gradually draw greater participation by overseas institutional investors in the A-share market and further boost market sentiment in the long run. With a strong pipeline of companies ready to list and investor sentiment unaffected by political shockwaves elsewhere in the world, we expect Greater China exchanges to remain the world’s most active markets for IPOs in 2017,” he says. Clearly, China is expecting a vibrant business sector for the coming year. To help understand how Chinese executives are adapting strategies to reposition for new growth, PwC polled more than 220 Chinese executives with operations in mainland China and Hong Kong, as part of its 2016 APEC CEO Survey and shared their views on doing business in China. According to PwC, even though China is still facing uncertainty in the macro-economic environment, some sectors are better poised for growth than others. Technology and financial services executives are especially optimistic about their business prospects in the coming year, drawing on the potentials of the fledgling fintech space. Around a third of executives in these sectors estimate annual average industry growth of at least 8% a year over the next three years. Who made it to HKB’s list? This year’s rankings saw the top 5 largest accounting firms maintain their spots from last year. All 5 firms also increased their total number of staff compared to 2015. PwC is still the largest accounting firm, with 3,900 staff in 2016, which reflects an 11% increase from last year. EY came second with a 2,900-strong staff, up 23% from 2015. Deloitte is ranked third with a 3% increase to 2,265, whilst KPMG’s staff numbers inched up 4% to 2,200. BDO is the fifth largest firm with 1,100 staff, up 10% from last year. Hong Kong Business compiled the firm-provided data from August to September 2016.

HONG KONG’s 25 Largest Accounting Firms 2016

Accounting Firm


2016 Total Staff

2015 Total Staff

2016 Accounting Professionals

Managing Partner







raymund chao


Ernst & Young







Deloitte Touche Tohmatsu HK




























HLB Hodgson Impey Cheng







Crowe Horwath HK














Baker Tilly Hong Kong














Grant Thornton*







Cheng & Cheng







PKF Hong Kong







Patrick Wong CPA














Wong Brothers & Co.














Ting Ho Kwan & Chan







FTW & Partners CPA







Philip Poon & Partners







KLC Kennic Lui & Co.







C K Yau & Partners







Lawrence Cheung CPA*



















CMO Briefing

Rethinking the value of email marketing As email usage grows each year, fresh marketing approaches must be considered.


ccording to the Radicati Group, a market research firm that provides, amongst others, quantitative and qualitative research on email and social networking, the number of email users worldwide in 2016 is estimated at 2.6b and will reach 3b by the end of 2020. It also says nearly half of the worldwide population will be using email by that year’s end. Marketers, then, are not discounting the impact of email marketing on businesses and their strategies, given the wide, and still expanding, reach of email. Three marketers give their thoughts on email marketing, related trends and threats, and its future. Mobile is the future Email has been incredibly effective and will remain so for the foreseeable future, says Josh Steimle, CMO, MWI. He cites a Litmus State of Email 2016 report, which showed that email was the preferred mode of communication for 72% of respondents. However Steimle notes that email marketing via mobile should be particularly observed. “The effectiveness of email marketing is decreasing on the desktop, but is increasing on mobile. According to a Litmus study during 2015, mobile open rates increased 17%, representing 55% of all email opens with webmail and desktop opens both decreasing,” he says. Steimle notes that this is happening at the same time that mobile usage rates are generally increasing, meaning that mobile email marketing is a huge opportunity. Given that email usage continues to grow, it is logical as well for marketers to evolve their way of thinking about email marketing. “In this day and age of alwayson communications, we have to relearn/rethink how we use email marketing,” says Mark Roberts, CMO, ShoreTel. Building “social debt” with our audience is a powerful tool, but only if we understand how to make


The problem isn’t so much about what marketers are doing, rather the way they go about it.

those quality connections upfront, he notes. “When it comes to this form of marketing, the future is bright, but only if we revisit it through a more human lens,” Roberts muses. For him, the biggest threat to email marketing is the lack of relationship building. “Social channels are all about the social debt we can build, how we can help others, and understand something about their world and environment,” Roberts says. He shares that based on his unofficial, initial research, more than 80% of the connections he accepts immediately want to tell him about their product, which he notes is totally missing the point. “Those that do this well know how to build a story, i.e., a connection, before sending over the details of what they are selling,” Roberts notes. “It’s going to be interesting to see how the bots deal with this. I’d pay for a bot that weeds out all the LinkedIn messages that take the ‘Hey buddy, I’d like to sell you something’ approach.” Don’t forget about quality Thus, quality should always be paramount for email marketers. Email is one of the most useful tools for productivity, but most people seem to have a strong dislike towards promotional emails filling up their inboxes, says Shao Ying, head of marketing, Greater China, Adobe. “The problem isn’t so much about what marketers are doing – generating leads and developing customers – rather the way they go about it,” Ying says. Email is often a company’s most effective digital marketing channel, but email marketing campaigns have stayed the same. Ying observes: “Many brands are simply not trying anything new. With so much noise in our inboxes, marketers need to reinvent their email marketing strategy to fit the wants and needs of the connected consumers.” With the evolution of the digital marketing area, email marketing will also need a lot more reinvention and adoption of new technologies to provide personalised experiences with more accurate targetting/segmentation strategies, according to Ying. “Emails will still be a formal and effective way to communicate with your customers. Today’s email marketing strategies must encompass some new ideas if marketers wish to be successful,” Ying notes. “Today’s email-marketing campaigns must be responsive to the demands of new, digitally sophisticated users who will no longer tolerate batch emails addressed to them by name as the only form of personalisation.” Ying says today’s email readers want truly personalised and contextually relevant interactions with the businesses they embrace. “Meaningful personalisation that will engage your customers can only be developed if you have a complete understanding of how customers and potential customers interact with your brand at every touchpoint and on every channel,” Ying points out. For Steimle, the biggest threat to a marketer is not technology, trends, or competition, rather it’s low quality content. “People subscribe to your email list because it promises something those subscribers want. They unsubscribe when that promise is broken,” he says.













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China’s PPI spiked 3.3% in November, its fastest pace since late 2011

Asia economics comment: Reflation - for real?

So, forget deflation. Apparently we are now reflating. At least that’s the message when you look at the headlines coming across your terminal.


lenty to worry about. Trump, trade, and turmoil in 2017. But the reflation thing is taking a special place. If this turns out to be a persistent acceleration in inflation globally, there’s much to think about: easy monetary policy could come to an end more quickly than thought, debtors may find that interest rates are rising more rapidly than they can stomach (even if cash flow improves), and currencies would become yet more volatile. But here is our take: breathe. This doesn’t look like a sustained return of price pressures, at least in Asia. Of course, things will be a lot more complicated if inflation in the US somehow decouples from the rest of the world, something that would be indeed open a can of worms (leading to a faster Fed, whilst everyone else is left in the dust). But our US chief economist, Kevin Logan, doesn’t believe we need to worry about a spike in US inflation just yet: the 36 HONG KONG BUSINESS | JANUARY 2017

This doesn’t look like a sustained return of price pressures, at least in Asia.

strong dollar, for one, helps keep a lid on price pressures. What’s the word? Here’s the skinny on what the latest numbers say on inflation. Foremost, China’s PPI spiked in November, rising at the fastest pace since late 2011 (3.3% yoy, 1.2% in October). Other indicators, too, are tracking up: have a look at rebar prices quoted in Shanghai - vertical. For the region overall, various consumer inflation surprise indices are also showing upticks that few had expected. Then there is oil, holding well above US$50 per barrel after OPEC promised to cut production. “Reflation” is the word. For real? We’ve just come off several years of sagging growth in Asia, with trade stuck, debt climbing, reforms stymied, and rates tumbling. Here’s the thing: reflation is real and it isn’t. Let us explain what we mean. In the coming months, various

inflation prints are likely to surprise on the upside, fuelling the narrative of relentlessly growing price pressures. But it won’t last. This doesn’t mean, of course, that we’ll stumble back into deflation: rather, headline inflation gauges will normalise again by mid-2017 or so and then level out at fairly low rates. Several points to make. First, base effects. Everyone knows about them, but they still have a tendency to whip markets. Oil is a great example. Given the plunge of crude in early 2016, annual price increases will look nasty by January 2017, even if prices don’t climb further from here. Things should however normalise by April or so. True, a wildcard is whether OPEC cuts stick and whether they can drive crude even higher — but, then again, that’s a supply shock which dampens demand and ultimately drags underlying inflation lower. RMB is weakening Second, the point about China suddenly “exporting inflation” again. We have some issues with that proposition. For one, China’s currency is weakening, and that exerts a deflationary, not inflationary, impact on the world: cheaper Chinese goods flood markets and other exporters in Asia will feel greater competitive pressure. Also, China may have pumped up its construction sector this year, but the economy is struggling with broader, structural issues and is still likely to slow down in 2017. The effects of tighter real estate regulations are the ones to watch. Third, currencies. The dollar has spread its wings. Of course, reflationists will argue (a) that rising commodity prices in the face of a stronger greenback are a sign that price pressures are truly back (usually raw material prices should fall), and (b) that weaker currencies in EM will spur growth and thus raise inflation. The first argument is harder to dismiss, although we suspect there are frothy expectations that may remain unfulfilled in 2017. From Asia Economics Comment by HSBC


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ANALYSIS: TRADING ECONOMICS ordination). ASEAN’s Blueprint 2025 work on services trade should be advanced. These actions benefit Asia. They may also influence future global policy norms, catalysing trade reform beyond the region.

Asian leaders have already launched ambitious initiatives to promote trade liberalisation and regional integration

Trading up: Asia should seize its chance to lead on trade The Regional Comprehensive Economic Partnership (RCEP) offers the prospect of a new Asian trade deal on a huge scale.


t is time for Asia to seize the initiative on trade. Negotiators have made progress this year on a number of substantial trade accords around the world. But there has also been a striking rise in populist and nationalist sentiment, particularly in Europe and the United States. The Brexit vote in the United Kingdom, the challenges in Europe to the EU-Canada Comprehensive Economic and Trade Agreement, and the protectionist mindset of the incoming US President (highlighted by his plan to scrap the Trans-Pacific Partnership) do not bode well for trade liberalisation, at least for the next few years. In contrast, Asia still views trade positively, particularly in emerging markets. This is not surprising because increased market openness in Asia has clearly helped improve economic performance. Recognising 38 HONG KONG BUSINESS | JANUARY 2017

The RCEP offers the best prospect for deep, largescale trade liberalisation covering goods, services, and investment in an integrated manner.

this, Asian leaders have already launched a variety of ambitious initiatives to promote trade liberalisation and regional integration. Now is the time to advance these, sending a signal to the world that trade remains central to Asian economic policy and that Asia is indeed open for business. Areas for immediate action include concluding the 16-nation, pan-Asian Regional Comprehensive Economic Partnership agreement, implementing the WTO’s Trade Facilitation Agreement (even ahead of its entry into force), and provision of Asian support for the nearly-complete WTO Environmental Goods Agreement. Longer term, China’s Belt and Road initiative should tackle issues beyond transport infrastructure (e.g., improved connectivity, customs co-operation, and trade policy co-

Shaping the trade agenda Amongst the proposed megaregional accords (i.e., those having members that account for more than 25% of world trade), the Regional Comprehensive Economic Partnership (RCEP) has emerged as the leading contender for early completion. It offers the best prospect for deep, large-scale trade liberalisation covering goods, services, and investment in an integrated manner. The two bigger potential competitors (in GDP terms) appear to have run aground, with no obvious way out of the shallows for the time being. The proposed EU-US Transatlantic Trade and Investment Partnership (TTIP) agreement has encountered popular opposition and challenges in the ongoing election cycle in the US, Germany and France. Some European parties have openly proposed suspension of the negotiations and its future is uncertain. As for the Trans-Pacific Partnership (TPP, a trade agreement encompassing 12 Pacific Basin countries, but not China), despite being signed and ready for ratification, now surprisingly appears dead in the water. US president-elect Trump has announced his intention to withdraw from the agreement on his first day in office. According to the TPP agreement text, without the United States’ participation, TPP cannot be ratified and enter into force. Some country representatives says without the United States, TPP would lack sufficient economic scale to justify the types of concessions it demands of participants. This situation opens a tremendous opportunity for the 16 nations participating in the RCEP initiative to show leadership

analysis: trading economics Regional Comprehensive Economic Partnership participants

Source: HSBC (2015), Trade Chartbook, 17 June. Note ASEAN members include: Brunei ,Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. ASEAN FTA partners Australia, China, India, Japan, Korea, and New Zealand

in global trade. Interestingly, RCEP includes 7 partners from the TPP and offers an alternative potential source of economic stimulus via trade. Earlier this month, Peru -- a further TPP member -- launched its discussions with China on joining RCEP as its first member in the Americas. RCEP has sufficient scale to shape the rules of trade across a large swath of the global economy. RCEP partners include nearly half of the global population and nearly a third of global GDP. As highlighted by HSBC’s economics team, the proposed agreement offers participants potential access to three of the largest consumer markets in the world (China, India and ASEAN). Thus, although RCEP has taken a less ambitious liberalisation approach than TTIP and TPP in terms of the depth of liberalisation proposed, it partially compensates through its tremendous scale. Would RCEP really deliver? According to one estimate, achievement and implementation of the RCEP objectives could deliver annual welfare gains for the participants of about US$600b, amounting to about 1.8% of GDP for the region. The gains for some participants range much higher. It is notable that three of the top five RCEP beneficiaries are also amongst the TPP participants. However amongst these three, Vietnam and Malaysia would fare even better under TPP than RCEP, whilst Brunei’s potential gains are roughly comparable under the two agreements. Benefits under RCEP may come in

Benefits under RCEP may come in part from liberalisation of traditional barriers to trade in goods such as tariffs.

Income gains from RCEP, estimates for 2025

Source: Petri, P. and A. Abdul-Rahee (2014) and HSBC This chart does not include estimates for the three smallest RCEP economies, Cambodia, Laos, and Myanmar

part from liberalisation of traditional barriers to trade in goods such as tariffs. Although within ASEAN and between ASEAN and its free trade agreement partners tariff barriers have been substantially addressed, RCEP may be able to deliver gains through liberalisation of tariffs in sensitive products such as steel or apparel, and amongst certain FTA partners such as along the ChinaIndia trade corridor. Yet, tariffs have been one of the sticking points in the negotiations. In India, for example, the steel and textile sectors have reportedly opposed some aspects of tariff liberalisation due to fear of potential economic harm from Chinese competitors. In response, India had proposed a tiered system of tariff liberalisation with lower cuts for the more advanced countries. Fortunately, RCEP is broad enough to afford some trade-offs. Indian negotiators reportedly have shown new flexibility on tariffs in recent months, recognising that India may benefit from a deal offering substantial services market liberalisation, a sector where India has demonstrated some comparative advantage (e.g., in information technology services). From press reports, it now appears that there is preliminarily agreement on tariff elimination on 80% of all goods, possibly with a longer phase out period for the sensitive items. There remain challenges in reaching agreement on services liberalisation, including finalisation of mutual recognition agreements (MRAs) that could potentially permit expanded trade in professional services like engineering, accountancy, or

architecture. RCEP is also tackling some challenges in newer trade-related issues such as intellectual property or investment. Leaked RCEP chapters dated October 2015 indicate that there are proposed provisions going beyond existing WTO agreements and offering protection in some advanced areas that were also covered by the Trans-Pacific Partnership. Next steps in RCEP It looks unlikely that the RCEP negotiations will conclude before the end of the year. The Joint Leaders statement after the August 2016 ministerial meeting in Laos recommitted to RCEP and called for a greater intensity in the negotiations but did not commit to a date, unlike previous statements. The 15th round of negotiations were held during 10-22 October in Tianjin, China, and a ministerial meeting took place on 3-4 November in Cebu, Philippines. There, the ministers reinforced their commitment to the original principles and objectives. They provided additional guidance to the negotiators, stressing the “urgency of a swift conclusion of the RCEP negotiations” as a means to counter the “subdued” outlook for the global economy and the “increasing protectionist sentiment”. The Chinese Ministry of Commerce noted that the significant progress made in Cebu “generates power for the negotiations”. The 16th round of negotiations is set for 2-10 December 2016 in Indonesia and a provisional work programme and hosting schedule are being developed for negotiations in 2017. By Douglas Lippoldt, HSBC Bank plc HONG KONG BUSINESS | JANUARY 2017 39

ANALYSIS: one belt, one road

What do Chinese firms have up their sleeve?

What are Chinese firms buying overseas? So far, investment in countries on the OBOR has actually decreased by 7.6% yoy to US$11.1b.


ince we last wrote about the New Silk Road in April, China’s overseas investment (non-financial) had continued to gain momentum. It has grown 53.7% yoy in the first nine months of this year, totalling US$134.2b, easily surpassing the total for 2015, US$121.4b. Perhaps surprisingly, this is not being driven by the One Belt, One Road (OBOR, ‘Belt and Road’) initiative to recreate the ancient Silk Road. So far this year, investment in countries on the OBOR has actually decreased by 7.6% yoy to US$11.1b, accounting for only 8.3% of total China non-financial ODI (13% in 2015). Before we jump into the details about what has changed over the past six months, which is discussed in the next chapter, we address the three top questions about China’s surging ODI based on the latest data available. 1. Is infrastructure still the dominant investment theme? China is still in the early stages of building the Belt and Road economic network, and infrastructure construction naturally has a leading role to play. Building the physical connections – railways, roads, and ports – to link China to Europe, central Asia and Southeast Asian countries requires steady expansion in infrastructure investment. Infrastructure ODI has grown at a faster rate than overall ODI since the OBOR initiative got underway. It rose 28.6% yoy in 2015 and 40 HONG KONG BUSINESS | JANUARY 2017

Infrastructure ODI has grown at a faster rate than overall ODI since the OBOR initiative got underway.

31.9% yoy in 2014, well ahead of overall ODI, including financial, which was up 18.3% in 2015 and 14.2% in 2014. 2. Are SOEs still the biggest contributor to ODI? China’s SOEs used to be the dominant contributor to the country’s overseas investment, helped by funding from state banks. But this has changed. Their share of ODI has dropped from 69.6% in 2009 to 50% in 2015. That’s not to say that it is slowing down. Accumulated SOE ODI has more than quadrupled (4.6x) in the past few years, particularly in the areas of mining and infrastructure following the announcement of President Xi Jinping’s Belt and Road strategy in late 2014. Non-SOE overseas investment has expanded even faster – 10.4x over 2009-15. M&A is a growing trend as 75% of 2015 acquisitions were made by non-SOE enterprises. The total value of M&A in the first nine months of this year reached US$67.4b, exceeding the 2015 total of US$54.4b. Manufacturing accounted for 24% and information transmission/software and IT services 23%. Large companies such as Dalian Wanda, Alibaba, Legend, Tencent and Leshi Internet made a number of big deals in Europe, the US and emerging Asian countries. 3. What are the opportunities and challenges for financial institutions? The rapid expansion of China’s ODI provides

ANALYSIS: one belt, one road opportunities and challenges for the financial sector. The financial sector ranks No. 2 in terms of China’s accumulative ODI, rising 16% yoy ytd in 2015. A wide variety of financial institutions in both developed and emerging markets – including banking, insurance, and investment management companies – are common targets for ODI, with M&A being the dominant type of investment. This is not surprising as, lacking international networks, Chinese financial institutions want to follow their corporate and retail clients overseas. Exports decreased 1.48% yoy, in line with the 1.9% contraction in total exports (RMB-denominated); OBOR imports contracted 21% yoy, much more than the 8.2% yoy fall in imports as a whole. China’s trade with countries on the Belt and Road are expected to reach a third of total trade value in the next decade as new trade and economic networks take shape. A variety of financial services, including M&A, trade finance, FX business, are cross-border funding and expanding quickly to meet China’s overseas investment demand and the related trade flows. Conclusion It is well known that infrastructure is the key physical component of the Belt and Road initiative, in addition to trade, investment and financial connections. Whilst China has invested heavily in infrastructure in the past few years, investment in manufacturing, especially equipment manufacturing, has accelerated in the past two years. This reflects Beijing’s efforts to promote international cooperation with regards to industrial production and equipment manufacturing. The idea is to upgrade the domestic manufacturing industry by internationalising it. This is all part of the evolution of China’s ODI. It started with mining and energy and moved on to manufacturing as China becomes deeply integrated into global supply chains as it upgrades its domestic industrial base. M&A is also part of this evolution. Highprofile M&A deals by private sector companies this year have made the headlines. Non-SOE enterprises now account for 65% of total ODI (for the first nine months of this year), according to the Ministry of Commerce. Another trend to watch is the growing role multilateral financial institutions will play in funding infrastructure ODI flows to New Silk Road area moderated in 2016

Source: Ministry of commerce, CEIC and HSBC

China’s ODI to the New Silk Road region started with a relatively low base of around US$0.2b in 2006.

projects along the New Silk Road. Whilst China’s policy banks have long played a supporting role, the commercial banks need to grab a bigger slice of the pie as Chinese enterprises expand overseas. Moving from resources to technology and brands China’s Overseas Direct Investment (ODI) exceeded Foreign Direct Investment (FDI) for the first time last year. China also overtook Japan to become the second largest provider of ODI flows in the world. This trend is partly being by the implementation of the One Belt, One Road initiative, also known as the New Silk Road strategy. According to the Ministry of Commerce, China’s investment in the New Silk Road region grew by 38.6% yoy in 2015, which is more than twice as much as the aggregate growth of China’s ODI. Whilst there is no official data on ODI in the New Silk Road region before 2014, we have come up our own estimates by adding together the ODI flows of all the 63 countries included in the region. In this way, we can trace the New Silk Road ODI flow back to 2003. China’s ODI to the New Silk Road region started with a relatively low base of around US$0.2b in 2006. After the financial crisis, as China’s ODI became more diversified, investment in the New Silk Road region (mostly developing countries) picked up quickly. In 2015, ODI flowing into the New Silk Road area surged to US$18.9b, accounting for 13% of overall ODI. Europe and the US are now the favourite ODI destinations as Chinese companies seek to invest in technology and brands. In 2015, China’s ODI to Europe and the US increased by 17.3% and 7.1% yoy, respectively. Within Europe, the UK, France and Germany are the top three countries. In the UK, there were 22 M&A deals recorded last year, including: Deep sea equipment (Zhuzhou China South Rail acquired Specialist Machine Developments-SMD, a British maritime engineering firm); New energy (China Communications Construction Group acquired Swansea Power, a British energy firm); Cars and car components (Geely’s acquisition of the London Taxi Company); Consumer goods (C. Banner’s acquisition of British toy store Hamleys). Another trend to watch is the growing role multilateral financial institutions will play in funding infrastructure projects along the New Silk Road. Whilst China’s policy banks have long played a supporting role, the commercial banks need to grab a bigger slice of the pie as Chinese enterprises expand overseas. We believe that financial innovation can help them achieve that goal. From resources to technology Alongside the pace of growth, the focus of China’s ODI has also changed. During the past 10 years, mining’s share of overall ODI has fallen from over 40% to less than 10%. By contrast, the share of high-end sectors such as commercial service, IT, and science and technology has improved significantly. For example, IT, science and technology investment increased from 1.5% to 7.0%. In absolute value terms, whilst overall ODI increased by HONG KONG BUSINESS | JANUARY 2017 41

ANALYSIS: one belt, one road 7x over the past 10 years, investment in IT, science and technology combined rose by over 30x during the same period. This trend is also visible at the company level. In recent years, there’s been a new wave of M&A activity aimed at improving the technological intensity of products. Based on data from the Global Investment Tracker provided by the Heritage Foundation, we summarise the amount of M&A in the technology sectors. This covers IT and medical equipment and its share of overall outbound M&A initiated by Chinese firms. It shows that growth in the absolute value of technology investment has been robust in recent years. In the first half of 2016, total M&A in the technology sectors exceeded the amount in full year 2015. The share of the technology sector in overall M&A also increased from 5.8% in full year 2015 to 13.5% in 1H 2016. In addition, officials from the Ministry of Commerce confirmed that in the first three quarters of 2016, the total amount of M&A deals (in value terms) in IT and manufacturing has surpassed that of mining and energy. The EU is an attractive market for Chinese investors seeking more advanced technologies. Although the EU’s share of total China’s ODI was only 3.7% in 2015, the region accounted for 17% of China’s scientific researchrelated outbound investment. Much of the activity centre on Germany. Kai Lucks, the president of German Federal M&A Association, estimated that the total amount of M&A deals initiated by Chinese firms in Germany in 2016 will be 10x in value terms as much as in 2015. In the first half of 2016, Chinese firms initiated seven M&A deals in Germany. Although different sectors were involved, they all had a clear purpose – acquiring new technology. In addition to directly acquiring new technology from more developed countries, some leading Chinese firms have started to establish their own research centres overseas. According to the Financial Times, between January and September 2016, nine Chinese firms opened overseas R&D centres with an investment value up to US$224m. The telecom giant Huawei already has 16 R&D institutes and 36 joint innovation centres around the world. Baidu, the huge Chinese Internet company, also owns two overseas research labs. Investment in the Belt and Road region has shown a similar trend. Although data on the distribution of outward investment within the Belt and Road region is not yet available, we can still get a rough idea by looking at the geographical changes. In 2015, the five countries that attracted the most ODI from China were Singapore, Russia, Indonesia, the UAE and Turkey. Together, they accounted for 89% of China’s total ODI in the Belt and Road region, with Singapore alone taking up more than half. Back in 2005, Russia received the biggest share (31%) in this region, followed by Kazakhstan, Malaysia, Mongolia and Yemen. This shift in investment in the last decade mirrors the change in focus in China’s outward investment – from resources to technology and services. For instance, 47% of China’s investment in Russia, the primary destination 42 HONG KONG BUSINESS | JANUARY 2017

in 2005, was in the mining sector. By contrast, China’s investment in Singapore, the current biggest investment destination, mostly went into financial services, manufacturing, wholesale and retail services. High-value brands: another driver for China’s ODI In addition to advanced technology, high-value brands are another driving force behind’s China’s recent outbound investment, especially in the service sector. Some Chinese technology brands gain more recognition from overseas consumers and generate more revenue from the international market as a result of cross-border M&A. For example, in early 2014, Lenovo and ZTE were generating over half of their revenue from outside China. Lenovo made quite a few overseas purchases in the past decade, from the PC business in IBM to the German computer firm Medion AG. Similarly, ZTE also expanded rapidly overseas, such as the purchase of Cell C, the third-largest wireless operator in South Africa. Rather than developing their own brands by investing heavily in marketing, these companies see acquiring an established one as being a more efficient way to expand. Finance, real estate, entertainment and tourism The service sector now contributes 50% of China’s GDP, so cross-border M&A holds the key to developing a modern services industry. Service ODI has increased at an average 20% in the past three years. High valueadded finance, real estate, entertainment, and tourism accounted for 25% of all cross-border M&A deals in 2015 and 2016 ytd, according to the global investment tracker. Top deals in value terms so far this year are Tencent’s US$8.6b bid for an 84% share of Finland Supercell’s and Anbang’s US$6.5b investment in Blackstone. Sports and cultural industry the new favourite Chinese firms are also aggressively buying stakes in famous sports names. Domestic policy measures are promoting the development of the sports industry. Recent deals include: Suning acquired a 69% stake in Italian football club Inter Milan for EUR280m (US$310m

What are they buying?

ANALYSIS: one belt, one road ODI exceeded FDI in 2015

Service sector ODI: strong expansion in high-end financial and real estate outflows

Source: CEIC, HSBC

Source: CEIC, HSBC

equivalent) in June; Dalian Wanda bought 20% of Atletico Madrid and a 100% stake in the World Triathlon Corporation and its Ironman brand; Shanghai’s China Media Capital Holdings (CMC), jointly invested by Alibaba, Tencent and Suzhou Oriza Holdings, invested US$400m in City Football Group in April 2016. City Football Group is the Abu Dhabi-based company that owns Manchester City, the top English Premier League team. Climbing up the value chain The HNA group is a good example of this trend. The HNA group is the parent company of Hainan Airlines, famous for its overseas expansion in the past few years. HNA owns the fourth largest airline in China, the No. 2 online travel agency, and also runs the country’s biggest aviation leasing business. In the past two years, HNA has spent about US$23.8b in cross-border acquisitions in order to extend its value chain and strengthen its aviation core business, by buying international airlines such as Virgin Australia (36.6%) and also seeking upstream technology (25.2%) and downstream commercial real estate (38.3%) for higher-value added businesses (the numbers in the bracket refers to percentage of HNA’s ODI for each specific sector). By region, 62.6% of HNA’s ODI goes to the US and 35% to Europe. It bought the world’s No. 1 airport luggage handler, Swissport International, in July 2015, supported by a state bank, China Construction Bank, which is the main financial supporter behind HNA’s international expansion. In order to address market concerns about high leverage and lack of synergies between group businesses, in the past few years, the HNA group has closed down and sold off unprofitable and non-core businesses whilst deleveraging its balance sheet. The group is now a Fortune 500 company, holding total assets of RMB600b with revenues of RMB190b in 2015. Its debt to earnings ratio dropped from 17% in 2012 to 12% in 2015. Its most recent international bid is for a 25% stake in the Hilton Hotel chain for US$6.5b, made in October. What next? The outlook for the rest of 2016 as we move into 2017 is a little cloudy. Although overall ODI growth remains strong, investment in New Silk Road countries has been moderating in recent months – in the first three quarters

ODI fell 7.6% yoy, compared with positive growth of 66.2% yoy in the same period in 2015. One explanation is that global uncertainties are on the rise (e.g. Brexit), so risk-off sentiment means that new investment is more likely to flow into developed rather than emerging markets. Moreover, the base effect from 2015 is quite high, which may also partially explain the low growth rate. That said, we still see many positive developments supporting future ODI flows in the region. There are a substantial number of new projects being negotiated or announced, which will be translated into stable flow of future outward investment. The China Development Bank lists more than 900 projects linked to the New Silk Road, with an aggregate investment value of US$800b. Table 3 summarises some of the latest deals announced. As expected, most are concentrated in infrastructure. In addition, multiple China-Europe railway lines, such as Guangzhou-Europe, Shenzhen-Hamburg, ChengduMoscow and Qinghai-Antwerp have been put into operation in 2016. So far, there are 29 China-Europe railways starting in 17 Chinese cities. This should help to increase the region’s future trade and investment flows. Finally, more financing support is on the way. Two government-led financial institutions – the Silk Road Fund and the Asian Infrastructure Investment Bank (AIIB) – are now fully operational. So far, the AIIB has provided financing support to six infrastructure projects in Asia, with total loan value reaching US$829m. In most cases, the AIIB is working with other leading global financial agencies to make the loans available. Meanwhile, the Silk Road Fund has originated three investment projects in 2015 and 2016. The fund tends to use a combination of equity and debt investments to provide support in four key areas – infrastructure, energy, industrial and financial co-operation. In addition, other domestic policy banks and commercial banks are also encouraged to participate in the Belt and Road initiatives. In conclusion, with the global economy showing signs of recovery, more projects are reaching the implementation stage, cross-border connections are becoming more sophisticated, and financing support is gradually strengthening. We expect China’s investment in the New Silk Road region to grow at a stable pace in the next couple of years. An excerpt from “On the New Silk Road V” by HSBC Global Research HONG KONG BUSINESS | JANUARY 2017 43


eric mayer

Genuine startups and entrepreneurs being turned away by HK banks


ong Kong has strongly built a reputation as a world class business center: not only is it one of the largest financial center in the world, but it is also the jurisdiction where most foreign investments going to mainland China originate from, as well where most mainland Chinese investments going to the rest of the world are structured. In this context where Hong Kong has built a strong reputation as a business friendly territory, a surprising problem potentially causing havoc to its economy has arisen:banks are refusing to open bank accounts to both local startup companies as well as to genuine foreign investors, thus preventing genuine international business to be carried out in and via the territory which is the gateway to mainland China. Such refusals have been so important in numbers that the Hong Kong Monetary Authority (“HKMA”) itself has decided to step in to prevent Hong Kong’s economy and its strong reputation being hurt, and to strike a balance between, on the one hand, the fight against money laundering and, on the other hand, the right for genuine businesses to open bank accounts in town to simply carry out their business plans. With the legitimate objective to ensure Hong Kong remains a successful international financial center, the Anti Money Laundering and Counter Terrorist Financing Ordinance (“AML Ordinance”) was enacted in 2012. Under the AMLCTF Ordinance, institutions haveto improve their due diligence process as they have an obligation amongst other things to identity their customers, to verify their identity before establishing a business relationshipor before carrying out for a customer any occasional transaction superior to a specific amount, and to repeat this process whenever they suspect that a customer or a customer’s account is involved in money laundering or terrorist financing. Authorised financial institutions have a legal duty to continuously monitor their business relationship with all customers. As a direct consequence of the heavy workload generated by the obligation to comply with the AMLCTF Ordinance, banks in Hong Kong recruited massively thousands of staff to reinforce considerably compliance departments. The implementation of new practices by banks in Hong Kong to ensure compliance with the AMLCTF Ordinance has been very strict, and it can be easily said that Hong Kong’s fight against money laundering has been very successful. However the business community, including twenty nine chambers of commerce established in the territory, have raisedearlier this year a justified concern: banks in Hong Kong have been applying compliance guidelines more strict that what is required under the AMLCTFOrdinance, leading to genuine businesses being unable to open bank accounts in the city. The Hong Kong Monetary Authority(“HKMA”) reacted strongly to such concern by issuing on 8 September 2016 a Circular (the


Eric Mayer Managing Partner Thomas, Mayer & Associes

“Circular”) setting forth guiding principles to be followed by banks which should “adopt a risk-based approach (RBA) and refrain from adopting practices that would result in financial exclusion, particularly in respect of the need for bona fide businesses to have access to basic banking services”. Mr. Norman Chan, the chief executive of the Hong Kong Monetary Authority has made official the necessity for banks to stop implementing a “one-size-fits-all” approach, considering this approach inappropriate and pointing out that a zero failure regime would not exist. The behavior of banks according to the AML Ordinance has to be proportionate and must not result on an undue burden on the customer. Three following specific guiding principles were set forth in the Circular: • Transparency: banks should clearly set out information and documents requirements needed for customer due diligence. Basic information should be downloadable by customer. • Reasonableness: all due diligence process and documentation requirements should be relevant and pragmatic with respect to customer’s background and circumstances. Requirements should not be similar when facing a multinational company, a startup or a foreign investor. • Efficiency: HKMA encourages all retail banks to have appropriate arrangements in place to facilitate customer’s initiation of the account opening process. Unfortunately, banks have not followed yet in practice HKMA’s guidelines and continue to damage Hong Kong’s reputation by denying genuine entrepreneurs access to bank accounts. It is difficult to assess the impact this unresolved problem may have in the local economy, but it is now worrying local qualified staff in search of business opportunities.


tim hamlett

Judicial review: a hasty pudding tim hamlett Former Editor of Sunday Standard and Associate Professor of Journalism


he law’s delay is one of the “whips and scorns of time” identified by Hamlet (no relation) in the immortal soliloquy which starts “to be or not to be”. Lawyers frequently quote the maxim “justice delayed is justice denied”, which oddly enough does not come from a judge; it comes from the 19th century prime minister William Gladstone. Lawyers cringe at the memory of the Lord Chancellor who started a summing up with the phrase “Having been worried about this will for ten years…” So we all agree. Doing it slowly is a Bad Thing. Less obviously doing it in a tearing hurry is a Bad Thing as well. It is a recipe for mistakes. This brings me to Thomas Au J’s decision in the oathtaking case, which illustrates the point rather well. We are enjoined on the highest authority (the late Lord Denning) to be kind in comments on judges, because they cannot reply. More, the judge can only adjudicate on the matters put before him. If the parties to the hearing have only very little notice, as they did in this case, then there is limited time for research or thought. Arguments which could have been put may not be. It seems that one of the points put to Mr Au, as I thought it would be, was that the courts have traditionally not had jurisdiction over the internal workings of the legislature. This was ascribed, wrongly in my opinion, to parliamentary sovereignty. Mr Au countered it with the equally erroneous assertion that Legco was not sovereign in our constitution, but the Basic Law was. Therefore it was appropriate for the courts to intervene if Legco violated said law. Who is sovereign? This is nonsense on several levels. Let us clear up first of all who is now sovereign. Sovereignty cannot reside in a law. It resides in a person or institution. Sovereignty consists of the right to make laws and decisions. It may be shared or limited. Clearly in Hong Kong at the moment sovereignty resides in the Standing Committee of the National People’s Congress, which approves senior appointments, controls the armed forces, and can – through “interpretations” – change the law. One country, two systems is a promise that this sovereignty will be limited to certain matters, and exclude others which in the Basic Law are stated to be for Hong Kong institutions to decide “on their own”. But like other sovereign institutions the Standing Committee has one limitation on its power: it cannot bind its successors. So if a promise made in 1996 is broken in 2016 there is nothing we can do about it. This is not a comfortable position. But if judges are going to describe it they should describe it accurately. Now we come to the question of parliamentary sovereignty. Nowadays this means the sovereignty of an elected legislature. But the idea that the courts should not intervene in the internal matters of the legislature goes back to long before anyone 46 HONG KONG BUSINESS | JANUARY 2017

thought of an elected legislature in those terms. The King in Parliament It makes its first formal appearance in the Bill of Rights of 1689 as “the freedom of speech and debates or proceedings in Parliament ought not to be impeached or questioned in any court.” By the time Blackstone wrote his Commentaries on the Laws of England in the 1760s this was a commonplace: “whatever matter arises concerning either House of Parliament ought to be examined, discussed and adjudged in that House to which it relates, and not elsewhere.” This was not an expression of parliamentary sovereignty because when people talked of parliament and sovereignty they did not just mean the House of Commons, or indeed the House of Commons and the House of Lords. The sovereign was the King. As late as 1885 the great constitutional historian Dicey wrote that “Parliament means, in the mouth of a lawyer (though the word has often a different sense in conversation) The King, the House of Lords, and the House of Commons: these three bodies acting together may be aptly described as the ‘King in Parliament’, and constitute Parliament.” The purpose of excluding the jurisdiction of the courts from the House of Commons was not to express sovereignty, but to limit it. The system in the 18th century was that the King was sovereign, subject to limits and the rights of the Houses to represent the lords and commons. To preserve this system it was necessary to exclude the jurisdiction of the courts, because they were the King’s courts. and proper for the courts to adjudicate where the Basic Law is alleged to be infringed.

Justice delayed is justice denied



HK heading back to the ‘60s


uring several days whilst I was waist-deep in the pre-removal sorting of household junk, the rectification of Hong Kong continued in all its classic Leninist subtlety. Three stories summarise the gloomy outlook. The government appears to be seriously planning to purge as many radical oath-distorting Legislative Council members as it can. Officials are being suspiciously blatant, even leaking details of the number of lawyers involved. So this could be their idea of managing expectations – a show to frighten the remaining pan-democrat monkeys after the killing of two or three localist chickens, or simply to impress the overseers from Beijing. If the government really does sweep eight or a dozen lawmakers out of office, it is steering Hong Kong towards potentially deep trouble. Many assume that the government aims to use an even-less-representative legislature to rubber-stamp Article 23 national security laws into being. But this is missing the point – Beijing already can and will kidnap and abduct people off Hong Kong’s streets to protect “national security”. The big picture is a significant decline in the already weak roles of the legislature and the election system (and possibly the courts). And of course, that diminishes the government’s already laughable legitimacy. Hong Kong’s style and method of rule could end up more “colonial” in terms of intolerant, top-down control than at any time since the late 1960s. Meanwhile, the Chinese Communist Party’s most cunning, scheming, profound micro-managing United Front brains have contrived an ingenious method to consolidate the Hong Kong government’s power base at this difficult time – give traditional moderate pandemocrats the right to cross the border and visit what is supposed to be their own country anyway. Delighted and flattered, the mainstream pan-dems and public opinion will obediently line up to kowtow to Beijing and reject the evil separatists. By way of icing on the cake, the ageing idealists will enjoy many trips to the mainland, where they will learn the truth about the wonders and benefits of the Communist one-party system. Yup. Lastly, the latest gossip insists that Beijing has told Financial Secretary John Tsang to forget about being Chief Executive. If Tsang showed signs of original policy vision, we might lament this as a lost chance for Hong Kong to reform its distorted and crony-ridden economic structure. As it is, we can only mourn the fact that the affable bureaucrat would not have embraced ever-more oppression to crush Hong Kong’s pluralistic


spirit. That, in a second term for CY Leung, is the default scenario — as is greater discord and resistance. HK government overcomes greatest quandary The Hong Kong government plans new legislation and regulation to clamp down on ‘forced shopping’ and other abuses of inbound tour groups. For years, tourist agency scumbag-lowlifes working on commission have been ripping off down-market mainland tourists by trapping them in stores, bullying them to buy overpriced garbage, abandoning them on the streets and other desperate measures up to and including the death of a hapless visitor. The mainlanders concerned were gullible, signing up to improbably cheap packages. And few right-thinking Hongkongers cared greatly that the city’s reputation was being damaged – the fewer tourists the better. But still – why did the government take so long to act? After all, Hong Kong officials would have us believe that mainland tourists are the Most Important LifeForm in the Solar System, to whom all mere riffraff residents must bow. Furthermore, the intimidation and exploitation of these visitors made headlines over the border-boundary. To 1.3b Glorious Motherland Compatriots, Hong Kong’s treatment of tourists is another example of the city’s treachery, on a par with the Umbrella Movement or voting for localists. We can suspect that the Hong Kong government found itself in its greatest ever quandary on this issue.

by hemlock Email:

Hong Kong Business (December 2016 - January 2017)  
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