Hong Kong Business (June - July 2017) by Charlton Media Group

Display to 31 July 2017 HK$40

2017

$ALARY SURVEY

• Will you get a pay hike this year? • Check out how much you should be paid

WHy ARE SOME FIRMS LEAvING CENTRAL? IS HONG KONG’S ECONOMIC GROWTH JUST A BLIP? WILL yOU BE REPLACED By A ROBOT? WHy vENTURE CAPITAL IS LOSING STEAM

MICA(P) 244/07/2011 KDM No: PPS1645/3/2008

RANKING MBA PROGRAMMES

HONG KONG

BUSINESS

FROM THE EDITOR

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

Welcome to Hong Kong Business. Our annual Salary Survey reveals that directors for treasury and accounting in the financial services sector can expect the highest increases of up to 10%, from $1.2m in 2016 to $1.32m this year. On the other hand, plenty of departments under operations can expect stagnant salary bases this year. . We also talked to analysts on Hong Kong’s economic status. When the economy beat growth expectations in the first quarter of 2017, it was tempting to think that the territory had found its footing. But analysts were quick to shoot down such hopes of a strong, sustained recovery this year. Hong Kong’s expansion is widely expected to be constrained in the coming quarters by still-soaring property prices at home and a slowdown in mainland China — and this is despite the bright outlook on electronics exports led by consumer electronics, wearables, and virtual reality gear.

Publisher & EDITOR-IN-CHIEF Tim Charlton associate publisher Louis Shek production EDITORs Karen Mesina & Roxanne Uy graphic artist Elizabeth Indoy

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Meanwhile, our annual Venture Capital briefing reveals that tech remains very popular with investors, as reports estimate that Hong Kong investments in fintech amounted to $165m last year, from $125m in 2015. Find out which deals defined Hong Kong’s Venture Capital scene in 2016. Enjoy this issue!

editorial@hongkongbusiness.hk

Tim Charlton ERRATUM

Hong Kong Business erred in the April-May 2017 issue when we released our largest hotel rankings for 2017. We placed Mr Stephen Yuen as Panda Hotel’s CEO. Mr Bernard Rodrigues is the current CEO of Panda Hotel Hong Kong. PriNting Gear Printing Limited Flat B, 3/F, Derrick Ind. Bldg., 49-51 Wong Chuk Hang Rd., Hong Kong.

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HONG KONG BUSINESS | JULY 2017

CONTENTS

COVER STORY Analysts predict dismal pay raises in Hong Kong this year

FIRST 06 It’s boom time for SMEs as economy flourishes

07 Rage against the machine 08 Tighter lending for property developers

REGULAR

Ranking MBA providers challenged with digital tech programmes

analysis The current status of Asia’s young and old

OPINION

20 Economy Watch 22 Financial Insight 32 Legal Briefing 34 Marketing Briefing

46 Tim Hamlett: Collapsing buildings have legal consequences — or maybe not

48 Hemlock: Hong Kong named world’s freest economy again

10 Why some companies are starting to bid Central good bye

12 Regulating the self-storage wars

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 | JULY 2017 262 Des Voeux Road Central, Hong Kong

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HOTEL & TOURISM

HR & EDUCATION

Wharf Group invests $7.8b to remake What the deferment of $32b Kai Tak iconic landmark into a flagship hotel Sports Park means for Hong Kong

Hong Kongers waste time in setting up virtual meetings: survey

The Murray is a contemporary urban chic hotel, but it is not just any other hotel. Duncan Palmer, managing director of The Murray, Hong Kong, shares that the hotel was designed by modernist architect Ronald Phillips in the sixties.

Almost 30% spend 11-15 minutes struggling with virtual meetings through technology. Hong Kong workers waste massive amounts of time and energy just setting up virtual meetings according to a survey by ShoreTel.

FINANCIAL SERVICES

Government to implement revised tax policies They include widening the marginal salary tax bands to $45,000. Secretary for Financial Services & the Treasury Prof KC Chan welcomed the Legislative Councilâ&#x20AC;&#x2122;s passage of the Inland Revenue Bill 2017. It enables the Inland Revenue Department to implement the tax policy proposals.

RETAIL

HONG KONG BUSINESS | JULY 2017

Long-delayed and debated plans for the $32b Kai Tak Sports Park reflect a poor track record of PPP implementation. With poor public perception of PPPs and few fiscal pressures, BMI Research believes that it will continue to face challenges.

HR & EDUCATION

Expat pay packages in Hong Kong drop to a five-year low A typical expat package for Middle Managers is around $2m. Expat pay packages have fallen to a five-year low but are still the fourth highest in the Asia Pacific region after Japan, mainland China, and India. This was one of the findings of the latest MyExpatriate Market Pay survey by ECA International.

RESIDENTIAL PROPERTY

Hong Kong tightens stamp duty exemption for permanent residents Buyers with more than one residential property will be affected. Under the new arrangement, buyers with no other Hong Kong properties who purchase a residential property under a single instrument can enjoy the exemption and pay the lower ad valorem stamp duty rates at Scale 2.

The all-new E-Class. Masterpiece of Intelligence. 5

HONG KONG BUSINESS | JULY 2017

FIRST says that Hong Kong’s 4.3% Q1 GDP growth is the highest rate since the Q2 2011 and far exceeding market expectations of 3.7% and the previous quarter’s growth rate of 3.2%. Lau is slightly positive on Hong Kong’s economic figures for the rest of the year as numbers picked up early this year, despite headwinds that keep on pummeling the market. “Private consumption growth rose from 3.6% in the Q4 2016 last year to a sixquarter high of 3.7%, whilst growth in building and construction jumped from 7.5% in Q4 2016 to 9.6% in the first quarter this year, the fastest pace since the second quarter of 2015,” it says.

millennials FOR THE financial sector

Love them or hate them, millennials are joining the growing workforce, and they are here to stay. But given the opportunity to choose between an array of industries to offer their skillsets, millennials find the financial services industry an easy left swipe. According to an independent research commissioned by Robert Half, 61% of Hong Kong chief financial officers in the financial services industry anticipate Gen Y professionals to be the most challenging generation to recruit in the next year. But all hope is not lost, as financial firms adopt a multipronged approach to pave the hiring road for the Millennials. Hunting for millennials Sourcing millennial candidates about the new hiring practices that their company adopted for the last two years to increase their pile of millennial CVs, almost two thirds (61%) of financial services CFOs say they have partnered with universities to source millennial candidates. Almost half (44%) are recruiting millennial candidates from overseas markets and 43% have increased their use of social networking sites as a recruitment method. According to Adam Johnston, managing director at Robert Half Hong Kong, aside from incentives being one of the most appealing factors to a career, the desire for greater work-life balance is also becoming a priority. This is why some financial institutions started to shy away from the traditional work hours and started to offer flexible working arrangements. Aside from this, 41% of millennial financial services candidates also responded that fast-tracked career paths and tailored career paths can also earn their right swipe. “Millennials also tend to be forward-looking, so providing clear opportunities for career advancement and professional development can hold just as much appeal as an annual bonus for many Gen Y candidates,” concludes Johnston. 6

HONG KONG BUSINESS | JULY 2017

Less risk of business failures

It’s boom time for SMEs as economy flourishes

ong Kong’s SMEs are putting away their “Business is closed” signs if the impressive improvement in Standard Chartered’s SME index is anything to go by. The index has risen to a sevenquarter high of 45.6 in Q2-2017. The 3.7-point jump is also the largest QoQ improvement since the index was launched in Q3-2012, thanks to a stellar GDP growth rate of 4.3%. According to Standard Chartered’s senior economist Kelvin Lau, only 19% of the SMEs say the economy is in the midst of a downturn, with another 66% seeing lingering instability, at worst. “Among these two categories, only 10% see a risk of shutting down their businesses if the economic challenges persist for a year. This is an improvement from 14% six months ago and 20% at the same time last year. 61% see no concern over business viability, versus 25% and 47% in Q2 and Q42016, respectively,” he says. The prospect of business failure seems to be receding as both external and domestic economic figures are finally picking up. Hang Seng Bank

The prospect of business failure seems to be receding as both external and domestic economic figures are finally picking up.

Getting better Hang Seng Bank’s acting chief economist Thomas Shik adds, “In the next few quarters, the rate of GDP growth may slow due to a high base the year before, but the underlying picture is that the overall fundamentals are better in 2017 than in 2016.” He forecasts that with the first quarter showing higher consumption and investment and increased trade flows, full-year GDP growth could hit 2.8% — a figure near the upper end of the government’s estimate of 2% to 3%. “In the next few quarters, the rate of GDP growth may slow due to a high base the year before, but the underlying picture is that the overall fundamentals are better in 2017 than in 2016.” SMEs are still cautious in fully embracing the optimism as they may not be enough to deliver a multiyear economic boom. Standard Chartered’s Lau notes, “It is however indisputable that improved sentiment is already giving economic growth a much-needed short-term boost.”

Improved external sentiment spilling over to Hong Kong

Source: Hong Kong Productivity Council, Standard Chartered Research

FIRST

Will automation snatch jobs away from workers?

Rage against the machine

hen struggled with an aging labour force and manpower shortage, it turned to robotics for help. The company deployed technologies such as a strap-on device that helps workers lift heavy loads and an automated arm that helps workers manoeuvre heavy equipment as if they are weightless. Robotics and automation reduce human error, boost productivity, and speed up processes, but some Hong Kong employees are not happy about it. A study conducted by Randstad

found out that 20% or one in five Hong Kong employees held the highest fears of losing their jobs to automation. Along with Singapore which turned out to have 19% of its employees fearing that automation will snatch their jobs away, these two countries were the most frazzled compared to Malaysian employees who held a much more relaxed sentiment with only 13% of employees having fears around automation. Despite the looming threat of

One in ten said they would rather move to a different company than retrain.

bots to their employment status, the prospect of losing their jobs did not dampen their hopes as over six in 10 employees said they would be happy to undergo retraining sessions into a new role provided that their salaries would remain the same or would be higher than before. Singaporean and Malaysian counterparts were the most open to retraining with 72% and 70% stating so respectively, whereas only 52% of Hong Kongers shared the same sentiment. Meanwhile, one in 10 said they would rather move to a different company than retrain. Whilst maintaining a positive outlook on automation with nearly half or 45% of employees in Singapore, Hong Kong, and Malaysia, the same study also reveals that 39% of Hong Kong employees are pessimistic about automation’s capacity to make their jobs better. Michael Smith, managing director, Randstad Singapore, Hong Kong, and Malaysia notes, “The results further highlight the need for organisations to listen to employees’ sentiments.”

Automation leaves one in five concerned about job security

Source: Randstad

The Chartist: Are Hong Kong Hotels on the road to recovery? Tourists are returning to Hong Kong as shown in the figures for the first four months of the year. There were around 19.02 million visitors, representing a 3.2% YoY growth. According to DBS Group Research, the recovery of overnight visitor arrivals aided hotel occupancy on its upward trajectory, reaching 88% in 4M17. Medium tariff hotels witnessed the largest improvement in occupancy. Occupancy at medium tariff hotels stood at 89%, up 7ppt. In general, medium tariff hotels fared better than their high tariff counterparts, and they have been able to raise the room rates since 3Q16, partly aided by the low comparison base. Room rates have increased by 1.9%, 2.9%, and 4.9% in 3Q16, 4Q16, and 4M17, respectively. On the other hand, room rates for high tariff A hotels dropped by 5.5% in 4M17.

Room rate - HK medium tariff hotels

Source: CEIC

Occupancy - HK medium tariff hotels

Source: CEIC

HONG KONG BUSINESS | JULY 2017

FIRST Pay hikes can’t buy employees

For two in three employees, a pay raise would not be enough to let them stay in a company. According to a Hudson survey, 90% of employees expect their base salary to increase at their next review with their manager. However, this would not stop the majority of these workers from finding new opportunities. The research revealed that most professionals are keeping an eye on the market in case there are better opportunities elsewhere. Only 17% of employees surveyed said they were planning to stay in their current job, whilst 30% were actively looking for new responsibilities. Fifty-three percent said they were open to new opportunities. If their salary was increased, 34% of employees said they will stay with their organisation for another 12 months. More than half (52%) were unsure, and 14% won’t stay anymore. Looking for options Hudson regional director for Hong Kong Siddharth Suhas said professionals want to keep their options open, specifically those who have niche skillsets or technical skills, as they know they are in high demand. “Professionals are managing their digital profiles and maintaining relationships with specialist recruiters so they can be alerted to good opportunities when they come up — even if they’re happy in their current organisation or indeed even if they receive a pay rise,” he said. When asked what outcome they expect from their next pay review with their manager, 39% of employees expected their base salary to increase by 0-5% whilst 30% are hoping for a 6-10% pay hike. Around 20% of these professionals expected an increase of more than 10%. Only 11% expected their pay to remain the same and 1% expected a decrease. The survey also found out that 93% of employers are either increasing headcount or replacing staff who left.

HONG KONG BUSINESS | JULY 2017

Tighter lending for property developers

midst the HKMA’s moves to cool down the heated property market, banks were quick to raise their mortgages and cut finance caps. Caught between the changing climate are Hong Kong’s homebuilders, but if this Land and Market Review from real estate and investment management firm JLL is anything to go by, they are still thriving. They retaliate by adjusting their baits, offering agreeable financing schemes, big home loans and high loan-to-value mortgages, and new property buyers are getting caught, hook, line, and sinker. Raising mortgage rates China developers now account for 62% of the total market capitalisation of property development companies listed on the HKEx, and are amongst the target of HKMA’s move to tighten lending policies on property developers as it seeks to contain risks in the city’s real estate market. Four of Hong Kong’s biggest banks responded by raising their mortgages. HSBC, Standard Chartered, Bank of China (Hong Kong), and Hang Seng Bank announced raising their Hibor-linked mortgage rates by 10 basis points to 1.4% above the city’s interbank offered rate. They are also cutting the

Hang Seng Bank raised mortgage rates

This measure will hit the small to mediumsized developers whilst the local firms will only suffer minimal backlash.

finance caps at 40% of site value and 80% of construction cost, with the overall limit reduced to 50% of the expected value of completed properties. Deeper cuts are to be considered for developers with weaker finances. However, Lau Chun-kong, international director and head of valuation and advisory services in Asia at JLL, believes that this measure will hit the small to medium-sized developers whilst the local heavyweights will only suffer minimal backlash. “We believe the government’s latest measures will limit the gearing ratio and increase the cost of land acquisition and property developments. Local heavyweights, which usually carry lower gearing ratios, will be minimally affected. However, the appetite of small to medium-sized developers with less robust cash positions could potentially be reduced,” he notes. He adds that developers are quick to adjust by offering financial schemes that support first time buyers, which accounted for about 90% of overall transactions.

Mobile App Watch

Gini simplifies personal finance management A new app called Gini is helping consumers manage their finances more efficiently. “People’s wallets are swollen with credit cards and loyalty cards, and their phones are full of different apps to manage these. This is making many people feel unhappy and stressed,” says Victor Lang, founder and COO of the app Gini. “We will be able to provide personalised and targeted discounts or rewards to users based on existing transactions and spending patterns,” notes Lang. “After the user accepts the discount in the app, they will be able to use one of their linked credit cards at a merchant, and the rewards will automatically be deposited into one of their accounts.” Gini chose data aggregation specialist eWise to safely and securely aggregate the app’s sensitive financial data and implement artificial intelligence-based categorisation technology to analyse users’ individual spending patterns.

Gini founders

FIRST

Why some companies are starting to bid Central good bye

hen companies demanding office space started fleeing from the city center and flocking to properties in Wong Chuk Hang and Hung Hom, analysts knew then that this is going to be a noticeable trend moving forward. Demand for office space doubled in these areas, right after the new MTR lines were completed, according to CBRE. Leasing momentum in Hong Kong’s retail and industrial sectors also registered an uptick, supported by improving retail sales. “The completion of new MTR lines has spurred relocation demand. We have already seen some tenants from core locations moving to Wong Chuk Hang and Hung Hom. Looking forward, we expect more occupiers to decentralise as rents become more affordable and the travel time is much shorter now,” says Marcos Chan, head of research at CBRE Hong Kong, Southern China, and Taiwan. Moody’s forecasts stable profit flow for property companies it rates as a steady growth of office rental income will compensate for a weakening in retail mall rental rates. According to Stephanie Lau, assistant vice president and analyst at Moody’s, “With the office segment, the moderate positive rental reversions for the

Grade A Office net absorption

sector will continue, registering 5-10% over the next 12 to 18 months for Grade A office space. This situation is driven by continued solid leasing demand, and limited supply in Hong Kong’s central business district, where most of the properties in Moody’s-rated companies’ portfolios are located.” A stellar performance Tarrant Parsons, economist at the Royal Institution of Chartered Surveyors (RICS), echoes this sentiment. Capital value forecasts for the next year remain extremely nuanced across all property segments, but office space is expected to outperform other segments in the prime and secondary markets. “Office rents are expected to continue to outperform over the next twelve months, with prime space expected to see rents increase 5.6%. Respondents in a survey RICS held are anticipating a 3.6% and 2.5% pullback in prime and secondary retail rents, respectively,” he adds. Apart from Wong Chuk Hang and Hong Hum, leasing activity was also buzzing in Tsim Sha Tsui and Kowloon East, albeit around transactions less than 10,000 sq ft — a medical service provider leasing 9,400 sq ft at Miramar Tower to accommodate expansion and AIA expanding in-house by

Source: CBRE Research, Q1 2017

8,700 sq ft at The Gateway Tower 6, according to JLL. “Rents in Kowloon East edged 0.2% MoM lower with the submarket’s vacancy still at a relatively high level (9.7%) at the end of April. Despite Hong Kong East continuing to benefit from tenant decentralisation, the lack of availability and firm rental levels pushed some tenants to consider more costeffective options in Kowloon East. Century Distribution Systems, for example, leased 8,700 sq ft at Millennium City 5, relocating from offices in North Point,” says Denis Ma, head of research at JLL Hong Kong. Yasas Wickramasinghe, senior analyst at Colliers Hong Kong, also urges tenants to consider decentralised options or workplace strategy solutions to maximise the efficiency of office space. In the first quarter of this year, AXA leased 44,000 sq ft (4,090 sq m) at Vertical Sq in Wong Chuk Hang.

OFFICE WATCH

Campfire offers more than just workspace For Campfire Collaborative Spaces, an office is more than just a place to work in. It should provide flexible and multifunctional creative spacing for professionals in any industry, community formed by connecting workers across office locations, and benefits including discounted deals. The business was co-founded by Wang Tse, Albert Fung, and Brian Fung, who all saw the potential of coworking in urban cities like Hong Kong. After 10 years in private wealth, Albert linked up with Tse and Brian — real estate entrepreneurs — to utilise their natural synergy in coming up with a coworking business that investors can get behind. Tse shares that they have recently finished their first seed round of funding, securing US$6m in investments from various experienced angel investors from the real estate industry. “Besides having convenient locations and sleek furnishings, what sets Campfire apart is that its centres are industryfocussed,” says Tse. 10

HONG KONG BUSINESS | JULY 2017

Multifunctional working area

Sleek furnishings

Creative spaces

Industry-focussed centres

FIRST NUMBERS

WOMEN REJOINING THE WORKFORCE

Is tighter regulation scaring investors away?

Regulating the self-storage wars

hen the Self-Storage Association of Asia suggested that passageways in storage facilities be wider after the fatal fire a year ago at Ngau Tau Kok, operators and investors started getting the jitters. This suggestion was made after a fatal fire incident at one of the mini-storage facilities last year which sparked debate on how facilities must be regulated. If passageways are made wider, doing so may lower storage operators’ rental income and therefore reduce the value of these facilities. According to JLL, the average capital value of industrial buildings housing self storage is about $3,200 per sq ft. Average yield ranges between 3.8% (based on sales transactions involving industrial buildings that house self-storage) and 3.9% (based on valuation).

Source: Robert Walters

HONG KONG BUSINESS | JULY 2017

An attractive investment target CBRE says that there was an estimated 3.4 million sq ft of selfstorage demand in 2015 making the sector an attractive investment target. It notes that investors who have injected assets in self-storage have crept up to 7.9% in 2016. “In practice, the Hong Kong government enforces laws regarding land use quite loosely, resulting in many selfstorage facilities operating illegally in buildings on ‘industrial only’ land,” says Dr Megan Walters, head

of research for Asia Pacific at JLL. “Tighter government regulation is a major risk factor for investors in selfstorage facilities. Less rentable floor area as a percentage of gross floor area as well as bigger capital outlays on fire safety will lower investment returns, and cause operators to reassess their options.” Dr Henry Chin, head of research, Asia Pacific at CBRE, adds that the demand drivers for self-storage are increasing as nano flats start mushrooming and as the manufacturing sector goes under pressure, dampening demand for If passageways industrial factories. “This represents a are made wider, potential market entry and expansion opportunity for self-storage players. doing so may However, while we see significant lower storage opportunities for growth there are operators’ also areas of caution around this rental income sector. There is a lack of awareness and therefore, of self-storage in the region and the reduce the shorter lease terms and land tenure in value of these Asia also present a challenge,” he says. facilities. Occupancy levels (%)

Source: Ipsos/SSAA 20107 Survey, FEDESSA European Self Storage Annual Survey

startups

Check out Hong Kong’s first ever Uber-like app for bicycles

his 24/7 bike rental service aims to have 300,000 bikes spread across the globe by the end of 2017. Gobee.bike is Hong Kong’s first bicycle-sharing service. It makes use of a smartphone application, currently available for Android devices, supported by a cloud-based system and GPS that allows users to locate, rent, and drop off bicycles anytime. “Gobee.bike is different from many other bicycle-sharing systems across the globe as it is station-free. Users can drop off their bicycles at any legal public space without the restriction

of fixed bicycle stations,” says founder Raphael Cohen. He says 1,000 smart bicycles are currently available in the New Territories area – Sha Tin, Tai Po, and Ma On Shan, specifically. Cohen is a serial entrepreneur who grew up in Paris. He has lived in Hong Kong for six years, and also lived before in Toronto, Shanghai, Singapore and Ho Chi Minh City. He says he started the business because in Hong Kong, storing bicycles at home and renting one are both inconvenient. “There were also no 24/7 bike-rental services, so many locals were not able to ride bicycles after work hours,” Cohen notes. “But with Gobee. bike, people can locate our bicycles that are near them through our app, rent them at any time of the day, and drop off the bicycles at their destinations.” They plan to have 20,000 bicycles in Hong Kong by September and cover most areas in Hong Kong by the end of the year,” shares Cohen. “We are also launching the iOS version of our app very soon. We also plan to expand into other Asian cities, European countries, and North America with 300,000 bikes by December 2017.”

Agent Bong is the app for domestic needs

When nations like Hong Kong and Singapore boast of its high productivity rates, it begs the question — who gets left behind to do the little chores at home? With the goal of empowering its subscribers with more freedom, Agent Bong provides a platform to create a home care network of housekeepers, nannies and caregivers for the elderly. Sam Ng, co-founder and CEO, says the Agent Bong app hits two birds with one stone — it provides jobs for the unemployed and it caters to the needs of the ever growing populace with high demanding jobs. “Firstly, our proprietary system simplifies and automates service

HONG KONG BUSINESS | JULY 2017

coordination,” says Ng on what makes Agent Bong unique. “Secondly, we have our own procedures to professionally train and verify all of our registered service providers, that is, helpers and caregivers.” Having decided to quit his job in 2014, Ng went on to start various ventures. After rounds of failures and pitches, one of their companies, Agent Bong, successfully entered into one of the well known incubation programmes in Hong Kong, ran by Hong Kong Science and Technology Park. Agent Bong quickly expanded the operations to Singapore six months after, supported by their Singaporean partner, Aili. Ng reveals they are preparing for the next round of funding to speed up business development in both Hong Kong and Singapore. “At the same time, we are exploring to expand into other APAC regions, such as Japan, which are suffering from an ageing population,” he says.

WeMine helps companies harness the power of WeChat

WeMine is a marketing technology firm specialising in developing an intelligent marketing suite on WeChat. “Our vision is to build experience-centric social media marketing tools that make a marketer’s life easier,” says Lala Tse, founding strategist and communications manager, WeMine. Tse notes that most WeChat service providers offer template solutions that are neither catered to international business’ operations nor compatible with customised development with other functions in the future. On the other hand, she says WeMine offers a flexible management platform that allows sustainable scalability for the company to add and expand their functions on WeChat. “A lot of third-party WeChat management platforms are available now in China. But very few to none of them are catered to the management personnels of international brands,” adds Tse.. “WeMine has the technical know-how of breaking the cross-border barriers for international brands by having strategic partners in China, offices in both Hong Kong and Shenzhen, and solid experience in working in process improvement in MNCs from the team.” Other features Unlike the native WeChat management platform, Tse shares that WeMine is capable of designing and developing universally friendly platform that focusses on MNCs’ management users, helping them through the so-called “wall of China” to reach the billions. The company traces back its beginnings in late 2014, when the business had a soft launch under their sister brand’s name, RollAngle, an outsourced all-around marketing consultancy based in Hong Kong. Tse shares that upon receiving tremendous demand on setting up a WeChat official account, WeMine was officially spun off from RollAngle and established its own entity in June 2016. Now it serves to provide marketing technology support and SaaS management platform to devise WeChat marketing campaigns in just a click. “WeChat active users rocketed from 195 million to 350 million in 2013,” says Tse. “We noticed the lucrative business opportunities behind the platform, and spent months digging into the details and understanding the platform inside out.” The company observed that despite WeChat’s attractiveness to merchants as a channel to build digital presence in China, the logistics and the rapidly changing policies of both the Chinese government and the platform set high barriers to the majority of international merchants to devise effective and responsive strategies.

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economy watch

It will be hard for the economy to keep its growth momentum

Why Hong Kong will run out of growth momentum Hong Kong’s economic figures at the start of the year looked too good to be true, but experts knew better than to believe the rosy numbers.

hen the Hong Kong economy beat growth expectations in the first quarter of 2017 (1Q17), it was tempting to think that the territory had found its footing. But analysts were quick to shoot down such hopes of a strong, sustained recovery this year. Hong Kong’s expansion is widely expected to be constrained in the coming quarters by still-soaring property prices at home and a slowdown in mainland China — and this is despite the bright outlook on electronics exports led by consumer electronics, wearables, and virtual reality gear. “Whilst high frequency indicators showed that the recovery in Hong Kong’s economy continued in 1Q17, this pickup is unlikely to be sustained for the rest of 2017,” says Chua Han Teng, senior analyst, Asia country risk and financial markets, BMI Research. “Hong Kong continues to be significantly vulnerable to the structural economic slowdown in the mainland Chinese economy due to their increasingly tight linkages in areas such as trade and tourism. A pullback in aggressive fiscal spending 16

HONG KONG BUSINESS | JULY 2017

Hong Kong continues to be significantly vulnerable to the structural economic slowdown in the mainland Chinese economy.

and a slightly tighter monetary policy will act as a drag on the mainland Chinese economy, and consequently, Hong Kong,” he explains. This gloomy forecast came after Hong Kong posted strong gross domestic product (GDP) growth in 1Q17 driven by mainland Chinarelated retail spending — which improved over months and recorded the first yearly growth since early 2015 — and re-exports. Alicia Garcia Herrero, chief economist, corporate & investment banking for Asia Pacific at Natixis, says the better-than-expected performance in 1Q17 was a cyclical spike. For robust growth to persist, Market outlook for 2017

Source: HKTDC Survey

the territory must first need to tackle daunting issues, foremost of which is cooling the property market. “All in all, Hong Kong’s rebound in external trade and retail sales are mainly cyclical,” she says. “With structural issues lingering, it will be hard for the HK economy to keep its growth momentum beyond a few quarters. Moody’s recent sovereign downgrade may even make it more short-lived,” she adds, pointing to Moody’s lowering of Hong Kong’s rating in late May following a downgrade on China’s sovereign rating. “1Q17 data was set on the back of favourable base, but this statistical benefit will wane in the coming quarters, thus explaining our slower GDP forecasts for the remaining quarters of the year,” says Adrienne Lui, analyst at Citi. In explaining the stronger-than-expected 1Q17, she says domestic demand was more robust than high frequency data were suggesting. Both private and government consumption had risen on the back of fiscal spending and a recovery in jobs and wages. Property market intervention Still, a more convincing rebound will require a solution to Hong Kong’s soaring property prices. Residential prices further accelerated by 17.8% YoY in March, which has prompted the Hong Kong Monetary Authority to push out more tightening measures. Herrero says taming the property market remains an uphill battle for the government, but such prudential measures, together with reduced outflows from China, should keep the property market in check for the rest of 2017. Meanwhile, Chua says Hong Kong’s extremely overvalued property

economy watch Contribution to GDP growth (% YoY)

Sources: Bloomberg, Natixis

sector is likely to face headwinds from rising interest rates and efforts by the government to increase housing supply and curb speculative activity. Should the new property measures turn out to be effective, the Hong Kong economy should start chugging along faster in the coming years. The electronics sector is also seen as a potential catalyst for an exports-led recovery. In 1Q17, exports continued to rebound as the global economy improved, and electronics industry players are particularly optimistic, projecting a spike in demand for smartwatches and audio-visual wares. Electronics market elation “With the electronics market remaining optimistic, audio-visual and digital entertainment items will be the next products worth noting,” says Hong Kong Trade Development Council (HKTDC) Research after it surveyed electronics industry players at the recent Hong Kong Electronics Fair 2017. “Consumer electronics continue to be the items with the best growth prospects in 2017. Smartwatches remain the products with the greatest potential among wearable electronic items. The market of smart home applications also appears promising for the next two years,” it adds. The majority or around 89% of the buyers and 87% of the exhibitors surveyed expected sales to rise or remain unchanged in 2017, revealing a very positive demand outlook. More than half or 52% of the respondents expect an increase in sales in 2017. “The survey findings reveal that market confidence on the global electronics market outlook for the

Property Indicators, Residential price index (% YoY)

Sources: Bloomberg, Natixis

rest of 2017 remains positive,” says HKTDC Research. Mobile phone demand Industry sentiment remains positive towards overseas markets, with the traditional markets of North America and Western Europe, and the emerging markets of the Chinese mainland and countries included in the ASEAN shown to be the most promising. More than half or 54% of respondents rated North America as having the best growth prospect for sales of electronics in 2017 among traditional markets, followed by Western Europe (51%), Japan (41%), Taiwan (40%) and Korea (40%). Among emerging markets, the Chinese mainland was rated as the most promising market for 2017, with 57% of respondents considering it as “promising” or “very promising,” followed by ASEAN countries (41%), the Middle East (30%), and India (30%). “On the whole, the Chinese mainland, North America, and Western Europe remain the top three overseas markets with the best growth prospects for sales of electronics in 2017,” says HKTDC Research. A third of the more than 500 respondents were based in Hong Kong. Nearly half of the buyers counted mainland China as their major selling or export market, whilst around half of the exhibitors pointed to Western Europe and North America as their major selling or export markets. Hong Kong will also need to be attuned to the shifting demands in electronics. Demand for mobile phones is showing signs of decline, and industry players are

The electronics sector is also seen as a potential catalyst for an exports-led recovery.

looking at electronic accessories and digital entertainment as the new dominant drivers of growth. Consumer electronics surge Electronic/electrical accessories remain the products with the best growth prospects in 2017, according to 20% of respondents in the HKTDC Research survey, followed by audiovisual products (12%), digital imaging (9%), home appliances (9%), and electronic gaming (9%). Virtual/augmented reality ears or headsets have the greatest market potential in the next two years among all audio-visual and digital entertainment items, with nearly half or 46% of respondents agreeing to this assessment. Other promising items for electronics manufacturers and exporters in the next couple of years include audio-visual items with connectivity to the smart home (20%), ultra-high-definition TVs with “smart TV” features (16%), wearable action cameras (16%), internet TV boxes (15%), and video game consoles (14%). “The growth prospects of mobile devices and related accessories continue to be viewed as less promising compared to previous survey results,” says HKTDC, after only 6% of respondents rated them with the highest sales growth prospects of 2017. “After rapid growth in recent years, demand for mobile devices has now levelled off. The great majority of respondents suggested that consumers’ appetites are turning to new generation audio-visual and digital entertainment items,” it adds. HONG KONG BUSINESS | JULY 2017

FINANCIAL INSIGHT: venture capital

Deal #1: Fintech company WeLab raised $160m in investments in its 2016 Series B round

Deal #2: Hong Kong travel technology startup Tink Labs raised $125m in a new round of funding from FIH Mobile

Why Hong Kong’s venture capital is losing steam despite market potential The past twelve months have been a mixed year for Hong Kong’s Venture Capital (VC) landscape, with the sector weathering an environment characterised by uncertainty in the global markets.

n 2017, experts are in agreement that Hong Kong, in terms of venture capital (VC), has a huge potential not only to remain as a startup and VC hub for Asia and the Pacific, but also to find its niche in the VC industry to reach the summit. The past year has been as divisive and polarising as in any other year for global political economy over the past decade, with mounting uncertainties in the global capital market and the world economy with major shifts in political economy following the results of the United States elections as well as the landmark Brexit vote that will see the United Kingdom eventually cut ties from the Eurozone. These developments have, more or less, affected the outlook and confidence of investors as well as the trajectory of global market activities among different economies in the coming months. Although many economies in Asia and the Pacific remained strong and gaining momentum, there are spaces for improvement. An example of this is the venture capital landscape of Hong Kong, a traditional financial and commercial hub in the Asia-Pacific region. Whilst the special administrative region has been blessed with geography — given its proximity with mainland China and its relentless march towards economic growth — and culture, with its British 18

HONG KONG BUSINESS | JULY 2017

Hong Kong’s VC landscape potential, despite growth over the past years, remains unfulfilled to its maximum.

colonial past giving the territory a global outlook with a competitive command of the English language, Hong Kong’s VC landscape potential, despite growth over the past years, remains unfulfilled to its maximum. In this article, we’ll look at how Hong Kong’s venture capital scene looked like last year compared to other traditional VC hubs in Asia and the Pacific, the challenges startups continue to face in Hong Kong, what needs to be done to address these challenges, and how the sector will ride out the rest of 2017 through the eyes of experts and industry practitioners. Regional overview Asia-focused venture capital fundraising slightly declined to $13.3b — after peaking midway at $14.5b — from the $14.1b raised in 2015 given the uncertainties on interest rates on top of instances of market volatility surrounding the Asia-Pacific region’s venture capital landscape last year. Cumulatively, over 300 funds have been raised in the region since the start of 2014, according to data from Preqin. China have the lion’s share of venture capital funds in the region over the past three years. VC funds focusing on China accounted for the majority of cumulative capital

FINANCIAL INSIGHT: venture capital from 2014 with 138 China-focused funds raising $27.6b worth in total capital. India-focused funds, meanwhile, accounted for 49 raising $4.9b over the same period. In general, outlook is on the positive side. Hong Kong will continue to be a financial hub for Asia and the Pacific and, to some extent, for global startups looking to find the light of day in penetrating the mainland Chinese market or mainland startups looking to expand in the global market. “In particular, China has played a central role in the growth of the Asian market, and is now beginning to rival Silicon Valley as a hub of venture capital activity,” says Felice Egidio, head of venture capital products at Preqin in a statement. “However, venture capital fund managers across Asia will have to prove that they can provide the strong returns that investors demand in order to ensure that the current boom in fundraising can translate into a long-term ascendancy.” But outlook for Hong Kong’s VC landscape may turn out to be average if persisting challenges remain unresolved. Hong Kong’s VC landscape Despite the rather inconsistent regional and global economic performance and outlook, Hong Kong remains a vital financial and commercial hub for Asia and the Pacific. This is true in the venture capital scene in the special administrative region — which can be considered as a microcosm of the rest of the region. “The Hong Kong venture capital scene continues to be strong when compared with the rest of Asia,” says Padraig Walsh, Partner at Bird & Bird Asia Pacific. “Many venture capitalists in Hong Kong also look to invest in other jurisdictions in Asia and do not limit themselves to the Hong Kong market, meaning that Hong Kong is still very much a hub for pan-Asian VC investment.” Alex Norman, an Associate for Bird & Bird Asia Pacific, added that in terms of hot sectors, technology verticals remain very popular with investors, particularly in financial technology (fintech). For instance, reports estimate that Hong Kong investments in fintech amounted to $165m last year, from the $125m in 2015. “Hong Kong’s proximity to manufacturing bases in mainland China has also made it a popular destination for companies in the [Internet of Things] space,” he says. Hong Kong has also been firming up its position as a lucrative destination and permanent base for various startups to thrive and prosper. Walsh notes that there’s Where the investors are investing?

Sources: Oddup.com, StartUpshk.com

Felice Egidio

Walsh Padraig

Alex Norman

Patrick Yip

a “burgeoning ecosystem of startup accelerators” and incubators, among others, which are increasingly calling Hong Kong home. According to reports, the number of startups in the special administrative region grew by about 245 to 1,926 last year. “The startup community has been developing space last year, with a number of coworking spaces, accelerators, and incubators opening their doors,” adds Walsh. “A relatively new development is that corporatebacked accelerators have also begun to spring up in Hong Kong, including accelerators backed by Accenture, AIA, Swire, and DBS.” 2016 VC deals Some of the more successful venture capital deals last year are in fintech. In the spring edition of this year’s journal of the Hong Kong Venture Capital and Private Equity Association, HKVCA mentioned about WeLab, a fintech company founded in 2013, which raised $160m in investments in its 2016 Series B round. Another deal is Hong Kong travel technology startup Tink Labs raising $125m in a new round of funding from FIH Mobile Limited to scale its idea of a designated mobile device provided with the hotel room for guests to use for free, eliminating the need to buy local SIM cards to makes calls, send messages, and use data. Other deals include AM730 Startup Fund’s investment of over HK$10m in the P2P diamond exchange; Horizons Ventures’, a private investment arm of business magnate and currently Hong Kong’s richest man Li KaShing, $15m funding of German insurance technology startup Friendsurance; and Credit China Fintech Holdings, a Hong Kong-based firm, entering into a $30m agreement and investment in BitFury, a leading bitcoin and private blockchain infrastructure provider and transaction processing company. Walsh notes that these deals show how “investors continue to have a strong appetite for technology-based companies. Technology verticals, such as fintech and traveltech, are booming.” Hong Kong will also continue to attract startups who is in the early stage of product development given the territory’s proximity to low-cost electronics and other hardware factories — particularly on the Internet of Things — in mainland China. Stumbling blocks Despite these rosy outlooks and positive statistics, Hong Kong’s startup ecosystem and venture capital landscape remain hounded with stumbling blocks along the way. “Hong Kong’s venture capital scene hasn’t demonstrated the consistent long term returns and success stories to justify the attention of big money,” said Peter Guy, a former international banker and a columnist for the South China Morning Post (SCMP), in an article. “Most of the so-called venture capital outfits in Hong Kong are really private equity only interested in China. There is insufficient angel and seed funding in this city.” Walsh, meanwhile, suggested that some of the tumbling blocks are structural, with the limited available capital based on the specific needs of certain startups, HONG KONG BUSINESS | JULY 2017

FINANCIAL INSIGHT: Venture capitaL despite Hong Kong being home to some of the wealthiest names in the Asia-Pacific region. Another is standard of living. “There are structural issues in the VC scene that need to be addressed,” he says. “There is a relatively limited pool of VC funds targeting Series A market. Unlike in some other jurisdictions, regulation prohibits equity crowdfunding. Seed and pre-Seed investment relies predominantly on angel investors. Follow on funding or new Series A investment is challenging.” To be fair, Walsh suggested that in terms of some of the intricacies of venture capital, Hong Kong is still learning. “Hong Kong is still finding its feet in terms of Series A, Seed, and pre-Seed investments, as traditionally conservative institutional investors have focused on later stage companies who are revenue positive and who are further in their life cycle.” Some hindrances also appear to verge on the policy level. Carman Chan, founder of venture capital fund Click Ventures, in an interview with SCMP, shared that whilst some other VC hubs across the globe are introducing more open policies, Hong Kong, in a way, remains “restrictive” and “regulated”. Patrick Yip, national M&A deader for Deloitte China, says that the “VC industry is generally more about new startup companies especially in the tech[nology] sector and I don’t see Hong Kong as an attractive destination for VC investors compared to places such as Shenzhen or Singapore.” Helping hand Whilst these challenges remain a stumbling block for Hong Kong’s venture capital landscape to realise its full potential, experts recognise some of the existing and anticipated policy efforts that the Hong Kong government have been implementing and will implement. Walsh says that there have been “very interesting development at a governmental level, as the Hong Kong government strengthens its support for startups, evidenced by the Hong Kong Chief Executive announcing a HK$2b fund to boost investment in innovation and technology.” He adds that there is also talk of possible deregulation in relation to equity crowdfunding for early stage companies, “although little appears to be changing from a regulatory perspective at present.” “It remains to be seen if Hong Kong will have a ‘big bang’ moment with regards to funding for early stage companies, and, without some form of deregulation, we expect that growth in the startup sector is likely to be steady rather than explosive over the next 12 months,” says Walsh, pertaining to some of the other initiatives to support startups by the Hong Kong government including the Innovation and Technology Venture Fund. In terms of this year’s outlook, Deloitte China’s Yip notes growth for Hong Kong’s venture capital landscape may just remain average. In terms of sector, Walsh remains firm that the technology sector — particularly fintech — will continue to be popular, given the “encouragement by the Hong Kong government through its various initiatives.” Another factor of this is the proximity of Hong Kong to factories and other facilities in mainland China, particularly in Shenzhen, considered as the ‘Silicon Valley’ of hardware. 20

HONG KONG BUSINESS | JULY 2017

Hong Kong is still finding its feet in terms of Series A, Seed, and pre-Seed investments, as traditionally conservative institutional investors have focussed on later stage companies.

Singapore view

Over half of 2017 deals were in tech Venture capital in Singapore has been robust in 2016 despite global uncertainties surrounding the sector, with fears that it would prompt investors, series funders, and even startups themselves to be more cautious, on top of other reasons. Valmiki Nair, senior associate at Dentons Rodyk & Davidson LLP, notes that the initial momentum for Singapore VCs last year slightly slowed down due to uncertainty over global markets and the lack of potential “next big disruptive idea” from startups, with only one or two startups doing the heavy lifting both in Singapore and the rest of the Southeast Asian region. “Many of the startups that had potential to become great had already managed to close relatively large rounds of fundraising and did not require further funding for expansion in the year,” he adds. “Startups based in Singapore have also been cautious about overspending to fund expansion efforts given the uncertainty over interest rates, market volatility, and changing politico-legal landscapes in nearby nations.” But Lisa Theng, managing partner at Colin NG & Partners LLP, says that numbers remain positive with VC investments in Singapore achieving historic figures with 100 deals with an aggregate value of $3.5b recorded in 2016, compared to the 81 deals valued at $2.2b for 2015. Experts are in agreement that technology remains the driver of venture capital growth in Singapore and, in large part, the region. According to a report by global valuation firm Duff and Phelps, the technology sector accounted for the majority of deal volume at 53% and deal value at 34%. Mega deals Sandra Seah, joint managing partner at Bird & Bird ATMD, however, notes that this strong performance in VC in Singapore was mainly due to the two “mega” deals last year that saw Chinese online giant Alibaba acquire Lazada, an e-commerce platform in Southeast Asia, for $1b as well as the $750m raised in ride-sharing/ride-hailing application Grab’s investment round of funding led by Japanese conglomerate Softbank.“The [Alibaba-Lazada] deal affirms the potential of Southeast Asia as an emerging market and may signal a tendency to fund mature businesses to secure larger returns,” says Seah, adding that “the deal also serves as a reminder to startups of the value of striking partnerships and scaling up beyond their home markets to attract VC interest” which is timely given the momentum towards the achievement of the ASEAN Economic Community.

Asia Pacific funds are sitting on an ample supply of dry powder, which has remained largely flat

Source: Preqin

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cover story

Sorry, no wage hike for you

Analysts predict dismal pay raises in Hong Kong this year Candidates are being urged to manage their high salary expectations.

irms in Hong Kong are scrambling to meet salary expectations this year as more candidates seek higher pay increments amidst a recovery from last yearâ&#x20AC;&#x2122;s bleak conditions. After being stuck in the doldrums, the city is slowly regaining strength with more jobs up for grabs. However, candidates cannot really expect much in the way of paychecks. Recruitment processes are taking much more time, as cost-wary employers seek highly qualified candidates who they can bargain salaries with. Job applicants need to account factors such as stable employment history, relevance of experience, and training, amongst others, before they come up with their desired salary range. Employers have also begun looking at longterm career progression as a major consideration before they take in new hires and offer more attractive figures. Analysts expect salary increments to be between 3-5% for internal moves and 15-20% for external moves. As industries push for increased digitalisation in their operations, professionals with skills in data analytics, mobile apps 22

HONG KONG BUSINESS | JULY 2017

Eddie Cheng

Michael Smith

Christine Wright

development, and IT security can command salary increases higher than the average. Meanwhile, contractors can expect even higher salary increments. In the world of big data, candidates who are able to show skills of transforming customer insights and data into business opportunities are deemed worthy of premium salary packages. Analysts at MichaelPage observe that companies are increasing investments in digital functions as well as rearranging their budgets to move in this direction. IT candidates can expect more opportunities and higher salary offers as this trend progresses amid talent shortages. Meanwhile, contractors who have desired skillsets can also expect even higher salary increments. All about the numbers The push for digitalisation across major sectors in Hong Kong has led to an unprecedented high demand for technology experts, which the current supply has not been able to meet in terms of numbers and quality. The city remains attractive to startups who wish to foray into mainland China, thus employers have been increasingly seeking

technology savvy individuals who are skilled in app development, social media, and marketing. Eddie Cheng, manager, IT, Morgan McKinley, says that demand for IT experts, particularly change management professionals, cyber security experts, and advance network and infrastructure specialists is not slowing down. The local market is not really lacking in talent, however, employers are looking at specific skill sets that most local IT experts do not yet have. In fact, a lot of international companies are willing to hire data scientists and data analytics talent from overseas either on a contractual or permanent agreement, if only to satisfy their needs. Best paying industries Robert Halfâ&#x20AC;&#x2122;s Salary Guide 2017 shows that the best paying industries for IT/technology professionals are private banking/wealth management, consultancies/software vendor, and insurance. At present, 73% of Hong Kong technology professionals feel that they are being paid fair wages in relation to their job roles and duties. Analysts at Robert Half reveal that several positions and departments across Hong Kongâ&#x20AC;&#x2122;s major sectors will be expecting more increases than others. Finance and accounting managers of small and mediumsized companies are set to receive an 11.1% increment this year, with a maximum of $720,000 this year from a maximum of $660,000. in 2016. Finance managers of small and medium-sized companies can also expect up to 8% in increases, with some receiving as much as $960,000. Robert Half reveals that finance and accounting employees would be willing to receive a lower salary in return for flexible working hours, option to work from home, medical benefits, increased holiday allowance, and accommodation benefits in that order. Nonetheless, Hong Kong CFOs agree that the most appealing factor to a career in financial services is still salary and bonus. In a survey, 56% of the CFOs forecast that salaries will grow, but only for top performers. Around 34% think that salaries will grow for all financial

cover story services professionals, and 10% predict that salaries will stay about the same for those working in the sector. Directors for treasury and accounting in the financial services sector can expect the highest increases of up to 10%, from $1.2m in 2016 to $1.32m this year. On the other hand, plenty of departments under operations can expect stagnant salary bases this year except for a few bright spots in positions such as VP for fund accounting and SVP for client services and marketing support, who are forecast to receive increases of 6.5% and 3.6%, respectively. Regardless of the industry, contractors in Hong Kong can expect above-market base salaries as the temporary candidate market continues to grow and remain strong this year. Wright says that global banks will continue to employ contractors to lead urgent projects and relieve the strain on permanent headcount. Analysts at Hays Asia have seen an increase in the number of employers providing more benefits to keep contractors motivated such as medical benefits and increasing annual leave entitlements, besides the above average pay. Managing expectations Michael Smith, managing director, Randstad Singapore, Hong Kong, and Malaysia, says that salary increases and bonuses this year will be highly dependent on the profession and industry. Randstad’s Workmonitor Research Report for Q416 revealed an average of 68% expected salary increases and 59% expected bonuses in Singapore and

Hong Kong, surpassing the global averages of 49% for salary raises and 53% for bonuses. Salaries in Hong Kong will be mostly stable this year, and employers will be looking for candidates who can manage their salary expectations and meet the company halfway. Christine Wright, managing director, Hays Asia says that the private banking sector in the city has prioritised tightening the risk culture. This is expected to generate demand for qualified candidates who may command higher salaries. However, economic uncertainty has plagued compliance and client on-boarding, hence, salary increases are expected to be less frequent than in the past years. “We have seen high demand for office professionals across most industries and sectors, particularly for executive assistants and senior secretaries. However, the focus for most organisations has been on replacement hiring rather than increasing total headcount. Salaries remain lacklustre as employers want more from the candidates they hire as we have seen increased hiring criteria around language and computer skills. Chinese language skills are required for most roles in financial services and this is likely to continue throughout the year,” Wright adds. Analysts at MichaelPage forecast that salary increases in Asia will remain modest in 2017. Half of the respondents indicate that the average pay hikes in their companies will be between 1% and 5%, and employers are looking at other employee engagement initiatives to keep their staff and motivate them as they progress in their careers.

CFOs’ forecast of the salaries of the financial services professionals in their company in 2017

COSTLIEST CITY FOR EXPATS Hong Kong is the Asia Pacific region’s most expensive location for expatriates and the second-most expensive on a global scale. This was one of the findings of the latest Cost of Living survey published by ECA International. To ensure that an employee’s spending power is maintained when they are sent on international assignment, a cost of living allowance is often provided as part of the pay package. This allowance will be affected by differences in prices as well as exchange rate movements between that employee’s home and host countries. Hong Kong is up one place from second position in the regional rankings. From a global perspective, it has climbed seven places to become the second-most expensive location for expatriates – its highest ever rankings on both fronts. Since 2011, Hong Kong has risen steadily in both the regional and global rankings. “Hong Kong has continued to get more expensive for expatriates. Over the past few years, the HK dollar has appreciated against most major currencies, owing to its peg to the US dollar, which has pushed up the price of goods and services relative to those in locations whose currencies have weakened against the greenback,” said Lee Quane, regional director– Asia, ECA International. “For companies who send staff into Hong Kong and provide cost of living allowances to protect their purchasing power, they will likely need to increase them to ensure that their employees’ buying power remains protected. ”ECA International has been conducting research into cost of living for over 45 years. It carries out two main surveys per year to help companies calculate cost of living allowances so that their employees’spending power is not compromised while on international assignment. The surveys compare a basket of like-for-like consumer goods and services commonly purchased by assignees in over 460 locations worldwide. Certain living costs, such as accommodation rental, utilities, car purchases and school fees are usually covered by separate allowances. Cost of living in other locations Tokyo has fallen by one place to second-most expensive location in Asia. All other ranked locations in Japan maintained their positions in the regional rankings. On a global scale, there has been some movement – other than Tokyo (retaining 7th position globally), all other ranked Japanese cities have fallen by four places, with Yokohama (16th), Nagoya (17th) and Osaka (18th). “Prices in Japan have remained stable over the past year. The yen, on the other hand, has weakened against most major currencies, contributing to the decline of Japanese cities in our rankings,” explained Quane. “This means that for many companies, the cost of maintaining their assignees’ purchasing power while posted here has fallen and international assignees based in Japan may see their cost of living allowances decrease.” Macau has climbed both the regional and global rankings this year, approaching the regional top ten and now making the global top 25. It ranks 11 th in Asia Pacific and 25 th in the world. Since 2012, it has risen by 17 places in the regional rankings – the third-highest climber in Asia Pacific over this period. “Furthermore, the strength of the currency owing to its peg to the strong Hong Kong dollar has also contributed to Macau becoming the second-most expensive location in the Pearl River Delta, overtaking Guangzhou and Shenzhen.”

Source: Independent survey commissioned by Robert Half among 100 CFOs in Hong Kong

HONG KONG BUSINESS | JULY 2017

salary survey 2017 Finance ROLE

EXPERIENCE

2017 SALARY (HKD’000)

2017 BONUS LOW (%)

2017 BONUS MEDIUM (%)

2017 BONUS HIGH (%)

Financial Control – Investment Banking Analyst

1 – 3 years

240 – 480

Associate/Assistant Vice President

3 – 6 years

500 – 750

Vice President

6 – 10 years

750 – 1,000

Senior Vice President/Director

10+ years

1,000 – 1,500

Country Chief Financial Officer

12+ years

1,500+

Regional Chief Financial Officer

15+ years

2,000+

Management Reporting/FP&A Analyst

1 – 3 years

240 – 500

Associate/Assistant Vice President

3 – 6 years

500 – 750

Vice President

6 – 10 years

800 – 1,200

Executive Director

10+ years

1,200 – 1,500

Managing Director/Head

15+ years

1,500+

Analyst

1 – 3 years

240 – 500

Associate/Assistant Vice President

3 – 6 years

500 – 750

Regulatory Finance

Vice President

6 – 10 years

800 – 1,200

Executive Director

10+ years

1,200 – 1,500

Managing Director/Head

15+ years

1,500+

1 – 3 years

300 – 500

Product Control Analyst Associate/Assistant Vice President

3 – 6 years

500 – 950

Vice President

6 – 10 years

950 – 1,300

Executive Director

10+ years

1,300 – 1,600

Managing Director/Head

15+ years

1,600

Valuations Analyst

1 – 3 years

300 – 500

Associate/Assistant Vice President

3 – 6 years

500 – 950

Vice President

6 – 10 years

950 – 1,300

Executive Director

10+ years

1,300 – 1,600

Managing Director/Head

15+ years

1,600

Analyst

1 – 3 years

300 – 600

Associate/Assistant Vice President

3 – 6 years

600 – 900

Tax

Vice President

6 – 10 years

900 – 1,300

Executive Director

10+ years

1,300 – 1,500

Managing Director/Head

15+ years

1,500+

1 – 3 years

300 – 600

Treasury Analyst Associate/Assistant Vice President

3 – 6 years

600 – 900

Vice President

6 – 10 years

900 – 1,300

Executive Director

10+ years

1,300 – 1,500

Managing Director/Head

15+ years

1,500+

HONG KONG BUSINESS | JULY 2017

salary survey 2017 Finance ROLE

EXPERIENCE 2017 SALARY (HKD’000) 2017 BONUS LOW(%) 2017 BONUS MEDIUM(%) 2017 BONUS HIGH(%)

Project Accounting Analyst Associate/Assistant Vice President Vice President Executive Director Head

1 – 3 years 3 – 6 years 6 – 10 years 10+ years 15+ years

200 – 450 450 –700 700 – 1,100 1,100 – 1,400 1,400+

0 5 5 5 5

15 15 15 15 20

25 30 30 50 50

5 5 5 5 5

10 10 10 15 15

25 30 30 50 50

Fund Accounting – Investment Management Analyst Associate/Assistant Manager Manager Senior Manager Director/Head

1 – 3 years 3 – 5 years 5 – 7 years 7 – 10 years 10+ years

Lawyer Private Practice Role Lawyers, International Law Firms1 Lawyers, Magic Circle Firms2

180 – 300 300 – 500 500 – 800 800 – 1,200 1,200+

SALARY RANGES (HKD’000) PLUS BONUS NEWLY 1 PQE 2 PQE 3 PQE 4 PQE 5 PQE 6 PQE QUALIFIED 720 – 1,020 840 – 1,032 936 – 1,248 936 – 1,248 1,020 – 1,440 1,044 – 1,440 1,080 – 1,500 960 – 984 1,008 – 1,128 1,068 – 1,200 1,344 – 1,404 1,188 –1,440 1,236 – 1,680 1,620 – 1900

The above table includes salary data collected from international law firms of varying sizes. The above table includes salary data collected from Magic Circle law firms.

1 2

Private Practice3 Role Senior Vice President/Director

SALARY RANGES (USD’000) PLUS BONUS 1ST YEAR (CLASS 2ND YEAR 3RD YEAR 4TH YEAR 5TH YEAR OF 2015) USD180 USD190 USD210 USD235 USD260

6TH YEAR

7TH YEAR

8TH YEAR

9TH YEAR

USD280

USD300

USD315

USD330+

The above table includes salary data collected from US law firms or US practices of international law firms where lawyers are paid on New York rates.

In-house Corporate4

SALARY RANGES (HKD’000) PLUS BONUS

Role

7 – 9 YEARS

10 – 15 YEARS

16 – 20 YEARS

Non Listed Companies (Non Transactional Role) 420 – 600

0 – 2 YEARS

576 – 720

3 – 4 YEARS

660 – 960

5 – 6 YEARS

720 – 1,200

1,000 – 1,500

1,200 – 1,560+

Non Listed Companies (Transactional Role)

480 – 660

576 – 780

660 – 1,020

960 – 1,320

1,200 – 1,560

1,300 – 1,680+

HK Listed Companies (Non Transactional Role)

540 – 780

600 – 1,000

720 – 1,200

960 – 1,380

1,200 – 1,680

1,320 – 1,800+

HK Listed Companies (Transactional Roles)

680 – 980

780 – 1,200

900 – 1,320

1,200 – 1,440

1,380 – 1,800+ 1,800 – 2,280+

Multinationals (Regional Coverage)

600 – 900

780 – 1,080

840 – 1,140

1,116 – 1,440

1,200 – 1,800+ 1,680 – 2,180+

Rates are not inclusive of General Counsels, for more detailed information, please contact us directly. Bonus is often discretionary within though we have observed most candidates receiving around 1 to 3 months depending on the role/organisation.

In-house Financial Services1 Role

SALARY RANGES (HKD’000) PLUS BONUS 0 – 2 YEARS

3 – 4 YEARS

5 – 6 YEARS

7 – 9 YEARS

10 – 14 YEARS

15+ YEARS

HEAD OF LEGAL

Insurance Houses

480 – 660

600 – 840

720 – 1,020

936 – 1,300

1,140 – 1,440

1,380 – 1,600

1,500+

Asset Management & Other Buy Side Houses

600 – 780

720 – 1,080

900 – 1,200

1,100 – 1,450

1,350 – 1,700

1,500 – 2,500

1,680+

Global Banks

720 – 900

840 – 1,200

1,020 – 1,300

1,140 – 1,440

1,320 – 1,620

1,560 – 2,300

1,800+

Local Banks

480 – 660

540 – 780

660 – 900

744 – 1,100

960 – 1,440

1,320+

1,600+

Chinese Investment Banks

540 – 660

660 – 1,000

720 – 1,200

960 – 1,380

1,020 – 1,500

1,300+

1,800 –2,200+

The above table includes salary data collected from international/investment banks, local banks, local and global insurance companies and buy side houses (such as fund/ private equity/security houses). Bonus is often discretionary within financial services though we have observed most candidates receiving at least 2 – 3 months. There may be variance when a lawyer is working in a buy side house or sitting with the business as a desk lawyer within an investment bank where bonus range tends to be higher on a case by case basis.

Regulatory Bodies Role Financial Regulators2

SALARY RANGES (HKD’000) PLUS BONUS 0 – 2 YEARS 3 – 4 YEARS 5 – 6 YEARS 480 – 720 720 – 960 840 – 1,080

7 – 9 YEARS 1,020 – 1,260

10 – 14YEARS 1,020 – 1,500

15+ YEARS 1,320 – 1,800+

Rates are not inclusive of Directors/Vice Presidents, for more detailed information, please contact us directly. Bonus is often discretionary/performance – based though we have observed most candidates receiving around 1 to 4 months depending on the role/organisation.

HONG KONG BUSINESS | JULY 2017

salary survey 2017 Consumer Products and FMCG ROLE

2017 SALARY (HKD’000)

MIDPOINT (HKD’000)

Brand & Product Development Brand Executive/Product Executive Assistant Brand Manager/Assistant Product Manager Brand Manager/Product Manager Senior Brand Manager/Senior Product Manager Research, Product Development and Planning Manager

192 – 264 276 – 348 348 – 540 500 – 720 450 – 900

228 312 444 610 675

216 – 336 384 – 700 216 – 336 384 – 800 1,000 – 1,500

276 542 276 592 1,250

180 – 320 360 – 700 1,000 – 1,200

250 530 1,100

Marketing Trade Marketing Executive Trade Marketing Manager Marketing Executive Marketing Manager Marketing Director Public Relations Public Relations Executive Public Relations Manager Public Relations Director Media/Entertainment ROLE

2017 SALARY (HKD’000)

MIDPOINT (HKD’000)

Event Management & Marketing Assistant Marketing Manager Circulation/Marketing Manager Marketing Manager Events Manager Circulation/Marketing Director

300 – 500 300 – 600 360 – 700 300 – 700 900 – 1,200

400 450 530 500 1,050

Professional Services ROLE

2017 SALARY (HKD’000)

MIDPOINT (HKD’000)

Marketing, Public Relations & Communications Marketing Executive Marketing Manager Marketing Director Research Manager Public Relations/Media Communications Manager Procurement ROLE Procurement Officer Senior Procurement Officer Assistant Procurement Manager Procurement Manager Senior Procurement Manager/ Regional Manager Director Regional Head Global Head Manufacturing & Production ROLE Material Planning and Control Supervisor Material Planning and Control Manager Production Manager Factory/Plant Manager General Manager Engineering ROLE Project Management Engineering (Manufacturing, Mechanical, Electrical and Electronic) 26

HONG KONG BUSINESS | JULY 2017

216 – 600 360 – 800 900 – 1,500 360 – 800 360 – 850

408 580 1,200 580 605

2017 SALARY (HKD’000) 140 – 180 168 – 330 340 – 480 420 – 780 600 – 840 780 – 1,000 1,000 – 1,500 1,800+

MIDPOINT (HKD’000) 160 249 410 600 720 890 1,250 –

2017 SALARY (HKD’000) 300 – 360 360 – 500 400 – 650 480 – 840 720 – 1,200

MIDPOINT (HKD’000) 330 430 525 660 960

2017 SALARY (HKD’000) 144 – 1,200 144 – 1,200

MIDPOINT (HKD’000) 672 672

salary survey 2017 Logistics/Warehousing/Distribution ROLE

2017 SALARY (HKD’000)

MIDPOINT (HKD’000)

Warehousing Warehouse Supervisor Assistant Warehouse Manager Warehouse Manager Warehouse Operations and Logistics Manager Regional Warehouse Operations and Logistics Manager Logistics Logistics Supervisor Assistant Logistics Manager Logistics Manager Senior Logistics Manager Director Vice President – Operations and Logistics

200 – 260 260 – 360 360 – 500 420 – 720 720 – 1,100

230 310 430 570 910

200 – 280 300 – 400 400 – 660 480 – 780 900 – 1,000 1,250 – 1,500

240 350 530 640 950 1375

Supply Chain ROLE Planner/Analyst Senior Planner/Senior Analyst Assistant Supply Chain/Planning Manager Supply Chain Manager Regional Supply Chain Manager (APAC) Supply Chain Director Head of Supply Chain

2017 SALARY (HKD’000) 140 – 320 300 – 360 330 – 450 480 – 600 600 – 840 780 – 1,000 1,200+

MIDPOINT (HKD’000) 230 330 390 540 720 890 -

Consultancy ROLE Property Officer Property Manager Project Engineer Project Manager Project Director Leasing Officer Leasing Manager Design Manager Facilities Officer Facilities Manager Facilities Director Valuations Manager Head of Valuations

2017 SALARY (HKD’000) 150 – 320 400 – 600 280 – 350 600 – 750 1,000 – 1,500 220 – 320 350 – 500 420 – 850 210 – 300 360 – 550 900 – 1,500 360 – 600 900 – 1,500

MIDPOINT (HKD’000) 235 500 315 675 1,250 270 425 635 255 455 1,200 480 1,200

Corporate Real Estate ROLE Building Services Engineer Technical Services Manager Facilities Officer Facilities Manager Project Manager Construction Project Director Head of Facilities Head of Engineering Head of Security Regional Head of Facilities Regional Head of Engineering Regional Head of Security Regional Head of Corporate Real Estate

2017 SALARY (HKD’000) 360 – 550 420 – 750 220 – 320 420 – 650 600 – 850 800 – 1,200 1,000 – 1,800 1,000 – 1,800 1,000 – 1,800 1,000 – 1,800 1,000 – 1,800 1,000 – 1,800 1,200 – 2,000

MIDPOINT (HKD’000) 455 585 270 535 725 1,000 1,400 1,400 1,400 1,400 1,400 1,400 1,600

HONG KONG BUSINESS | JULY 2017

RANKING: MBA

Hong Kong University of Science and Technology

MBA providers challenged with digital tech programmes Some are already offering programmes on fintech and big data.

hen the University of Hong Kong and Chinese University of Hong Kong recently checked on their alumni after graduation, they discovered that their former students’ paychecks ballooned by an average of 114% and 132% from pre-MBA salaries, compared to Singapore’s MBA graduates who obtained increases of up to 97% on their pre-MBA paychecks. These numbers are expected to increase in light of widespread digitalisation and innovation, as MBA students take on highly specialised programmes and acquire IT and digital credentials which are increasingly being demanded from junior and senior executives worldwide. Aside from frequent and rapid digital disruptions, the rise of China in recent years and the mainland’s foray into Hong Kong are also changing the city’s economic landscape, consequently transforming the MBA academe. Local and international MBA providers have continued to add China and Asia-focused electives to their curricula, thereby allowing 28

HONG KONG BUSINESS | JULY 2017

Local and international MBA providers have continued to add China and Asia-focused electives to their curricula, thereby allowing students to better contextualise their future careers.

students to better contextualise their future careers. “In today’s world, the biggest challenge to the MBA academe and in a wider context, our university is to cope with the unprecedented fast changing business world primarily driven by technology and other push factors. In Hong Kong, another big deal would be the rapid rise of China technology sector and the rapid ODI from China, which significantly affect Hong Kong,” says Lawrence Chan, administrative director for MBA and master programs, CUHK Business School. Digital is the way to go From a study stream in fashion, a highly-competitive case competition, to a fintech-dedicated course, Hong Kong’s MBA providers have fully embraced current trends in business and are stepping up to the challenge of dynamic educational innovation. This is reason why the city remains as a major hub for business students and educators, and top MBA providers from all over the region and the world. Over the last few years, Hong Kong’s executives rapidly adopted

digitalisation as the primary strategy in growing their business and setting a direction for their firm. MBA providers continue to ride on this trend and provide the appropriate programme specifications in line with what’s hot in the market. For instance, the Chinese University of Hong Kong (CUHK) launched a fintech bachelor programme, the first of its kind in Hong Kong, to meet the growing fintech space in the city. Students can expect state-ofthe-art course offerings within the programme, such as financial infrastructures, e-payment systems and cryptocurrency technologies, internet finance, and financial informatics. Chan adds that CUHK’s MBA programme also recently partnered with IBM to provide regular technology briefing and updates to students regarding technology trends such AI, blockchain, and cognitive business, among others. The rise of big data has also led to the adoption of business analytics, and the infusion of MBA programmes with business analytics courses. Big data and business analytics As a response to the business analytics market trend, PolyU is now offering a new subject focused on big data and business analytics. June Cheng, MBA programme director at PolyU says that this course aims to enable students to provide solutions to business problems through intelligence tools. The course also tackles pressing challenges in relation to business analytics, particularly ethical issues which may arise from the utilisation of private data. Despite recent economic setbacks, China continues to uphold its “build, build, build” mantra. With the ever-growing scope and scale of mainland companies, Hong Kong’s MBA graduates have deemed it beneficial to join Chinese companies, particularly technology-driven ones which are building names within and outside Asia. Chan

RANKING: MBA that their programme continues to grow in scale as it offers weekday and weekend modules and marketoriented and/or China and Asiafocused electives, thereby providing diversified value-added components to the programme. PolyU has also prioritised an international business standpoint by offering its own international business stream, which arms students with expertise in aspects related to international trade, such as sourcing, supply chain management, project management, investments, and international financial management. Cheng also shares PolyU’s business research stream, which allows students to focus on their research interests whilst being guided one-on-one by a strong faculty team. The University of Hong Kong

says that graduates of CUHK are given a profound understanding of Chinese business culture on top of the western educational setting, hence, they are well-equipped to take on the challenge of Chinese companies. “CUHK MBA has also provided entrepreneurship studies within MBA for more than five years, as now MBA students are expected to have entrepreneurial spirit. They are often asked to start a new venture, acquire new overseas subsidiaries, start new business units, among others, and also straight ahead to start up,” says Chan. Dynamic international education Hong Kong’s MBA providers have embarked on even more firsts for the MBA academe in the city. Cheng says that PolyU’s fashion stream for MBA — the first and only one of its kind — draws upon PolyU’s Institute of Textiles & Clothing to offer practical knowledge from omni-channel retailing to international fashion and textile design. This MBA is especially relevant in the age of fast fashion and the ubiquity of huge clothing brands around the world. Meanwhile, HKU MBA has recently strengthened its career development services in order to provide a sharper focus for career goals and directions among students. Sachin Tipnis, executive director of HKU’s MBA Programme, shares

Setting a solid foundation CUHK Business School is also set to launch a new Master in Management (MiM) programme this summer 2017, designed for young graduates with low work experience who wish to accelerate in their careers. According to Chan, this programme would be ideal for non-business graduates to set a solid foundation to start their career in a business role despite having a beginner-level background in work. It is also important for MBA graduates to understand the huge competition they have from other topnotch MBA providers around the world. With this in mind, the

Hong Kong’s MBA providers have embarked on even more firsts for the MBA academe in the city.

Hong Kong University of Science and Technology (HKUST) Business School launched the Global MBA challenge, which aims to be a platform for MBA students from around the world to compete and learn from each other. Sean Ferguson, board director, HKUST, says that the Global MBA challenge is an excellent opportunity for HKUST’s students to engage in cross-cultural exchange. “We aspire to attract talented students from around the globe so that we can all benefit from the interaction and being able to put together a truly international case competition,” says Yulia Adamskaya, co-chairperson, competition organising committee, HKUST. The recent Global MBA challenge was composed of three different rounds, including a short flash case, a strategy case, and a negotiation competition, all towards presenting viable solutions for strategic issues faced by the case companies — Sears Holdings Global Sourcing Ltd and ANZ Banking Group. HKUST won third place, Nanyang Technological University Business School won second place, and Tsinghua University School of Economics and Management brought home the gold. Other schools who took part in the challenge are NUS Business School, Singapore, SDA Bocconi School of Management, Italy, London Business School, UK, INSEAD, France, UCLA Anderson School of Management, USA, and Université Laval, Canada.

The Chinese University of Hong Kong

HONG KONG BUSINESS | JULY 2017

The Chinese University of Hong Kong

Columbia Business School, London Business School, HKU Business School

The Hong Kong Management Association

The University of Hong Kong

Hong Kong UST Business School

CUHK Executive MBA

CUHK MBA

EMBA-Global Asia

GlyndÅµr University, UK*

HKU MBA

HKUST MBA for Professionals (Part-time MBA)

HKUST MBA for Professionals Bi-weekly Part Time

HKUST Full-time MBA

Hong Kong UST EMBA for Chinese Executives

Kellogg-HKUST Executive MBA Program

270 3,043

University of IOWA Tippie College of Business

Hopkins Training & Education Group

International Academy of Management

The Hong Kong Management Association TOTAL

University of Iowa Hong Kong MBA

University of Northern IOWA MBA*

University of Wales, Newport MBA*

University of Wales, UK*

3,287

270

800

300

113

355

109

110

300

100

249

115

160

2016

DATA PROVIDED BY COMPANIES. SURVEY PERIOD: MARCH TO APRIL 2017 Currencies were converted to HKD based on FOREX rates as of APRIL 24, 2017. *DATA RETAINED FROM 2016 REPORT

800

300

Kaplan Higher Education

The University of Hull Executive MBA

197

The Hong Kong Polytechnic University

355

110

300

100

107

130

160

PolyU MBA

Manchester)

Manchester Business School (The University of

City University of Hong Kong

CityU MBA

Manchester Global MBA*

218

The University of Chicago Booth School of Business

Chicago Booth EMBA*

2017

Provider

MBA Programme

Total Number of Students

William Chow

Charles Huang Qin

Rebecca Lui

June Cheng

Steven Dekrey

Yan Xu

Sean Ferguson

Sachin Tipnis

Dave Evers

Stephanie Villemagne

Andrew C. F. Chan

Kevin Chiang

Richard Johnson

Head of Hong Kong Office/Dean

Full Time

270

800

300

197

355

110

240

100

154

107

160

Part Time

Total Number of Students

585,000

525,000

510,300

304,000

Full Time

104,000

108,000

147,600

273,000

168,000

230,100

386,000

1,253,660

921,203

478,000

432,000

378,000

105,500

1,200,000

356,400

544,000

263,200

1,200,000

Part Time

Minimum cost

12 or 16 months

14 months

12 or 16 months

12 or 18 months

Full Time

2 years

18 months

20-24 months

15-18 months

2 years

2 - 4 years

2.5 years

18 months

16 months

24 months

15-19 months 1.5 years

Number of Intakes

24 months

24 or 36 months

21 months

Part Time

Duration

RANKING: MBA PROGRAMMES

Legal briefing

The benefits of amending the PI Rules The amendments to the Professional Investor (PI) Rules are intended to enhance market consistency.

rior to the proposals amending the Securities and Futures (SFC) PI Rules, intermediaries were becoming increasingly frazzled when determining who might qualify as professional investors. The culprit — an array of modifications to the rules individually granted in various applications which were obscuring the exact qualification requirements and made compliance more taxing. “The proposed amendments are intended to enhance market transparency and promote consistency in the application of the PI Rules,” says Ashley Alder, the SFC’s CEO. The proposals should cater for the business needs of intermediaries and their clients without compromising investor protection seek to incorporate the PI Rules modifications commonly granted to intermediaries, and legal experts argue that these will reduce the compliance burden on firms. What will the proposals amend in the PI Rules? What will stay the same? “The proposals provide some pragmatic and important expansions to the PI Rules, largely in response to industry developments and requests over the years,” says Urszula McCormack, a partner in King & Wood Mallesons Hong Kong banking & finance team, specialising in financial services regulation and banking. The proposals will amend three key areas. First, they will allow the portfolio of individuals on a joint account to be taken into account in meeting the professional investor test, even where the individuals concerned are not “associates”, such as a sibling or a friend. Second, they will broaden the concept of corporate professional investors, including looking more broadly at corporate structures and loosening strict requirements on “sole” business activities to “principal” business activities Third, they will allow broader categories of evidence to

The proposals provide some pragmatic and important expansions to the PI Rules, largely in response to industry developments and requests over the years. be used in satisfying the relevant financial thresholds. But McCormack says there are no proposed changes to the monetary thresholds and the type of assets that can count to the client’s portfolio — still only securities, deposits, and certificates of deposits. What are the implications for intermediaries? The proposals are intended to enhance market consistency in the application of the PI Rules and provide greater flexibility to meet the business needs of intermediaries, says Karen Man, a partner in Baker McKenzie’s corporate practice group, specialising in financial services 32

HONG KONG BUSINESS | JULY 2017

Balanced approach to standardising the market practice

Charlotte Robins

Karen HY Man

Paul Moloney

Urszula McCormack

regulations, mergers and acquisitions, and general corporate matters. “We expect that intermediaries will welcome the clarity and guidance offered by the proposals, which, if adopted, are likely to facilitate more efficient and accurate professional investor classification,” says Man. “In our view, the proposals offer a balanced approach to standardising the market practice and acknowledging the practical business needs of intermediaries when serving and assessing professional investors.” Firms should react positively to the proposals and gain increased confidence, given that they are clearly designed to reflect common business practices and structures, says Paul Moloney, a partner in the investment funds and asset management team at Eversheds Sutherland. “The SFC expects that, were the revised PI Rules to be adopted, firms should find that an increased number of clients meet the relevant professional investor tests, and it should be more practical for firms to obtain and maintain appropriate evidence of this classification. The SFC have also indicated that they expect the amendments will facilitate and encourage the participation of corporations in private placement activities,” says Moloney. What should intermediaries do to prepare for the regime change and how should these preparatory steps be carried out? Intermediaries will need to check their client on-boarding arrangements, where relevant, Charlotte Robins, a financial services and regulatory partner based at Allen & Overy in Hong Kong. This is to assess whether any clients need to be re-categorised as the result of the proposed changes to the PI Rules, although the changes should make no difference to licensing requirements or the treatment of professional investors under the SFC Code of Conduct. “Intermediaries will need to check their marketing procedures to identify any target clients who may, following implementation of the proposed changes, be treated as professional investors for the purposes of the Hong Kong public offer restrictions,” she adds.

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marketing Briefing

Is account-based marketing efficient? Hong Kong’s marketers reveal how best to utilise data-driven ABM.

Automation. “A need to establish one’s USP is highly critical, even for one deemed as a commodity. Whilst we analyse the needs and external factors of each segments and verticals, the articulation and alignment of ABM efforts positions one as a partner, as opposed to just another regular vendor,” Lai adds. In industries such as manufacturing, the appropriate funding for data-driven ABM hinges largely on customer needs. “Specific to my

s the industries become more competitive and, at times, cutthroat, customer-centric businesses are compelled to adopt calculated strategies that ensure their resources are targeted and utilised effectively. In recent years, data-driven, account-based marketing (ABM) has emerged as an effective tool to ensure companies target the right audiences, and using the right resources to do so. “ABM is creating personalised marketing campaigns for key accounts an enterprise business wants to grow or expand. HubSpot refers to it as ‘marketing to one’ — as in one company,” says Catherine Williams-Treloar, APAC marketing leader leader at “CMO on-demand” consultancy MarkyCo. Another expert agrees, noting that data-driven ABM works effectively when data and information is employed to the advantage of companies. An evolving set of tools “Data-driven ABM helps companies leverage an evolving set of tools to help marketers and sales teams identify the best companies (accounts) to target, who to build relationships with, and tailor highly relevant campaigns to each account,” says Lee Jun Wen, chief marketing officer at same-day flower delivery service A Better Florist. “The mindset behind data-driven ABM isn’t new — it asks the same questions as conventional marketing: which accounts are most likely to buy? Who are the decision makers and influencers, and how do we engage them? How do we increase our lead-to-sale conversion rates? How do we increase our demo-to-sale win rates? How do we decrease the time to close each sale? The ‘data-driven’ approach automates time-consuming tasks and provides new ways to generate answers,” Lee adds. Companies, however, need to work closely in order to arrive at a truly unique selling point (USP) in order to differentiate among peers. “There isn’t a one-size-fits-all strategy when it comes to the marketing of industrial-based solutions,” cautions Jordan Lai, business development manager APAC at vessel switchboard and switchgear manufacturer Z-Power

HONG KONG BUSINESS | JULY 2017

“ABM is creating personalised marketing campaigns for key accounts an enterprise business wants to grow or expand.”

Catherine WilliamsTreloar

Joradan Lai

Lee Jun Wen

industry, my solutions comprise approximately 35% capex capital expenditures to a project, and with organisations moving toward leaner operations and value-based procurement strategies, it is critical to address not only return on investment but the fundamental question of ‘what does my customer really need?’ With this data, I am able to ‘right-size’ and price-right,’” shares Lai. Knowledge is power Consequently, knowledge is a premium when it comes to data-driven ABM — hence, companies, especially B2B firms — are urged to gather enough relevant customer data in order to deliver sufficient ROI. “The best place to start with the data is your targets — what accounts do you want to win or expand? Who is ‘known’ to your businesses based on your previous marketing efforts? What are the needs of the account? What assets have worked before with a ‘lookalike’ account and how can you tailor this across the buying journey?” suggests Williams-Treeloar. For data-driven ABM to be successful, however, various company teams — particularly in sales and marketing — must coordinate closely on some common criteria in order to achieve the same set of goals. The possibilities entailed by utilising data-driven ABM has been magnified by the volume of data that is made available. Sales teams used to select their target accounts from in-house database, but with the current efforts on maximising readily accesible data, marketing teams can adopt a data-driven approach to make use of CRM and third-party data. “On a higher-level, always start by making sure marketing and sales teams are aligned on a common set of ABM-focused metrics that everyone is held accountable for. Incentives for both marketers and salespeople should be tied to a core number like revenue, fuelling closer collaboration between the two departments — a key ingredient for excellence in ABM,” says Lee. WilliamsTreloar agrees: “ABM is a mindset for the business — without collaboration and aligned focus between marketing and sales, you won’t be able to start,” she says.

HONG KONG BUSINESS | JULY 2017

Event COverage: ITF 2017

Countries are treading cautiously in transport innovation

Why governments can’t keep up with transport innovation Politicians are deemed playing safe and not reacting quickly enough to come up with the right policies for automated vehicles.

f you think that driverless cars and cabs, and trucks with joysticks in place of steering wheels will be filling the roads in the near future, think again. Highly automated vehicles are currently avoiding and operating away from public roads, and are being safely run in controlled environments like ports and mines. In the next few years, yes, there may be a small scale deployment on limited public roads of vehicles moving at low speed with substantial supervision, but experts at the International Transport Forum 2017 held in Leipzig on May 31-June 2 expect a long transition. “In the next couple of years it’ll be done at a small scale,” said Sarah Hunter, head of Public Policy, X (formerly Google X). “Looking at the industry right now and observing how competitive it is, it is difficult to predict when exactly these driverless vehicles will roll out. We will definitely have some deployment of fully automated vehicles in a very small number – maybe a few places in the world – and that will be when we get a chance to see these things actually work. Only after that do we get to see politicians act on it and 36

HONG KONG BUSINESS | JULY 2017

We will definitely have some deployment of fully automated vehicles in a very small number.

bring the technology home equipped with the right regulation.“ The sector is moving away from a time where vehicles are stand-alone units because with automation and connectivity, these become an integral part of transport solution.“We will have a very long transition period and there are very many advantages to this transition period, but it’s important that we are allowed to run large-scale pilots,” added Anders Kellström, senior product planning manager and automation spokesperson, Volvo Group. Not fast, not furious As a result, some governments are rather seen as onlookers, playing safe and they keep avoiding being an obstacle to innovation, setting the framework for autonomous vehicles to operate safely and cleanly, but not to regulate prematurely in anticipation of impacts that may not eventuate. The experts also acknowledged that regulation is unable to keep pace with innovation. “We shouldn’t allow the political system to hold things back. We can’t keep up but we can

be fast followers.” Tim Macindoe, associate minister of Transport, New Zealand, said. “Technological changes move society more than politicians do... I make the legal framework, and it should enable development that is good for society even though I can’t foresee exactly what that development will be,” said Ole Birk Oleson, minister for transport, building and housing, Denmark. “Are politicians reacting quickly enough? No, but they never do.” Bryant Walker-Smith, Associate Professor of Law, University of South Carolina, commented. A long, gradual transition also provides opportunities to use evidence, rather than speculation, to develop responses to questions about the expected social and economic impacts of highly automated vehicles. While many issues are still very uncertain at this stage, there are already steps that governments and developers should take towards ensuring society obtain a net positive benefit from automated vehicles. The question is, if and when autonomous driving comes into fruition and is full realised, how do we ensure that this transition yields a positive outcome to every party involved? “I think it’s important to manage the transition period and to manage it pro-actively. For the industry, it’s most important to have the same framework for at least a continent as our trucks don’t stop at the borders.” Christian Labrot, President, International Road Transport Union (IRU). For developers, Professor WalkerSmith challenged them to engage in a public compact and indicate what reasonable safety means to them and how they monitor and maintain it over the life of the system. New Zealand’s associate minister of transport agreed and said, “We have to set the right incentives for safety. It is not our job to protect drivers from change, but to prepare them for it.” When it comes to deployment of the said innovation, Google’s Hunter said that mayors will have to play a big role and are going to be incredibly powerful. “We need to have the conversation at the local level,” she said. By Karen Lou T. Mesina

ANALYSIS: INDUSTRIAL PROPERTY

New industries seeking alternative workspaces boost demand for industrial buildings

Alternative uses for industrial buildings The growth in demand for industrial space over the past decade has largely been driven by nonmanufacturing trades and phenomenal growth in the retail sector has driven strong demand.

ver the past 40 years Hong Kong has gradually transformed itself from a manufacturing-based economy to one of the world’s leading financial centres. During this period the manufacturing sector’s contribution to GDP has fallen from an average of 27%in the 1970s to the current 1.5%. Today, 93% of Hong Kong’s GDP comes from tertiary industries. This pattern has been mirrored by new supply in the city’s commercial property sector, with total office stock increasing by 6.3 times between 1976 and 2016, compared to growth of just 1.8 times in industrial space. The relocation of manufacturing to the Pearl River Delta beginning in the 1980s pushed up factory vacancy rates to double-digit levels in the mid-1990s, although it later fell back to the current low single-digit levels. The growth in demand for industrial space over the past decade has largely been driven by non-manufacturing trades. As discussed in the CBRE Research special report entitled Hong Kong Logistics: Retailers Expose the Lack of Warehouse Facilities published in 2014, phenomenal growth in the retail sector has driven strong demand for industrial space by third-party logistics (3PL) operators. While such demand has weakened since the retail sector slowdown, other commercial trades and new industries seeking alternative workspace have emerged as new demand drivers for industrial premises. According to the Planning Department,at least one38

HONG KONG BUSINESS | JULY 2017

Low vacancy and high rents in other commercial property sectors point to sustained demand for legitimate use of high specification industrial buildings.

third of industrial space in Hong Kong, equivalent to circa 87 million sq. ft., is occupied for non-industrial purposes. Typical commercial sectors occupying industrial buildings include arts and performance,education, F&B, general retail,recreational and sports. While some non-industrial trades operate legally in industrial premises, others evade operational, legal and safety requirements in noncompliant properties. Low vacancy and high rents in other commercial property sectors point to sustained demand for the legitimate use of high-specification industrial buildings to facilitate the growth of new and emerging industries. Industrial space demand The surge in commercial property rents in recent years has forced many low-margin trades out of their longestablished locations. Conventional and revitalised industrial buildings have therefore become substitutes for businesses with the flexibility to operate from alternative workspaces which come at a fraction of the cost. Examples include niche cafés and eateries,small retailers,indoor recreational and sports centres, churches, cultural workshops and performing arts studios. At the sametime, the government’s promotion of re-industrialisation and development of high-tech industries has driven demand for modern industrial space from the technology sector. Properties suitable

ANALYSIS: INDUSTRIAL PROPERTY for data centers, laboratories and other clean industrial operations have become keenly sought after by emerging industries such as biotechnology, pharmaceuticals,highprecision manufacturing and big data.The likes of ASM Pacific Technology, TĂ&#x153;V Rheinland And Intertek Have All recently leased bulk industrial space in Hong Kong. Automotive companies are another key source of demand for high-specification industrial space amid the lack of suitable options for car repair centres in rezoned industrial areas.The rapid expansion of the F&B sector in recent years has also stimulated demand for space in industrial buildings capable of housing central kitchens. These new occupiers leased a combined total of 1.5 million sq. ft. of industrial space since 2014. Space Requirements often vary significantly between new users of industrial space and traditional industrial occupiers. New users typically require larger floorplates with higher power capacity and water supply. Depending on their industry, some users also require higher floor loading capacity. Lack of industrial space The lack of high quality and modern industrial space has forced many new industries to operate in a sub-optimal environment.According to the Rating and Valuation Department,around 40% of industrial space in Hong Kong was constructed in the 1970s or earlier, while another 43% was built in the 1980s.The bulk of these properties are outdated in design as well as building infrastructure and safety features. Of the 1,448industrial buildings in Hong Kong, around 300 have no fire sprinklers installed. Operating laboratories, central kitchens and other commercial trades in such buildings brings with it an increased risk of fire and other safety hazards.Due to fragmented ownership structures, some buildings are poorly maintained and managed,making them unsuitable for new industries. The non-compliant use of industrial buildings is also commonplace. While the usage of industrial land does have a certain degree of inbuilt flexibility, it is usually subject to town planning approvals and land premium or waiver fee charges. The process of obtaining planning approvals often complicated, lengthy and sometimes involves professional fees. Individual landlords and occupiers therefore place a low priority on legalising space usage,thereby exposing themselves to lease enforcement risks. Since statistics were first published in 2012,an average of 260 enforcement actions per year have been taken against the breach of industrial leases New users of industrial buildings

Source: CBRE Research, May 2017

Non-compliant use of industrial buildings is commonplace

by the Lands Department. While Circa 1,000 valid temporary waivers had be issued as of February2015,the fact that one-third of industrial space is occupied for non-industrial purposes points to a high rate of noncompliant use in the industrial property market. Demand for the alternative use of industrial properties has become more evident since the introduction of the Other Specified Uses annotated for Business (OU(B)) zone in 2001,which saw the rezoning of 200 hectares of industrial land across Hong Kong to facilitate the gradual rejuvenation of selected industrial areas. Since then,a total of 15 million sq. ft. of Grade A office space has been completed in the five largest OU(B) zones, which are located in Kowloon East, Cheung Sha Wan, Wong Chuk Hang, Kwai Chung and Shek Mun. Unlike the office use permitted in industrial zones which is more restrictive in nature and subject to lease compliance, OU(B)-zone properties provide much higher flexibility for general office occupiers from a planning perspective.

Demand For the alternative use of industrial properties has become more evident since the introduction of the Other Specified Uses annotated for Business (OU(B))zone in 2001.

Influx of white-collar workers New offices bring with them an influx of white-collar workers and drive higher demand for supporting businesses and social amenities.Shops, restaurants,bars, fitness centers and banks are among the main beneficiaries.Fire safety concerns mean that the scope for retail operations in industrial buildings is more limited and generally permissible only on the ground floor. However,retail operations are permitted on the lower floors of OU(B)-zones industrial buildings as long as they are separated from other industrial users within the same building by means of a buffer floor. Typical retail uses for industrial/retail hybrid buildings include shops and services, restaurants, and sports centres. The government is currently examining the feasibility of relaxing the use of the lower floors of industrial buildings provided that certain fire safety standards are met. CBRE Research has identified clear demand for the broader and legitimate use of industrial buildings.High specification schemes capable of legally accommodating industrial and commercial operations will be keenly HONG KONG BUSINESS | JULY 2017

ANALYSIS: industrial property Distribution of use in industrial buildings (*) ( by gross floor area)

Source: Report on 2014 Area Assessments of Industrial Land in the Territory , Planning Departmenr, HKSAR, CBRE Research, May 2017

sought after by new industrial users and certain commercial operators who favour buildings with high ceilings, large floor plates, heavy floor loading and high power capacities with adequate safety provisions. Many existing purpose-built industrial buildings are designed to cater to homogeneous trades and are typically in the format of built-to-suit data centres, car repair centres or other specialised factories/warehouses. CBRE Research estimates there are 182 such schemes in Hong Kong, totaling approximately 35 million sq. ft. of industrial GFA. Better flexibility in building use Rapidly changing economic, social and technological trends mean that buildings should have higher flexibility in terms of usage.For industrial properties, the way how economic values are created and how products are designed,produced, sold and transported has evolved significantly in recent years. Industrial buildings are now no longer just a format of real estate to facilitate labour intensive manufacturing activity; they are becoming bases for high value-add new industries. If planned,designed and built appropriately,some can also be integrated with commercial activity to cater to new ways of entertaining, shopping and socialising. Advances in technology are already allowing the retail, recreation and industrial sectors to co-exist. Innovations such as 3D printing, virtual/augmented reality, predictive maintenance, nanotechnology and automation are changing the way in which products are developed and manufactured,while reducing hazards.Customer experience is becoming increasingly important for research and development(R&D) and is forming an integral part of todayâ&#x20AC;&#x2122;s manufacturing process. Industrial buildings with customer experience laboratories, plants and showrooms under the same roof can provide an integrated real estate solution for product manufacturers and technology companies. Much of this activity involves highly skilled professionals and will attract high quality walk-in customers, creating a viable environment for general retailers and other service trade operators. Depending on building design,similar real estate models may also fit small-to-medium car dealers who can have their inventory warehouse, showroom and workshop all in the same building without needing their own premises. Restaurateurs,indoor recreational and sports arena operators, cultural performers as well as art galleries can 40

HONG KONG BUSINESS | JULY 2017

Well-managed hybrid buildings with the right specifications and features will command a competitive advantage in the marketplace.

also make good use of the large floorplate and footfall in industrial/retail hybrid buildings.F&B chains can integrate their central kitchens on the upper floors with their restaurants in the retail podium. Although indoor venues for sports such as trampolining,skating and climbing are gaining popularity globally and locally, they are not usually found in Hong Kongâ&#x20AC;&#x2122;s shopping centres due to high rents and the lack of space. Such venues are dispersed across the city in industrial buildings but many of these premises are unsuitable due to low ceiling height and/or small floor plates.These difficulties are shared by edutainment operators and performing artists who generally prefer more spacious environments than those available in small and old factory buildings. Subject to planning approval,modern industrial buildings in the right catchment areas can help develop and promote these industries. Creating synergy Synergy can be created between these retailtainment industries as the flow of people visiting sports and arts venues can drive demand for F&B and shops within the same building. The Reverse also applies as it is good marketing for these venues to be situated nearby a retail environment. Childrensâ&#x20AC;&#x2122; playgrounds or daycare centres will benefit from parents spending time in the building for exercise and other entertainment. CBRE Research believes it is essential for industrial/ retail hybrid buildings to be planned and built to highspecifications to meet the sophisticated requirements of new industrial users and contain the right features to attract customer-facing businesses. Well-managed hybrid buildings with the right specifications and features will command a competitive advantage in the marketplace. Landlords of industrial/retail hybrid buildings may find industrial occupiers on the upper floors less sensitive towards location but retailtainment tenants on the lower floors are likely to place a stronger importance on where they are going to be based. Underpinned By either a growing resident or working population, or both, Wong Chuk Hang,Kowloon East, Cheung Sha Wan and Tsuen Wan are among the districts zoned for Industrial or OU(B) with the highest retailtainment potential. Kowloon East is forecast to see around 40,000white-collar workers based in the 4 million sq. ft. of new office space scheduled for completion in the next five years. The same period will also see the completion of 18,300new apartment units, which will drive solid retail, F&B and entertainment demand in the vicinity, both day and night. Elsewhere,Wong Chuk Hang has benefitted from the recent completion of the MTR line extension and the increased availability of office space, which has driven growth in the working population. Projects under construction and planning will supply the district with an additional 460,000 sq. ft. of office space by 2021, sufficient to house 5,000white-collar workers. The subway-linked residential sites to be tendered by phases will also bring an additional 15,000 residents to the area. Tsuen Wan is set to receive an extra 20,000residents

ANALYSIS: industrial property Real estate stock growth: office vs industrial

Sources: Rating and Valuation department, HKSAR, CBRE Research, May 2017

when the 6,800 flats currently under construction are ready for occupation in the next five years. Underlying demand for high specification industrial buildings is robust and baked to a certain extent by strong government support. Testing and certification, smart city technology, robotics and re-industrialisation have all been included in recent government policy addresses. On Top of the four pillar industries of financial services, logistics and trading,professional services and tourism, the government has identified six new industries to diversify Hong Kong’s industry structure. They are testing and certification, education services, innovation and technology, medical services, environmental industries and cultural and creative industries, all of which are set to underpin demand for high specification industrial space. The establishment of the Innovation and Technology Bureau In 2015is part of the government’s attempt to drive and promote growth for Hong Kong’s tech sector. Through the Innovation and Technology Fund,the government has subsidised over 5,800 new tech projects over the past 18 years with a total investment of approximately HK$12billion. More recent schemes such as the Technology Start-up Support Scheme for Universities and the Technology Voucher Programme are set to support the development of local tech companies in Hong Kong. Many of the beneficiary companies are engaged in biotechnology, information and communication technology, electronics and etc. The future of development landscape Along with the tech sector, many traditional industrial space users plan to automate their production and raise their budget for R&D. In a survey of 640 Pearl River Delta-based Hong Kong manufacturers by the Federation of Hong Kong Industries in 2014, over 40%of respondents said they intend to automate their manufacturing processes, and close to 30% said they plan to improve their R&D over the next three to five years. This dovetails with the government’s policy of re-industrialisation which stresses creativity and innovation for functional technology. However,these manufacturers intentions to return to Hong Kong are low. Amongst the many challenges identified in the survey, about half of respondents cited the high cost and shortage of land as a hurdle,highlighting the need for more modern industrial space. To this end, a dilemma exists. The lack of new and high specification industrial

Many of the beneficiary companies are engaged in biotechnology, information and communication technology, electronics and etc.

space has been compounded by a net stock withdrawal in recent years as property owners convert or redevelop industrial buildings for commercial use under the government’s Industrial Revitalisation Scheme.Close to nine million sq. ft. of industrial space has been revitalised for commercial use since 2010. Although many of these buildings have been renovated with a modern fit-out to cater to the commercial sector, they do not meet the requirements of new industrial users and retailtainment operators due to their floorplates and other building specifications. There are new industrial options available but only in quasi-government schemes including the Hong Kong Science Park And various industrial estates.The total GFA of the Hong Kong Science Park has increased from 1.3 million sq. ft. in 2004to the current 3.5 million sq. ft. and will reach 4.3 million sq. ft. by end-2020.Another 3.3 million sq. ft. exists in industrial estates, which are all purpose-built to fit designated end-users. New supply in the private sector has been very limited. Ofthe 6.4 million sq. ft. of new industrial space supply completed over the same period, only 2.8 million sq. ft. is suitable for modern industrial use. The remainder is either purpose-built for warehousing or in the format of socalled curtain-wall industrial buildings which, generally do not suit modern industrial operations. To support the development of new industries in Hong Kong, the government plans to reserve over 50 hectares of land for high-tech industrial development in the future Liantang/Heung Yuen Wai Boundary Control Point. The Hong Kong and Shenzhen Governments recently signed a memorandum to jointly develop an Innovation and Technology Park near the border at the Lok Ma Chau Loop. From CBRE’s “Modern Industrial Buildings Foster Hong Kong’s Retailtainment and Technology Sectors“ A hypothetical industrial/retail hybrid building

Source: CBRE Research, May 2017

HONG KONG BUSINESS | JULY 2017

ANALYSIS: OFFSHORE RMB BONDS

M I C

E P

N E

Population dynamics is a critical factor for growth

Currency gains impaired by funding rates Currency strength has been accompanied by higher rates and concerns about funding costs are rising.

ith a softer USD and rising rates in China’s onshore market, CNH strengthened against USD by 1.8% in May. The gap between USDCNH and USDCNY moved back to around -250pips. At the same time, the CCS curve rose significantly, especially at the front end. There was another funding squeeze in the CNH market, with overnight HIBOR surging to 43% on 1 June. Thus, for CNH bonds, any currency gains have been offset by rising funding rates. As funding rates rose, CNH CGBs were under pressure. The 10yr bond yield rose 66bp for the year and 8bp for the month. By contrast, IG bonds held up well, with yields slightly lower and HY bonds performing strongly for another month. However, the credit bond space, especially corporate bonds, shrank significantly in May, with an increase in net redemptions. Total CNH bonds outstanding fell by RMB26bn to RMB536bn by the end of the month. The redemption amount for June remains high, 42

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The stronger RMB in May also reflected continuously rising yields in China’s onshore market.

and shrinking supply remains the main challenge. We do not expect offshore RMB liquidity to improve significantly in the near term. As funding remains a big concern for CNH bond investment, we keep our investment strategy on short-dated HY bonds that have good liquidity and provide a higher yield buffer to rising funding rates. Among IG, we favour Formosa financial bonds that lagged the rally over the past three months. The RMB again surprised the market and turned stronger against the USD, with USDCNH and USDCNY dropping 1.8% and 1.2% respectively over the month. The gap between USDCNH and USDCNY dropped to around -250pips by the end of May after a positive showing in April. The RMB’s gain is partly to do with the slide in the USD. Fig 1 shows that the USD index was 1.8% lower, at 97.3, by the end of May. However, the RMB had been relatively stable against the USD in March and April, when the USD index was dropping.

The stronger RMB in May also reflected continuously rising yields in China’s onshore market. But at the cost of a funding squeeze However, the stronger currency has come at the cost of higher rates and another funding squeeze in the CNH market. USDCNH CCS rates climbed further, especially at the front end. On 1 June 2017, the overnight CNH HIBOR surged to 43%, its highest level since the last funding squeeze in January 2017 (Fig 3). As the CNH market has shrunk and has always been short of liquidity, any large buying of RMB is likely to lead to a lower USDCNH rate and higher funding rates. In view of this, the RMB’s firm performance will not be of much help to CNH bond investors. The elevated funding costs will easily erase the gains of currency strength. Further improved sentiment towards the currency and better liquidity will be needed for this to change. CNH sovereign bonds remained under pressure last month. From one

ANALYSIS: OFFSHORE RMB BONDS side, we think concerns remain about the high funding costs that we have identified in the past few months, particularly in the light of another squeeze in funding. On the other hand, the continued rise in onshore yields has also weighed on CNH sovereign bonds. Although external pressure eased as US Treasury yields tracked lower, China’s economic rebound in 1Q 2017 gave Beijing an opportunity to step up its tightening measures, as discussed in China Onshore Insights: Deleveraging – doubts, difficulties and dilemmas (15 May 2017). Since the beginning of 2017, the onshore 10yr CGB yield has risen 64bp and was up 18bp in May alone. The CNH 10yr CGB yield rose 66bp over these five months and was up 8bp in May. Recent data shows the Chinese economy is under pressure again, which may result in eased tightening measures and thus eased rates pressure. CNH credit bonds outperform Onshore bond yields have risen continuously in the past several months. Onshore ‘AAA’ and ‘AA’ rated bond yields were higher by 100bp and 115bp respectively in May. In contrast, offshore RMB IG bonds held up well, with spreads marginally tighter last month, and HY bonds have continued to outperform, spreads tightening by 96bp in the first five months and 33bp in May. As Figs 5 & 6 show, the yield gap between onshore and offshore has reversed for IG bonds and disappeared for HY bonds. We believe reduced concern about the currency has stimulated investment into RMBdenominated assets. For RMB holders, CNH credit bonds, especially HY bonds, provide relatively high yields in the offshore market. A stronger RMB presents a better FX return against USD bonds. However, we think that the investor base is still narrow and that CNH bond holders are subject to funding volatility, which remains high with such a small offshore RMB pool. With more redemptions and muted new issues in May, total CNH outstanding bonds declined RMB26bn to RMB536bn. Of the RMB26bn, some RMB8.4bn were of redemptions of CGBs. Another RMB6.1bn will mature in the next month, and we

expect these to be replaced by a CGB auction in June. Apart from CGBs, RMB15bn in China corporate and financial bonds was repaid in the past month, with RMB14bn more due to follow in June. However, we haven’t identified any refinancing of the maturing credit bonds, especially in view of the recent funding squeeze. Although there was an increase of RMB11bn in offshore RMB deposits in HK in April, offshore RMB liquidity remains tight and this temporary recovery is not enough to improve the bond issuance environment. Bond Connect On 16 May, the HKMA and PBOC announced that the ‘Bond Connect’, which will provide mutual bond access for mainland and overseas investors to trade bonds in the Mainland and Hong Kong markets, will start with northbound trading in the initial phase. So for the time being there will be no inflows into the offshore RMB bond market through this scheme. As discussed by the HSBC FX team in FX implications of Bond Connect (18 May 2017), CNYsettlement will be more optimal than CNH-settlement, which will do little to improve CNH market liquidity. The ‘Bond Connect’ will act at first more like a new channel for foreign investors to access the onshore bond market. However, according to the announcement, northbound trading will follow the current policy framework for overseas participation in the China Interbank Bond Market (CIBM). Although details have not yet been disclosed, it is likely that the existing concerns regarding crossborder capital flows, which currently discourages foreign investment in the CIBM, will also apply to northbound trades through the ‘Bond Connect’. In other words, the new channel will not be able to attract significant foreign investment in the onshore bond market without further improvements, leaving aside the fact that onshore yields are still climbing. As we have discussed, despite the strength of the currency in the past month, CNH bonds have come under pressure from rising funding rates. Considering frequent funding

Chinese economy is under pressure again, which may result in eased tightening measures and thus eased rates pressure.

turbulence but a relatively stable FX rate, we hold to our investment strategy of the past several months, favouring front-end HY bonds that have adequate short-term liquidity. Favour Formosa financial bonds CNH IG bonds performed well in the past month. By contrast, CNH CGB yields moved 10-20bp higher along the curve. With the outperformance of several bank notes, the rich spread that used to be provided by these names against China sovereign bonds has mostly been removed. In the financial space, Formosa bonds still look cheaper than other senior bank notes. They have a 30-50bp yield spread to CGBs and a similar spread to other senior bank bonds with the same rating. In the corporate space, ‘BBB’ rated bonds that provide significantly higher yields also look attractive. As CNH funding is quite volatile, HY bonds provide more of a buffer to counter rising funding rates. Apart from that, many CNH bond issuers have broadened their funding sources to the USD bond market. So we believe they have adequate short term liquidity to cover their shortdated CNH bonds. Technically, the net supply of CNH HY bonds continues to shrink: there have been zero new issues this year. However, HY bonds have rallied in the past three months and their spread to IG bonds has dropped to new lows (around 80bp by end of the May based on Markit CNH HY and IG indexes). From HSBC’s “Dim Sum Tracker: June 2017 – currency gains impaired by higher funding rates“

Shrinking CNH outstanding bonds (including CDs)

Sources: Bloomberg, HSBC

HONG KONG BUSINESS | JULY 2017

ANALYSIS: asia demographics

Population dynamics is a critical factor for growth

The current status of Asia’s young and old Diverging demographics outlook promises heterogenous regional performance in the decades ahead.

long with global output growth, Asia as a region has slowed in the past decade. While the 2008/09 global financial crisis and the subsequent rise in trade protectionism have played major roles in subtracting from economic activity, a broader, structural factor is at play. Many of Asia’s dynamic, fast growing economies of the past decades are slowing as they have begun to age, with the share of the economically inactive population rising as a share of those in the labor force. For economies like Singapore, South Korea, or Japan, this is taking place at a time when they have already reached the high-income cohort, affording them with the wherewithal to deal with the associated headwinds. But for the likes of China and Thailand, the onset of aging has coincided with reaching only middle-income status. For a variety of reasons, aging before getting rich can be particularly challenging.

HONG KONG BUSINESS | JULY 2017

Asia’s working age population will grow by 317m, roughly in line with Africa’s, to 3.3b by 2030.

Although economies representing 1.8b Asians are past their demographic peak, another group of countries, representing an even larger population (around 2.1 billion) remain blessed by favorable demographic dynamics. Led by India and Indonesia, and followed by Bangladesh, Myanmar, Pakistan, and the Philippines, these economies offer considerable potential in the form of a demographic tailwind. Indeed, the fact that some parts of Asia are aging and some parts will likely remain largely youthful offer intriguing recalibrations of growth and relocation of production in the coming decades, in our view. Population dynamics is a critical factor in determining potential economic growth. A favorable proportion of working people over non-working ones means more income generation, higher tax collection, higher savings, lower cost of labor (and hence competitiveness), and more societal and fiscal affordability with respect to pension

and healthcare costs. All of these trends can reverse as the population ages. Of course, a youthful population is not a guarantee for high growth, nor is aging destined to confine an economy to low growth. A poorly educated workforce and inadequate infrastructure can diminish the demographic dividend, while productivity enhancement through innovation and investment can keep growth going even in an aging society. Abundant labor supply Asia has impressive financial savings, sizable FX reserves, and vibrant markets, but its biggest asset is in fact its people. According to the United Nations, the region is home to 60% of the world’s population. Going forward, Asia will therefore continue to account for the bulk of global growth and demand. The region’s large population also ensures abundant labor supply, providing firms relative ease to expand capacity within the region. While the African continent is fast catching up, Asia

ANALYSIS: asia demographics remains home to 6 for every 10 of the world’s workforce. Mediumvariant projections of the United Nations, which assume that fertility behavior evolves in line with historical trends, indicate that Asia’s working age population will grow by 317m, roughly in line with Africa’s, to 3.3b by 2030, whereas the rest of the world’s workforce is projected to remain stable. With continued labor force growth, increased labor competition could give way to technological advancements and innovations, breathing vitality to many of Asia’s economies. In particular, emerging economies of India, Indonesia, and the Philippines, as well as the frontier markets of Bangladesh, Cambodia, Laos, Myanmar, and Pakistan-altogether comprising a population of around 2.1 billion, nearly half of Asia’s headcount--have the potential to achieve stronger economic growth going forward. Most of these economies can leverage on their large and youthful populations to stimulate domestic demand and lift output. In addition to a demographic tailwind, many of these economies have populations over 100m, a large enough scale to help support self-sustaining domestic demand. At a time when the global trade outlook has darkened, economies with large and young populations ought to be able to differentiate with higher potential GDP growth in the coming decades.

have attained in the past decade or so--in terms of reviving growth, containing inflation, liberalizing trade and finance, fiscal consolidation, and ultimately poverty alleviation -- also puts these countries in a position to reap the demographic dividends to some extent. On the other end of the spectrum are Asian countries marked with a graying population. Leading the pack is Japan with a median age of 46, the world’s highest, and which is projected by the United Nations to rise to 51 by 2030. Japan’s rapidly declining birth rates have already driven down the population to 126.5m in 2015 since peaking at 127.3m in 2009. The United Nations is projecting the population to further drop to 120m by 2030, with the elderly accounting for 53% of the working age population. The protracted struggle of Japanese policymakers to revive the country’s sluggish economic growth and reverse chronic deflation illustrates the challenges associated with rapid population aging. Hong Kong, South Korea, and Singapore are also at the advanced stages of their demographic transition. With a median age of at least 40 years old, these three countries currently have three dependents for every 10 people in the workforce, and which are projected by the UN to double in the next 15 years.

Harvesting demographic dividend A demographic dividend is not a guarantee; it needs to be harvested. The gains would only occur if the rapidly expanding workforce is channeled into gainful employment, thereby, converting the ample labor supply into productive economic agents. In fact, realizing the demographic dividend requires prudent policymaking and collaboration between the public and private sector. For one, it requires good governance, sound macroeconomic management, sufficient public sector investments in economic and social services, and efficient labor and financial markets to attract jobcreating private sector investments. The socio-economic progress they

Unfavorable demographics But in as much as the dividends are not automatic, there remains hope for countries facing an unfavorable turn in their demographics. Faced with an aging society, policymakers would now have to turn their attentions towards structural reforms particularly aimed at boosting productivity and promoting innovation. The labor force pool can also be expanded by raising the retirement age and encouraging more women to work, while creating a working environment conducive to the seniors and women such by allowing flexible working schedules and providing more childcare centers. Singapore, for instance, apart from raising the retirement age to 62

Hong Kong, South Korea, and Singapore are also at the advanced stages of their demographic transition.

years old, is requiring employers to re-employ eligible employees up to the age of 65, and which from July onwards, will rise to 67. In addition, policies and incentives to encourage child-bearing would help to boost labor force participation in the long run. Equally important as well, Asia’s diverse demographic dynamics poses an opportunity to deepen intraregional integration. More advanced yet aging economies of China, Hong Kong, Japan, Singapore, South Korea, and Taiwan, would find it viable to export capital and expertise to less advanced economies in the region with large domestic markets and abundant labor supply. This would increasingly be the case going forward, in our view, as protectionist measures are advanced by the US and to some extent, Europe, triggered by Brexit. Deepening regional economic integration would also have to involve greater labor mobility so that countries with labor shortages can leverage on the slack in other parts in Asia, and vice versa. That is partly the goal of the ASEAN Economic Community, although progress in establishing free movement of skilled labor has unfortunately lagged behind. With recent developments in the West becoming unfavorable to Asia, now will have to be the time for policymakers to step up efforts to facilitate easier flow of goods, labor, investment, and capital within the region. That is, as the West looks inward, Asia would have to awaken its growth potential from within. By Taimur Baig, Chief Economist Asia, Deutsche Bank

Asia’s other half is facing unfavourable demographics

Sources: Haver Analytics and Deutsche Bank

HONG KONG BUSINESS | JULY 2017

OPINION

tim hamlett

Collapsing buildings have legal consequences – or maybe not

ometimes two decisions, made separately by different people but trying to apply the same rules, come out with disturbingly different results. Consider two announcements which both came out recently, about the aftermath of unexpected collapses of part of buildings. One of these concerned the collapse of one wall of the Police Married Inspectors Quarters Building, which is part of the old Central Police Station. In fact it is among the oldest parts; construction started in 1862. The wall collapsed on May 29 last year. The other case which came to fruition at the same time concerned the roof of the Chan Tai Ho Multi-purpose Hall, which is part of a sports centre at the City University. The whole roof fell down on May 28 last year. The hall was practically brand new. Both these cases had been the subject of inquiries, the conclusions of which were in due course transmitted to the Department of Justice. And the department has decided, it announced last week, that the contractor who was in charge of the married quarters work will be prosecuted. The first charge will be carrying out building works in a manner “likely to cause a risk of injury to any person.” On the other hand, the Justice people have decided that in the City U case “no prosecution was warranted”, according to the Standard. And where, you wonder, is the justice in that? It may be that there are further nuances in the Married Quarters matter which will emerge in court. But on the face of it the contractor seems to have been rather unlucky. Dismantling or renovating a building more than 150 years old is always going to be tricky. There are probably no plans, and if there are plans the building will have been modified, and it was certainly not designed with a century and a half in mind. Certainly the falling wall presented a risk of injury, but this was not entirely surprising. The risks involved were known and resulted in precautions not found in City U sports halls – the public were not admitted, workers were expected to wear hard hats, and so on. University obligation The City U situation is rather different. The sports centre was in use while the university decided to add a lawn to the roof. Students played underneath it oblivious of the risk to which they were exposed. Indeed the university was in a sense lucky. If it had not been for the alertness and initiative of a security guard who organised an evacuation just in time, there would have been many people under the roof when it succumbed to Sir Isaac Newton’s great invention and tried to merge with the floor. If the roof had chosen another time to demote itself the casualties could have been in three figures. Now I realise that there are regular arguments in educational circles about whether and if so to what extent universities are in loco 46

HONG KONG BUSINESS | JULY 2017

tim hamlett Former Editor of Sunday Standard and Associate Professor of Journalism

parentis – whether they have parental or pastoral obligations as well as academic ones. But I think everyone who has discussed this would agree that universities do at least have an obligation to provide premises in which the roofs stay where roofs should be, rather than descending on the defenceless heads of their students. The inquiry into the City U roof collapse attributed it to three causes: “the screeding of the roof structure was thicker than the original design, laying of greenery cover on the roof, and localised water ponding on the greenery cover.” This is not very helpful. I presume that the heavier screeding was necessary to support the greenery. And once the lawn was up there it should not have been difficult to predict that it would get wet in wet weather and it would then weigh more than it did dry. In fact, to put the matter in plain English, it appears that the City U put a lawn on the roof without giving due consideration to whether the roof was strong enough to support it. City U has a Campus Development Office – duties “providing comprehensive services covering campus master planning and space allocation, capital and renovation projects, repair and maintenance of building services and estates of the entire campus.” The office has seven sections, supervising 17 “units” which in turn overlook 18 teams. Plenty of relevant talent there, then. The university also has a Department of Physics and Materials Science, and a Division of Building Science and Technology. So the roof in question was surrounded by a great many people who knew, or should have known, that putting a roof on your garden is much easier than putting a garden on your roof.

Roofs stay where roofs should be

OPINION

Hemlock

Hong Kong named world’s freest economy again

by hemlock www.biglychee.com Email: hemlock@hellokitty.com

ven by its own embarrassing standards, the Hong Kong government has rarely looked as lame and pitiful as in its attempts to justify the determined criminalisation of ride-hailing apps, personified by Uber. Perhaps Hong Kong’s officials were emboldened by Uber’s mounting reputational problems in the US, from poor treatment of its drivers to a recent sexual harassment scandal. The company’s loss of its cool and trendy innovation/ tech appeal represented a perfect opportunity for our bureaucrats to give it a good kicking for willfully ‘breaking the law’ (and ‘undermining our core values’) by operating here. But the Hong Kong public have not been so easily fooled. As not one but two South China Morning Post columns make clear, the government is simply trying to protect the speculative investments of some (wellconnected) rent-seekers who hold the city’s limited number of taxi licences. Silicon Valley hype The fact that the threat to these vested interests comes from the officially hyped ‘innovation/tech Silicon Valley’ thing is a double embarrassment to the administration, which went to great lengths to establish a whole bureau to promote space-age cyber-infoblah-blah. It is a reminder of the essential principle that the Hong Kong government will favour cartels and cronies over competition and the interests of the overall population and economy. This is hardly news (see housing, supermarkets, construction supplies and dozens of other domestic markets). But in this case, the failure of governance is particularly stark. Ride-hailing apps have become popular in Hong Kong because they meet a real social need by filling a gap in local transport options. Existing taxi services are fairly cheap but crummy and inflexible, and in practice won’t serve certain types of route. Looking at the big picture, Hong Kong needs to embrace new approaches to how it uses scarce road space. In urban areas the streets are clogged up with illegally parked or crawling vehicles, at the expense of pedestrians and air quality. At a bare minimum the government should be pedestrianizing and pricing private cars out of the most crowded districts. Ridehailing aps could help us use space more efficiently. Looking further ahead, it will be technologically possible and practical, indeed necessary, in cities to replace single-owner cars and traditional taxis with shared self-driving electronic vehicles, operated by companies that may or may not include Uber. Under 48

HONG KONG BUSINESS | JULY 2017

just-slightly-visionary leadership, densely developed and economically advanced Hong Kong could be pioneering this sort of change – and selling its knowhow to Mainland cities, and probably to all sorts of politically correct Belt and Road markets as well. MTR corporate communication case study Problem: Hong Kong’s mass transit system has become unbearably overcrowded because of Mainland tourists and their vast amounts of luggage full of milk powder, Yakult, toothpaste, non-fake quack medicine and more milk powder. Solution: strip out seats from some carriages to create more space for Mainlanders’ wheeled suitcases. Problem: local residents resent the removal of their seats and having to stand on journeys, especially just to enable parasite mall-owners to hike rents for stores catering to cross-border smugglers capitalizing on corrupt Communist dictatorship forcing adulterated products on its citizens. Solution: we have consulted government officials, and they say “Screw local people – we don’t care about them.” Problem: front-line staff report difficulties relaying above policy to passengers. Solution: put up signs suggesting that the seats have been removed for the benefit of unfortunates like the disabled, for whom notoriously soft-hearted local people will have sympathy. It might work. Worth a try.

Undermining core values