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Spinning the wheel of fortune As Hong Kong waits for full details of government plans to release housing for the sandwich and perhaps dim-sum classes, the city’s own property developers are looking further afield and are investing offshore. This has opened the door for some of the larger mainland Chinese developers to step in to the local market and may help break the cartel. This is a story that will develop over time but is worth watching. One thing for sure is that the absence of a well articulated property policy from the government is not doing anyone any favours, and the sooner certainty returns to the market the better. Rochelle Romero


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Anna Healy Fenton sat down with Wharf T&T president and CEO Vincent Mak and writes about the company’s ambitious plans to conquer the cloud.

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In this issue we also feature our annual motoring report in which Jeff Heselwood takes some great cars out for a ride so you don’t have to. Hang on a minute, Jeff, I want your job!



Hong Kong Business Magazine has a newly formed research department and one of the first things we will be doing is creating Hong Kong’s first ever lists of largest companies in industries. The first list, Hong Kong’s top 25 accounting firms, will preview in our October/ November issue, followed by the top 25 law firms. I trust you enjoy this issue as much as we did in putting it together.

Tim Charlton

Hong Kong Business is available at the airport lounges or onboard the following airlines:





10 Barbarian at the moats 10 Breaking the property cartel

ANALYSIS 18 Is food inflation a boon or

12 Bank of East Asia’s worrisome net interest income

OPINION 12 The coming American diaspora 14 How minimum wage indirectly fueled the economy

17 Exceeds expectations 22 Civic education in question

Published Bi-monthly on the Second week of the Month by Charlton Media Group Pte Ltd, 19/F, Yat Chau Building, 262 Des Voeux Road Central, Hong Kong 6 HONG KONG BUSINESS | AUGUST 2012

burden to rural Asia?

SPECIAL REPORT 44 The rise of the supercars Luxury car sales thrive despite the economic crunch

Economists debate whether rampant food inflation will raise living conditions in the region’s countrysides.

11 Food inflation - Feast and famine




26 China’s Catastrophic

FIRST Barbarian at the moats

Deleveraging Has Begun

Troubling economic data suggest that the over-leveraged Chinese economy is on the brink of collapse.

30 Burning the peg the hot issue

REGULAR 20 CEO Interview: Wharf T & T

out to conquer the cloud

36 Legal Briefing 56 Life & Style 58 Numbers

But the issues, as always, are not as clear cut.

For the latest business news from Hong Kong visit the website


News from Daily news from Hong Kong What’s up with HK’s talent dearth? most read HR & EDUCATION

Despite the downbeat market, some jobs are still staying strong in Hong Kong Global economic uncertainty is taking an obvious toll on employment in Hong Kong financial services this year, with cost controls creating redundancies and reducing recruitment, especially at international firms. But that’s not to say the market is completely moribund. A few functions, continue to experience comparatively healthy hiring, albeit typically at lower levels than last year. ECONOMY

Hong Kong to brace for threatening challenges by 2020 Can Hong Kong hold its competitive position by relying on an open economy, low taxes, rule of law, and excellent infrastructure? The past fifteen years have been good to Hong Kong as economic expansion has cemented its position, alongside New York and London, as a global finance center. Looking towards 2020, challenges such as innovation, integration, and virtualization threaten Hong Kong’s position as the most competitive economy

More land supply to come


Property prices to drop to a 2.6% growth rate per annum The government aims to help release 20,000 units every year - almost twice the 9,500 units made available in 2011. A combination of more land for homes and a pro-supply government could see property prices in Hong Kong come down by at least one-half. Hong Kong’s residential property prices are due to decline should the new administration of Chief Executive

Leung Chun-ying make good on its promise to increase land supply for housing. FINANCIAL SERVICES

Hong Kong encourages small businesses with easy loans Hong Kong has launched a threeyear microfinance loan scheme to foster entrepreneurship in a sputtering economy. The Hong Kong Mortgage Corporation, Ltd with six banks and five non-governmental organizations are partnering in the scheme that could lend up to HK$100 million to qualified firms.

Registered firms in HK up 4% ECONOMY

Hong Kong takes steps to solve talent dearth Hong Kong has an urgent demand for more talented individuals and business professionals. Hong Lijuan, an international education consultant from the EIC Group, said the city has a pressing need for talented individuals, especially in finance, banking, logistics and tourism sectors. Hong noted that Hong Kong has created policies that lure talented people, such as allowing graduates without local residence registration permits to live and work in the region for at least one year. PROFESSIONAL SERVICES

Let’s get physical: Exercise tops HK workers’ to-do list in flexi job condition 3-year microfinance loan scheme launched


Almost 9 in every 10 professionals would spend time for physical

fitness during free time gained from flexible working practices. Regus research found out that 35% of Hong Kong professionals are free to work from locations other than their company’s main offices for half a week or more, helping them reduce the time spent commuting and giving them the freedom to choose work locations closer to home. ECONOMY

Registered firms in Hong Kong reach close to 1 million The total number of active local companies registered in Hong Kong rose 4% to 997,750 at the end of June. The Companies Registry said the total number of newly registered local companies during the first half was 72,427, up almost 3% from 70,338 in the second half of 2011. About 12,580 companies incorporated online via the e-Registry (www.


FIRST did mention that overall industry growth is likely to slow on a yoy basis, mainly due to a high base as well as concerns over China’s slowing economy,” said Ting. While credit facilities were non-existent during the global financial crisis, both junkets and casinos are now in a stronger position to lend as balance sheets and cashflows are stronger than they were during 2008-09. “Consequently, we are hearing that junket operators have access to plenty of credit but are being more cautious on who they lend to, especially when it comes to new players. On the demand side, we gather from the gaming operators that VIP players seem to be more cautious in their spending. We have not heard of any instances of the inability by casinos or junket operators to collect debt,” he added.

Industry dividend payout to increase from US$2.9bn in 2011 to US$3.4bn in 2013

Barbarians at the moats


Macau: Gaming revenue growth

Figure 10

Macau: Gaming revenue growth 60


2011: +42% growth

50 40

YTD2012: +21% growth

30 20


Source:CLSA Asia-Pacific Markets

2013 CL

Ju n- Dec 1 2

Apr - 12

Ma y - 1 2

Ma r - 1 2

Ja n - 1 2

Fe b- 1 2

De c- 1 1

Oct- 1 1

Nov - 11

S ep- 1 1

Jul- 1 1

Source: CLSA Asia-Pacific Markets

Aug- 1 1

Ju n- 1 1

Apr - 11

Ma y - 1 1

0 Ma r - 1 1

Still packed – for now Michael Ting, an analyst with CIMB, reckons that the mass market is not seeing any significant slowdown in growth and his recent trips to Macau showed that the mass areas in both the Peninsular and Cotai casinos were almost at full capacity. “Gaming operators also said that they are still seeing strong volumes in the mass market and are guiding mass GGR growth of around 25% for 2012. On the VIP side, gaming operators

More than casinos? But there will be some hurdles ahead as competition from Singapore and other regional casinos looms and Macau has not diversified its offering. Fischer reckons the government may require more non-gaming investment and it may be that the government is taking a much closer look at the non-gaming attractions for the next round of Cotai properties. “We hope that the government commands a much improved offering from each of the operators. Quite frankly, the government has been too lenient on the license holders since deregulation with some companies, like Wynn, barely spending anything on non-gaming attractions.” The Macau government should have adopted an approach more similar to the Singapore government which requires billions of USD spent on theme parks, museums, convention facilities, and iconic developments, he adds.

Ja n - 1 1

Macau’s investment appeal “We recommend investors to track the weekly gaming revenue data, which we believe to be the most reliable yardstick, and it has thus far not indicated a collapse in Macau VIP gaming revenues,” noted CLSA analyst Aaron Fischer. “We encourage investors to own the sector for dividend yield, which is the highest in Asia and still growing. In nearly every meeting, investors asked about Macau,” he added. Of the investors that the CLSA team met, most still own Macau for growth. But for the first time during a roadshow, they had heard 3 to 4 investors saying that they own Macau names in their firm’s dividend funds. “We also meet a few dividend only portfolio managers, which is also encouraging. Over the past two years, we have also been noticing consistently inflows into global dividend equity funds.”

Competition looms But is there room for Macau to keep growing profits and dividends, especially with new competition coming from the Cotai strip? According to Fischer, not only is the dividend sustainable but it is also likely to grow over time, underpinned by the growing free cash flow. “We estimate industry dividend payout to increase from US$2.9bn in 2011 to US$3.4bn in 2013, representing 9% Cagr and 6-7% 2013 dividend yield for Wynn, Sands, MGM and SJM. The strong dividend payout will also rank Macau gaming as the sector with the highest dividend yield.” Fitch, a ratings agency, is more sanguine on Macau, noting that whilst the market is up 20% year on year, there were noticeable slowdowns in May when revenues grew only 7.3%, followed by 12.2% in June. “Junket operators might find it increasingly challenging to access credit as conditions tighten in China, but this has not proved a problem for larger junket operators yet,” added the agency.

Fe b- 1 1


n a recent trip to Europe to meet with investors, Hong Kong brokerage CLSA asked the beleaguered Europeans what they were looking for in Asian investments. The answer, perhaps not surprisingly, was companies that are immune from any slowdown, or in the words of the analysts, “moats”. To meet the definition of a moat, a company must generate visible, consistent cash flow growth and score well on corporate governance. And perhaps the best such moat in a volatile world and a slowing China is Macau gaming, which continues to thrive even as the general economy slows.

FIRST Mainland firms are coming in to take up the slack

Breaking the property cartel


f the fortunes of Hong Kong’s biggest property developer, Cheung Kong, were built on local property, that is not where the company is now seeking to make money. In the first half of this year the property developer acquired only one site for redevelopment in Hong Kong, which could suggest it sees only downside for prices. Not that Cheung Kong’s doesn’t make good money from selling properties in Hong Kong. It sold 7,000 of them in the six months to June 30 for HK$32.5 billion, and made a margin of 33% on the Hong Kong units.What is deterring it, and other developers from investing heavily in future supply is concern over the eventual shape and sieze of the government’s public housing program, which has been

much talked about but not yet delivered. This uncertainty is causing developers either to bid lower or not at all, or seek better returns offshore. All abroad Cheung Kong, for one, is now putting more money to use alongside Cheung Kong International for European projects. It is too soon to say what the net effect of developers holding back on Hong Kong is, but fewer private flats will only put more of a burden on the government when it finally does deliver its housing program, and may even be counterproductive. The need for a fully articulated and costed government housing program is more urgent than ever. But as the Hong Kong developers are pulling back, mainland firms are coming in to take up the slack.

Enter the dragons China Vanke, the biggest mainlandlisted property developer by sales, has announced that it is buying a 74% stake in Hong Kong-listed Winsor Properties for HK$1.08 billion, while Cofco Corporation has announced a HK$362.18 million takeover bid for Hong Kong Parkview Group. China Overseas Land & Investment, for example, recently returned to the Hong Kong market with its purchase of the Urban Redevelopment Authority (URA)’s Ma Tau Kok site. Andrew Lawrence, an analyst at Barclays, noted it was interesting that mainland companies’ activity in Hong Kong has markedly picked up in recent months, as much of this activity coincides with C.Y. Leung’s appointment as Chief Executive. “It is fair to say that small cap shares have been trading at deep discounts to book values for a long period before this recent increased acquisition activity, so it is difficult to argue this is simply a value proposition,” he said. “Of course, C.Y. Leung is widely recognised as being more PRC friendly and therefore perhaps mainland developers feel there will be increasing opportunities for them within the Hong Kong market. Yet it is also likely that the Chief Executive will welcome such new entrants to the market; solely relying on the Hong Kong property cartel to raise housing supply was always likely to be tough.” Perhaps, but it seems as if some of the Hong Kong developers have already voted with their wallets and are not as intersted as before.

Food inflation – feast and famine 22 % but in China favourable weather coditions are proving a good harvest. Woodbridge says that US agricultural prices are on course to increase a whopping 25% m/m in July due to a severe drought, which translates into about a 6% y/y gain. “If US agricultural prices stop rising sequentially they should finish the year up 20% y/y. By itself that doesn’t justify panicking over Asian food.

as local agricultural production can be sustained and that in turn depends mainly on the weather – something nobody seems very good at predicting, he adds.

Monthly US agricultural prices and Asian food inflation Chart 1: Monthly US agricultural prices and Asian food inflation 80%



























Asia (ex. Japan): Food CPI S&P GSCI Agricultural Commodities Index

-40% Jan-03

Inflation based on the traditional relationship with US agriculture Recent US agricultural price increases are a negative for Asian food inflation, but not necessarily disastrous as long


If commodities were truly transportable globally, one would expect that prices would also be similar across the world. But in the case of many food items, that has not been the case, notes Duncan Woodbridge, an economist with UBS, who adds that there have been many times over the last decade where US agricultural prices and Asian food inflation have de-coupled. The main reason is changing weather patterns which may give Asia a bumper crop and the US a poor one, or visa-versa. This year in Asia, India is having a bad year with production down

CEIC, Haver, UBS estimates. Note: July is based on prices as of July 17th Source:Source: CEIC, Haver, UBS estimates. Note: July based on prices as of July 17th


FIRST BEA-group loan/deposit ratio (including CDs) Figure 3: BEA – group loan/deposit ratio (including CDs) 68% 67%






66% 65% 64%

Bank of East Asia reported a net profit increase of 10% to HK$2.99 billion in the first-half of 2012.

63% 62% 61% 60% 1H11

Source: Company Barclays Research Source: Company data, data, Barclays Research

Bank of East Asia’s worrisome net interest income


ank of East Asia, the third largest bank in Hong Kong, reported a net profit increase of 10% to HK$2.99 billion in the first-half of 2012. But though Hong Kong’s largest local independent bank posted a profit increase, analysts are worried over its net interest income which fell for the first time since 2009. Despite the 4% loan growth year to date, the bank’s net interest income fell by 5%. The collapse in BEA’s net interest margin is blamed for this blip - a predicament that is exactly opposite to its peer Hang Seng Bank. Analysts are also concerned about BEA’s capital position as total CAR fell further to 13.2%. And if that’s not enough bad news, the bank’s China business suffers from ongoing margin pressure. Its margin dropped to 2.27% due to a rapid rise in funding costs.

BEA-Tier 1 and total capital ratios

Figure 5: BEA – Tier 1 and total capital ratios 16% 14% 12%





13.2% 3.5%













10% 8% 6% 4% 2% 0% 1H10

Tier 1



Source: Company data, Barclays Research

Source: Company data, Barclays Research

what the analysts say Maybank Kim Eng: Ivan Li, Analyst BEA’s 1H12 net profit was up 10% YoY to HKD2.99b, higher than market consensus of HKD2-2.5b, and reached nearly 67% of our old FY12E profit  estimate of HKD4.5b. Results surprised on low qualities items including 1) HKD1.2b of non-fee income mainly driven by trading profit and fair value gain. 2) Disposal and property revaluation gain of HKD445m was also higher than expected.   Core operations just satisfactory, concern on NII and NIM trends. Hong Kong segment PBT was just flat YoY, and we are particularly concern about the net interest income (NII). NII fell by 5% HoH, despite the 4% YTD loan growth, and this is the first time since 1H09 that BEA 12 HONG KONG BUSINESS | AUGUST 2012

reported HoH fall in NII. The fall was due to the collapse in net interest margin (NIM), as NIM fell 10/13 bps YoY/HoH. Note that this trend is exactly opposite to peer Hang Seng Bank. China segment PBT was nearly flat YoY, and China segment only represented only 33% of Group PBT. BEA China’s YTD loan and deposit growth were only 5/3%, respectively, and much lower than the 9/9% industry growth.   We are still concern about  BEA’s capital position.  Total CAR fell further to 13.2%, while core CAR rose slightly to 9.7%. BEA’s decision to keep interim dividend unchanged (despite the 10% YoY grow in EPS) may be also due to the capital concern.

Barclays: Tom Quarmby, Head of Regional Banks Sector, Asia Ex-Japan Equity Research Although we see growing headwinds for BEA, especially on its Mainland business, which is experiencing great margin pressure, we believe share price performance will continue to be supported by the presence of its two key shareholder’s CaixaBank and Guoco. BEA reported 1H12 profit of HK$3bn, up 10% y/y and 2% h/h, above our/ Bloomberg consensus estimates of HK$2.2-2.3bn. The beat came entirely due to 1) trading/mark-to-market gains on investments of HK$875mn and 2) oneoff gains on disposals and revaluation of properties totaling HK$358mn.

Underlying profit was 10% below our expectations because of the disappointing net interest margin, which declined by 14bps h/h and resulted in a 5% decline in NII. Asset disposal gains helped with the capital adequacy ratio (Tier 1 at 9.7%). Ongoing margin pressure on the China business: The 14bp h/h decline in group margin to 1.63% was due to a rapid rise in BEA China’s funding costs as liquidity conditions loosened and deposit competition intensified onshore. BEA China’s margin dropped 28bps h/h to 2.27%. Funding cost improvement in Hong Kong was insufficient to offset this. We expect margins to remain under pressure going forward.



Ian Perkin

How minimum wage indirectly fueled the economy


ong Kong’s introduction of statutory minimum wage in May last year, widely and correctly seen as an additional business cost and a potential threat to future employment, may have had the unexpected but welcome short-term benefit of helping keep the local economy moving in the past 12 months. The Government’s first quarter economic report issued on May 11 showed real Gross Domestic Product (GDP) up just 0.4% year-on-year in the opening three months of the year to the end of March. Looking at the details, the figures showed that this modest growth was due to solid levels of domestic activity (both consumption and investment) offsetting a decline in external trade in goods and the adverse impact of the uncertain global economic situation. Private domestic consumption, the biggest driver of GDP growth, expanded 5.6% in the opening three months of the year. This was down markedly on the average 8.5% growth for 2011, but only slightly on the 6.6% recorded in the last year’s final quarter. Wage and consumption boost Clearly consumption has come off its peaks of last year, and there are many factors that help explain its first quarter growth, including good confidence levels despite the global situation, low interest rates, a strong property market, and so on. But one that tends to be overlooked is the rapid rise in wages and earnings including, as the government puts it, “the additional boost from the implementation of (the) statutory minimum wage since May 2011.” According to the Government’s figures, median household income rose by a nominal 9.5% in the

IAN PERKIN Independent Economic Consultant

Table 1: Hong Kong Gross Domestic Product 2011-12 (%) GDP Components

2011 Annual

2011 Q1

2011 Q2

2011 Q3

2012 Q1

GDP (real)







GDP (nominal)





















Exports (goods)







Imports (goods)







Exports (services)







Imports (services)







GDP deflator







and the unemployment rate has remained relatively low and stable at 3.4%, virtually full employment in the Hong Kong context. The first quarter GDP outcome means Hong Kong’s economy is on target to meet consensus growth forecasts. Growth in the second quarter is likely to have remained modest with the global economic uncertainties (especially in Europe, but also in the Americas and Asia) playing their part and stagnant international trade affecting exports. But as the year progresses, growth should improve as the international situation starts to clear and continued strong growth on the Mainland (of 8% or better) underpins confidence in the local economy.

Betting on numbers To reach the Government’s lower level growth target of 1%, the economy needs to grow only marginally for the final three quarters of the year. Right now the betting would have to be on “Hong Kong’s employment is still at record annual average real growth coming in at the levels and the unemployment rate has higher end of the 1 to 3% range, but a pick-up in activity could see a better outcome. remained relatively low and stable at 3.4%” global The government, however, is remaining very first quarter of this year compared with a year earlier. cautious. “Looking ahead the downside risks in the external environment remain notable, due mainly to After allowing for inflation, the real increase was the lingering Eurozone sovereign debt crisis,” it said 4.1%. in its First Quarter report. Given that lower paid employees are more likely It warned that the problems in Europe and the to spend any increase in earnings in the domestic US could spill over to affect Asian economies, but economy, these big increases in wages and earnings growth in the Mainland China economy remained a are likely to have had a significant impact on stabilising influence in the region (and especially for consumption and therefore overall growth. Hong Kong). Hong Kong’s employment is still at record levels 14 HONG KONG BUSINESS | AUGUST 2012

2011 Q4

Undervalued minimum wage?


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richard branson Exceeds expectations


“Doing things better doesn’t have to cost more – all it takes is a little creativity and attention to hiring, training and management.”

: How does Virgin manage to deliver impeccable customer service that at times seems to be above and beyond the norm while keeping prices competitive? And why is it that so many other businesses only seem to be able to deliver either low prices with no service, or high prices for good service? — Ryan Morphett, Entrepreneur magazine A: When you are making a decision about how best to serve your customers, your own experience is often a better guide than a more sophisticated analysis of the market. I find that I am often more disappointed by expensive goods and services than I am by lower-priced ones because my expectations are often over-inflated when I pay a high price, but I have few expectations when I pay a low price. If a top-of-the-line product or service doesn’t work as I had hoped, I might think: “At that price I really expected something better.” But if something is disappointing at the other end of the scale, I’m likely to think: “I’ve only got myself to blame,” and “Oh well, I guess you get what you pay for!” A question that often appears on customer surveys is: “Did we meet your expectations?” If the response is in the affirmative, the company may conclude that they must have done a good job – which may not necessarily be the case. Consider a situation where a customer who has had a bad prior experience comes in

with very low expectations. When a client anticipates that service will be lousy and that’s precisely what they get, then technically their expectations have been met! Realistic expectations The key is to set realistic customer expectations, and then not to just meet them, but to exceed them – preferably in unexpected and helpful ways. Setting customer expectations at a level that is aligned with consistently deliverable levels of customer service requires that your whole staff, from product development to marketing, works in harmony with your brand image. Because when there is no alignment, chaos can ensue. In commercial aviation, the big, long-established carriers, often still referred to as “full-service” airlines, set themselves up for failure by continuing to oversell their services, even though they ceased to provide great service long ago. Their passengers have higher expectations than when they pay an identical fare for the same trip on a low-cost carrier. Meanwhile, the lowcost carriers have done a very good job of setting expectations as they reinvent short-haul flying. Ryanair CEO Michael O’Leary and his team are unapologetic about their decision not to provide a great many traditional perks. What their customers do get in exchange for consistently low fares is flights on clean, well-maintained aircraft that usually leave on time.

Virgin America’s model At Virgin America, we try for a different model. We offer great value, providing clean, stylish, comfortable planes for our passengers; in terms of service, we try to surpass travelers’ expectations by offering better entertainment, good food and more comfortable seats. For the last five years the airline has consistently won customer service awards. Pricing your product or service is only one way to exceed expectations, however. The other is through your front-line employees – everyone who works with customers. Surpassing expectations on the service side means that your people understand what your brand stands for, that they are proud of it and will go the extra mile to make sure that your customers are happy. Call for creativity Doing things better doesn’t have to cost more – all it takes is a little creativity and attention to hiring, training and management. To achieve consistently terrific customer service, you must hire wonderful people who believe in your company’s goals, habitually do better than the norm and who will love their jobs; make sure that their ideas and opinions are heard and respected; then give them the freedom to help and solve problems for your customers. You should ask them to treat the customer as they themselves would like to be treated – which is surely the highest standard! HONG KONG BUSINESS | AUGUST 2012 17


Is food inflation a boon or burden to rural Asia?

Economists debate whether rampant food inflation will raise living conditions in the region’s countrysides.


hilst inhabitants of Asia’s cities are decrying rising inflation, out in the country sides they are celebrating their new found wealth from agriculture. Far from being a negative, for much of Asia, this recent 2-year bout of inflation, much of which is food related, is helping to spraed the wealth to the poorest parts. Inflation drives rural boom In effect, farmers are enjoying positive terms of trade shock. Frederic Neumann, co-head of Asian economics research at HSBC, argues that the real boom lies in rural areas as farmers are able to purchase more in return for their output year after year. As a result, consumption in the countryside is soaring, even if average incomes are still below those in cities. “High food prices have lifted incomes in the countryside, often at a faster pace than in the cities. This has important implications. First, it adds to wage pressures as migrants 18 HONG KONG BUSINESS | AUGUST 2012

“High food prices have lifted incomes in the countryside, often at a faster pace than in the cities”

require ever higher wages to entice them to industrialized areas. Second, while it helps alleviate inequality between rural and urban areas, it aggravates it in cities. For officials, this means that potential growth rates have slowed, and industrial slack is no longer the best guide for the appropriate monetary stance,” he said. So how much faster are rural incomes growing than city incomes? In China, by some measures, rural incomes have outpaced urban incomes since 2009, and by an increasing margin over the years, estimates Neumann. ”In Indonesia, per capita consumption in rural areas has risen faster than in cities since 2006, after lagging urban areas for years. In Thailand, though patchy, data also shows faster income growth in the largely rural Northeast than in Greater Bangkok in 2007, and in India,rural areas are seeing burgeoning consumption, a fact that helps to propel overall demand even as the industrial sector looks a little

shaky.” Some economists, though, remain unconvinced that food inflation is driving Asia’s rural boom. Alaistair Chan, an economist at Moody’s Analytics, notes that many rural dwellers are farmers and so higher food prices mean higher rural incomes. “That said, in China’s case much of the food inflation is due to higher logistics costs, toll charges and so on, so the rural boom has been driven by government investment, rather than rampant food inflation.” According to BBVA chief economist Alicia Garcia-Herrero, rapid income growth and rising labor costs are the true factors that lift living conditions in rural areas. “Income growth increases demand on food products from rural areas, and rising labor cost can bring more revenues to rural families via remittance from migrant workers. Therefore, we would rather not attribute the increase in living conditions in rural areas to food inflation itself, but rather to the increase in other costs like transportation and fertilizers,” she adds. But Herrero argues that neither income growth nor rising labor cost would lead to a boom in Asia’s rural areas. “For a rural boom to happen we should see more investment and more productivity gains.” Hyun Son, senior economist at Asian Development Bank’s economics and research department, argues that food inflation proves to be more of a curse than a blessing to poorer households in rural areas. Studies have shown that many rural households in developing countries are actually net food consumers, meaning they consume more food than they produce or sell. “Our view is that in the long run we can only improve rural incomes by enhancing rural development through investment to improve farm productivity or to promote food processing industries. While rising food prices may favor the agricultural sector and, possibly, help reduce poverty in the short-term, this is neither a sustainable nor a long-term solution to rural poverty,” says Son. When rural and urban meet Neumann also points to the equitable effect of higher food prices, which he notes leads to rising rural incomes

ANALYSIS: Asia’s RURAL BOOM and have helped reduce the income gap between rural and urban areas. DBS chief economist Dave Carbon also believes higher food prices can help improve income distribution. “Higher food prices are an important part of the rebalancing between urban and rural areas. While governments try to keep food prices low, often in the name of the ‘poor’, it really only helps the urban poor. In many countries higher food prices are good for the poor, as many poor reside in rural areas,” he adds. Moody’s Chan believes the income gap reduction has not happened yet but will happen soon. “Inequality remains a big problem in China and urban incomes are rising quickly, so there is still a big gap between urban and rural incomes. But as rural incomes rise, there will be less urban migration,” he adds. But in order to reduce the urban/ rural income gap, average rural incomes will have to rise faster than urban incomes and this trend has not materialized yet, says Son. She notes that rising food prices affect people’s welfare by weakening purchasing power—simply put, higher food prices will make city dwellers worse off assuming that their incomes stay the same. Moreover, the adverse welfare impact of the high food prices would be more severe on the poor. “It is easy to see how those who spend 80% of their incomes on food will suffer more than those who spend only 20% of their incomes on food.” In ADB’s recent study on food

security, the impact of rising food prices on poverty in Asia was explored. Son reveals that during the late 2000s four factors led to changes in the number of poor people in the region including population growth which increased the number of poor by 6.5 million; higher food prices which increased the number of poor by 112 million; higher non-food prices that increased the number of poor by 95 million; while there were higher nominal incomes which reduced the number of poor by 244 million. “Therefore, the net effect of these four factors is a reduction in Asia’s poverty headcount by 30 million in the late 2000s.” Meanwhile, Neumann also notes that the rural boom slows the flow of migrant workers into cities, thus putting upward pressure on wages. “One salient feature of urban labor markets in recent years has been sharply rising wage costs and, in some cases, lack of available labor, forcing companies even in manpower-abundant China to turn increasingly to factory automation.” However, Son argues that a rural boom does not necessarily cause wage pressures in cities. She notes that even if we assume that a rural boom is happening, rural wages are still so low compared to those of urban wage rates that we do not expect a significant reduction in rural-to-urban migration. “Rather than rural wage rates, economic growth is the main cause of upward pressures on urban wage rates as

Poverty reduction rates in rural and urban areas (in %) 20 Rural



10 5 0




Source: ADB publication Global Food Price Inflation and Developing Asia.

economic growth increases demand for labor.”

Alaistair Chan

Alicia GarciaHerrero

David Carbon

Hyun Son

Urban-rural rebalancing in Asia BBVA’S Herrero reckons that Asian countries, accounting for one third of the world’s GDP and contributing one half of growth, have come to a crossroads when it should start to rebalance its economy: from export oriented to domestic demand driven, from investment-focused to consumption-focused, and from growth-targeted to one caring more about social welfare. People in the rural areas have improved their living conditions through remittance income. In the same way, cheap labor from the rural labor bolstered economic growth in urban areas. Herrero notes that in China, 120 million migrant workers from rural and western areas are working in the more industrialized eastern coastal areas. But according to Chan, the massive urban migration seen in the past few decades is beginning to slow, although the share of urban dwellers as a proportion of the population will continue rising, albeit at a slower pace. Rural boom still premature Ultimately, Son reckons it is still premature to say that there is a rural boom or urban-rural rebalancing in Asia. From a recent study by ADB on food security and poverty, in India, economic growth between 2004 and 2010 resulted in nearly the same annual rate of poverty reduction in rural (3.96%) and urban areas (3.64%). On the other hand, in Indonesia, economic growth between 2005 and 2010 led to faster poverty reduction in rural areas (5.21% per year) than urban areas (0.36% per year). However, in China, rural poverty decreased at an annual rate of 4.9% between 2005 and 2008, while urban poverty decreased at an annual rate of 15.26% in the same period. “What the findings from China, India, and Indonesia show is that we cannot say that there is a rural boom or urban-rural rebalancing in Asia even amid rising food prices in the late 2000s. While higher food prices should improve terms of trade and eventually benefit food producers, many other factors come into play to determine rural development.” HONG KONG BUSINESS | AUGUST 2012 19

Vincent Ma President, Wharf T&T 20 HONG KONG BUSINESS | AUGUST 2012


Wharf T & T out to conquer the cloud Anna Healy Fenton talks to Wharf T & T president Vincent Ma as he spells out the opportunities in Cloud technology and the challenges it poses. Anna: After 18 years in the telecommunications industry, how has Wharf T&T grown as a fixed-line operator? Vincent: Calling Wharf T&T a fixed line operator is by itself very boring. It implies you don’t do mobile or have iPhones, so how can you survive? We developed a unique market position as probably the only telecoms operator in Asia dedicated to serving the business sector with a 100 per cent business brand. Wharf T&T is a business, not a consumer brand, and that reflects our philosophy. Our mission is to enable business for our customers - we enable businesses to do business and enable them to make profit. None of our competitors has this commitment. We are not just a fixed line operator, we serve our clients end to end in terms of all their ICT (Information and Communications Technology) needs. From survey and network infrastructure, security firewall, data centres, business continuity, system integrations, applications, e-marketing, to social media marketing – a full portfolio. Of course a fixed-line operator is very infrastructure-oriented; unless you develop fibre infrastructure and data centres you would not be labeled as a fixed-line operator. To deliver the genuine value on this “enabling business” model, we merged with our sister company

“Wharf T&T is a business, not a consumer brand, and that reflects our philosophy. Our mission is to enable business for our customers we enable businesses to do business and enable them to make profit.” COL, which has been in IT for 30 years, giving us data centre facilities, system integration and application expertise. In 2006 we started a Wharf subsidiary, Wharf T&T ebusiness, which helps our customers in the front end, to help them find their customers through effective marketing technologies. We start with subscription-based email marketing, then social media campaigns. For a couple of thousand Hong Kong dollars a month people are there to help with all their marketing. Smalland medium-sized enterprises (SMEs), which account for 95 per cent of our customers, don’t have a sales and marketing department, so we can enable their business from back to front end. Anna: You have been named a LOOP Gold Label ICT (WWF-Hong Kong’s Low-Carbon Office Operation Programme Labelling Award Ceremony) service provider two years in a row. Tell us more. Vincent: We believe Corporate Social Responsibility (CSR) and business objectives can co-exist, so our CSR team and volunteers work closely with WWF to establish guidelines and policies for reusing and recycling towards the greening of Hong Kong. We just launched the “You Love IT” TV commercials, featuring the band Girls Kingdom and we have a charity campaign: “ICT Heart to Heart”, which is probably the first time iPhone apps have been used here to do charity. We try to implant CSR as an inborn attribute of the whole company.

Anna: You invested HK$5 billion in your telecommunications network infrastructure in Hong Kong. Any plans to increase your investment internationally? Vincent: Our objective is to put fibres to cover 95 per cent of the business community of Hong Kong. Two years ago we said we wanted to extend our fibre network to the desks of 95 per cent of our business customers and already we have achieved 85 per cent of that, but we still have to work on that over the next couple of years. In Hong Kong we still run into problems like building access, but we have already covered most of them. I am not very interested in going into international submarine cable; a lot of expert people are already doing it. We have been a very good partner with those submarine cable owners and we help them to bring their cables to the territory, extending it to any customer that needs it, end to end. I am more interested in Cloud services. Cloud is the hot topic, the sexy buzz word in the global IT sector. But we need to make sure Cloud can serve our customers better than we serve them today and there are still a lot of question marks. But Cloud is the way forward for us, with public Cloud services for SMEs. Anna: How are you overcoming your current challenges? Vincent: As a relatively young company, we need to exploit our development potential to get a bigger share of the market. Also we don’t call ourselves a fixed-line operator any more; we’re an ICT company, so as well as infrastructure we need a lot of value creation services. That involves talent. Hong Kong has close to 100 per cent employment, so finding and training talent is always a challenge. And when we go into Cloud services we will need even more talented staff. These are the two major things, along with keeping pace with technology advances. Anna: Amazon’s USA Cloud storage was recently hit by major power outages caused by exceptional weather. How will you address those risks? Vincent: I think the Cloud technology will make it reliable and secure, but you have to do it seriously. Private Cloud will be for the big enterprises. They will use it to improve their productivity, cost efficiency, serving multiple offices, those kinds of things. But the SMEs will struggle to find the expertise to do Cloud themselves. That’s where an ICT company like us can play a massive role by establishing public Cloud services with end-to-end applications, private infrastructure, everything integrated. Then these SME customers won’t need a huge IT department. Hong Kong has 200,000 active registered businesses and we have 50,000 of them. There are huge opportunities, but if you ask me how to run these Cloud services, I am not 100 per cent confident of the proven formula yet. We still need to trial and error and research because of customer concerns about security, trust and their exact needs. You need a very high quality, secure data centre with a lot of redundancy. COL is probably the longest-serving data centre operator in Hong Kong. So we’re working on technologies in terms of securities infrastructure, network structure, security platforms, all providing a lot of Cloud security. HONG KONG BUSINESS | AUGUST 2012 21


Hemlock Civic education in question

by hemlock Email:


ollowing the shocking revelation that 99.98% of Hong Kong Chinese preferred to marry Westerners, we now learn that no fewer than two out of three school children are depressed because of exam pressure. As well as lies, damned lies and statistics, there are also statistics as summarized by the Standard. The ‘two thirds’ is actually 57.3%– closer to half. Further down the article, the percentage has whittled down to 22 and ultimately it transpires that 3.5% are seriously at risk of depression, leaving us with a textbook example of a non-story. Studies show that, as well as suffering dire mental health due to exam stress, hefty percentages of the Big Lychee’s kids are stricken by gambling, smoking, drinking, hanging around Internet cafes with bad elements, compensated dating, computer games and Facebook, with a smaller proportion of nostalgic traditionalists who are still being turned into crazed drug fiends by good old-fashioned violent comic books. The children, welcoming a few minutes break from their books, regale the inquisitive social workers with lurid tales of substance abuse and rampant sexual promiscuity, and everyone is happy – not least newspapers in search of horrifying stories. The reality, readily observable on the street before and after school every day, is that most kids are pretty normal and apparently happy in spite of everything. This is just as well, because the next time-wasting idiocy adults have decided to hurl at the poor mites is on the way: national education. This scandal is a double-edged one, however. It concerns The China Model, the communist propaganda textbook that, Reuters-subscribing news media around the world are reporting,

do, the content will backfire. There is, we are told, no acknowledgement that the system has delivered tainted milk, high-speed rail crashes, Bo Xilai, corruption, nepotism and injustice along with its policymaking decisiveness and economic growth.

The problem of funding So the scandal is not the silly text, which is intended to ‘balance all the negative stories’ and probably also to appease officials here and to the north. The problem is in the funding of it. For some five years now, the Education Bureau has been giving the United Front-linked National Education Services Centre and associates HK$12-13 million a year to produce this stuff. The NESC and related National Education Centre are endorsed by the usual leading pro-Beijing political and labour figures. Compared with the fortune Hong Kong on textbooks, the money is a drop “The children regale the inquisitive social squanders in the bucket. But you do have to wonder what workers with lurid tales of substance abuse they were doing with it. There is a precedent for the Education Bureau to embarrass Hong and rampant sexual promiscuity, and Kong. A few years back, someone had the bright idea to use the Society of Truth and everyone is happy.” Light, which sees gays as sinful and in need of curing, to train teachers in human rights and, as you Hong Kong will use to warp and twist its innocent would expect, nondiscrimination. children’s minds. The book states that the American So, total damage done: HK$13 million a year political system is a screwed-up mess, and so of our tax money down the drain; the Big Lychee obviously isn’t completely inaccurate rubbish. But made to look stupid in the international press; of course it lauds the one-party dictatorship as a the integrity of the ‘China Model’ and one-party blessing, reportedly using phraseology intended to rule left in even greater tatters than before in most make young readers’ hearts swell with pride. Since Hongkongers’ minds. On balance, it probably all most kids know BS when they see it, and since their evens out. parents study their textbooks just as hard as they 22 HONG KONG BUSINESS | AUGUST 2012

Were you a depressed student?

co-published Corporate profile

Go west… but tread carefully. Bad news thrive, but survey says western Europe is rising


ick up a newspaper, watch the TV business reviews, check online newswires: the story’s the same: Western Europe is battling an epidemic of diminishing business and consumer confidence, falling demand and spiralling debt. Of course, that is what you might expect from news channels. They thrive on bad news. In fact, to some, the only news worth reporting is bad news. The economic downturn of 2008 marked a sea change in the career prospects and earnings power of economic journalists and broadcasters, many of whom have found themselves transformed from grey suited backroom boys – reeled out for a two minute comment on the exchange rate mechanism – to near rock star status, with interviewers and audiences alike hanging on their every word, even if we truly understand only half of what they say. That’s the news. The question is ‘Does it accurately reflect the true picture – or indeed, does bad news of this kind become a selffulfilling prophecy?’

in Hong Kong that is already trading in Europe, or has an eye on Western European countries as a potential market. The reason? It’s that, if you were to make strategic sales decisions on the basis only of what you’ve gleaned from news channels, you would be missing out on the valuable insights of those who are actually doing business - and on Atradius’ unique analysis. Take the survey responses to the question ‘What percentage of the total value of your B2B invoices are overdue?’ While it may come as no surprise to see businesses in Greece, Italy and Ireland – three Eurozone countries at present struggling to get their economies back on track – reporting a sizeable volume of late payments from their domestic customers (41% in the case of Greece), it may come as something of a shock that German survey respondents also report a considerable level of late payments from their domestic customers (31%). While over half of Germany’s late payments are settled within 15 days of their due date, that still leaves many debts languishing: some to over 90 days late.

Keeping the balance At Atradius, while we of course value the analysis and forecast of economic experts, we also balance that by seeking the views and first-hand knowledge of those at the very forefront of national and international trade – and factoring their experience into our trade risk assessment. The Atradius Payment Practices Barometer, a survey of business of all kinds across the world, asks those at the ‘sharp end’ of commerce and trade for their views and experiences. Are their business-tobusiness customers paying on time, late – or at all? What steps are they taking to keep their cash flow healthy, encourage early payment and avoid bad debts?

Sales norms In many respects though, most of the surveyed companies in Germany, together with those in Austria, Sweden, Great Britain, The Netherlands, Denmark, and Switzerland, keep a tight rein on their exposure to the risks of non-payment by restricting their contractual payment terms to no

Indispensable analysis Atradius’ latest Payment Practices Barometer surveys business experience in Western Europe, and it serves as a useful guide to any business

“Stories of economic doom and gloom may keep newspapers and economists busy, but many of the businesses surveyed by Atradius nevertheless saw them bottoming out.”

Matthew Cockerill Atradius Country Manager - Hong Kong

more than 30 days credit. Potential suppliers from Hong Kong may therefore consider this to be an acceptable norm for their sales to these countries, although clearly terms of payments are a matter for agreement between the contractual parties. Bright future ahead To return to how I began this article, stories of economic doom and gloom may keep newspapers and economists busy, but many of the businesses surveyed by Atradius, while acknowledging that financial trading risks may not lessen over the rest of 2012, nevertheless saw them bottoming out. Notably, over 72% of Dutch and 78% of Danish respondents believe that the risks will remain unchanged or decrease, while the same goes for a massive 84% of Turkish and Swedish respondents. However, when analysed by trade sector across Western Europe, wholesalers and retailers were the most pessimistic about their short-term trade credit risks. Could that be the inevitable outcome of bad news influencing consumer confidence? Whichever way the economies of Western Europe go, credit insurance provides vital protection against unforeseeable financial risks. And, on the positive side, by assessing the creditworthiness of your prospective B2B customers, credit insurers act a signpost to the potentially most worthwhile sales prospects. You can download Atradius’ detailed Payment Practices Barometer from www.



Tim hamlett

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

The appeal of uniforms


wide variety of official pictures announced the arrival of our new CE and his selected advisors. One thing was really strange about them: all the men (there was only one woman) were wearing the same thing. Every man was wearing a uniform. Not a military uniform or a police uniform or an MTR uniform, but a uniform just the same. This consisted of a suit in lightweight charcoal grey worsted. No visible stripes or pattern. A white shirt. There was some variation in the choice of tie. Where the picture extended low enough, everyone was wearing black shoes. Unsuitable suits There are a number of things we can say about this get-up. The first is that it is completely incompatible with the Hong Kong climate. The whole look was designed for Northern Europe and wearing it in the open air here is an ordeal. This does not mean that our future leaders were voluntarily exposing themselves to discomfort, of course. It means that in the normal course of events, everywhere they go, apart from the short distance from building exit to car, is air-conditioned. It is furthermore air-conditioned to a fairly low temperature, because so many people in it are going to be dressed in the same way. Suit for business You could say, I suppose, that they were being lazy. The nice thing about a uniform, as C.S. Forester observed long ago, is that it spares you the exhibition of personal taste involved in choosing your own clothes. Whether it looks good on you, or looks good at all, does not matter. You did not select it; you wear it because you have to. But there is really no reason to be as uniform as people commonly are in Hong Kong. Business requires a suit. It does not require dark grey monochrome. I assembled a small collection of suits when I was doing a lot of television work. One does not wish to appear to be wearing the same thing all the time so I had different colours: dark blue, brown, dove grey. People who go in for the same boring look have chosen not to choose. There is similarly no reason why the shirt should always be white. I must confess that all my surviving ones are. Again this is laziness. It saves you worrying about whether the suit, tie and shirt as a combination go together. A Hong Kong thing Actually this desire to dress the same seems to be a Hong Kong thing. I was bemused to read that the commander of our PLA garrison does not let his men out in case their “martial spirit” is diluted by contact with Hong Kong people. Has he not met any Hong Kong people? Our countryside resounds every weekend to the noise of amateur wargames. I came across a large contingent in a country park last year and was impressed not only by their numbers but by the uniforms, all matching and all purchased at considerable expense. The Boy Scouts, which in other parts of the world is a relaxed introduction 24 HONG KONG BUSINESS | AUGUST 2012

to the skills involved in open-air activities and living, is in Hong Kong a paramilitary organisation, replete with heavy boots, foot drill and a large military band. I once played at a parade for Red Cross nurses. They were all in nurse uniforms, but the performance was the usual passing out stuff at light infantry speed. The medical usefulness of foot drill to this standard seemed to me questionable. I occasionally used to come across students who had been in one of these organisations. They usually said they enjoyed doing drill. It was the togetherness. Mainland graduate students have all done it as a compulsory subject at university. They regard it as a waste of time. Which just shows you that people generally like what they choose and reject what is forced upon them, a point which local curriculum planners have great difficulty with. But I digress. Suits in perspective Hong Kong people slip into uniform very easily. In very early photographs, where the local population is still in traditional Chinese, everyone is already wearing the same thing. Same gown, same hat. Nowadays shop assistants, receptionists, street sweepers, waiters... every job has a uniform. The Western suit is of course the uniform of business. Real estate salesmen swelter in it when showing people round our estate. I suppose they would not be taken seriously otherwise. Look at the top table at your company’s AGM, press conference or whatever, and you will see much the same as Mr Leung sees round the Exco conference table: acres of uniform suiting. The idea that men should dress as if they were going to a funeral actually dates back only to the Victorians. Before then men were expected to be colourful. Those 18th century military uniforms now found only on bandsmen were in their day no more colourful than the civilian stuff. I suspect that like so many Victorian innovations the sober suit was introduced as an antidote to sex. Advertising desirability Culturally, we tend to behave as if men hunted for wives and women were the passive recipients of their attentions. Biologically, it is the other way round. In other species this is obvious. The reason why the male bird has the colourful plumage and the female is a boring brown shade is because she does not need to advertise. The ladies do the choosing. According to the biologists, this is the case with humans as well. A young male may feel that he walks into the bar, sizes up the prospects, and pursues the one which catches his eye. Close examination of the body language, though, reveals that he goes where he is invited. So the prevalence of funereal male garb is something of a puzzle. I imagine we would find a good many conspicuous. One does not see grey Ferraris. A man who drives a grey Rolls is saying that, for him, the mating season is over. He is only available as a sugar daddy. “Strut those uniforms!”



China’s catastrophic deleveraging has begun Troubling economic data suggest that the over-leveraged Chinese economy is on the brink of collapse. By Dee Woo


f one wants to know how bad the health of China’s economy has gone, look no further than The People’s Bank of China’s (PBOC) composure, which seems rather frustrated and aggressive as of late. On the 5th of July, the central bank cut benchmark interest rates for the second time in less than a month. This happened right after the fact that in December 2011, PBOC cut the reserve requirement ratio (RRR) by 50bps to 21%, it followed up with another 50 bps in February and another 50 bps in May to 20% currently. On top of all the rate cuts, PBOC also made its biggest injection of funds into the money market in nearly six months. The PBOC injected a net 225 billion yuan ($34.5 billion) through the reverserepurchase operations in mid-July, following a combined injection of 291 billion yuan in the previous four weeks. The systematic short-circuit of debt financing is in order So why is PBOC in such an urge to open the floodgate of liquidity? 26 HONG KONG BUSINESS | AUGUST 2012

“The country’s biggest banks will need to increase their capital levels to 11.5% of assets by the end of 2013.”

This economist will spare you the boredom of looking at the diagrams of China’s economic misery: HSBC PMI, etc, since you can find those eye candies everywhere else on the web. Let me cut to the chase: However high it aims, PBOC’s action in practice merely works as the band aid to the bleeding economy; but it won’t be able to fix it. The central bank’s aggressive pro-liquidity maneuvers at best serve to sustain the over-leveraged economy and avoid the systematic short-circuit of debt financing. Now allow me to divulge: The main drivers of China’s debt financing, China’s state-owned banks, are starving for cash. According to Citigroup estimates, in 2011 seven of the biggest Chinese banks raised 323.8 billion yuan ($51.4 billion) in new funds. Several financial firms are expected to raise another $17.7 billion in the next few months, with China’s fifth-biggest lender, the Bank of Communications, accounting for $9 billion. The unprecedented lending binge encouraged by the central government, increasingly rigorous requirement of regulatory capital and

excruciating maintenance of excessive dividend payouts have rendered the most profitable banks in the world-Chinese banks--in a rather precarious position. GaveKal’s data will illustrate that this is no exaggeration. In 2010, China’s five biggest banks — the Big Four plus the Bank of Communications — paid more than 144 billion yuan in dividends while raising more than 199 billion yuan on the capital markets. The ballooning balance sheet caused by the loan frenzy and strict capital requirement make China banks’ cash-craving burning at both ends: This march, China’s Big Four— Industrial and Commercial Bank of China, the Bank of China, China Construction Bank and Agricultural Bank of China — had a combined 14% increase in total assets, to 51.3 trillion yuan, which is roughly the size of the German, French and British economies combined. Meanwhile, under a new set of rules, the country’s biggest banks will need to increase their capital levels to 11.5% of assets by the end of 2013. Their core Tier 1 capital ratio will need to be at least 9.5%. These requirements are more stringent than the rules that apply to American and European banks. Hereby, we shouldn’t be surprised why the world’s most profitable banks are in dire need of cash. It has to be PBOC who comes to the rescue. But we can’t expect the alchemy of central banking to conjure miracles other than administrating monetary band aids when the economy is broken. The over-leveraged economy and unsustainable bubbles According to the great Ray Dalio’s principles, the credit-fueled Chinese economy is so over-leveraged that a great de-leveraging is going to be the only way out. The pyramid of debt/ credit is cracking and will collapse since the conditions of underlying economic agents are deteriorating. There’s no amount of monetary band aids that can alter that destiny. According to Fitch’s data, the ratio of total financing/GDP in China rose from 124% at end‐2007 to 174% at end‐2010, and rose by another 5pp to 179% in 2011. In 2012, the growth of broad credit will slightly decelerate

ANALYSIS: CHINESE ECONOMY but still outpace GDP. Clearly, China is not suffering a liquidity crisis but one of diminishing economic return on credit. According to Fitch, in 2012, each CNY1 in new financing will yield ¥0.39 yuan in new GDP versus ¥0.73 yuan pre-crisis. Returns would have to rise above ¥0.5 yuan for domestic credit/GDP to stabilize at 2011’s 179%. The dilemma is that business entities will need more and more credit to achieve the same economic result, and therefore will become more leveraged, less able to service the debt, and more prone to insolvency and bankruptcy. It will reach a turning point when the increasing number of insolvencies and bankruptcies initiate an accelerating downward spiral for underlying asset prices and drive up the non-performing loan ratio for the banks. And then, the over-stretched banking system will implode. A full blown economic crisis will come in full force. The chain of reaction is clearly set in the motion now. The question is when we will reach that turning point. What PBOC has done is only add fuel to the fire because it is unable to tackle the root causes of China’s economic ills. The root causes are unsustainable economic bubbles and collapsing demand. Firstly, I will analyse China’s construction industry to illustrate the severeness of China’s economic bubbles. Accoding to Société Générale, in 2010, China spent more than $1 trillion on construction (including residential/non-residential real estate and infrastructure), representing around 20% of its nominal GDP, or

almost twice the world average as the chart below shows. In 2010 the scale of the Chinese construction market outpaced that of the US and became the largest construction market worldwide with around 15% share. That year China’s construction binge pushed its investment/GDP ratio to 48.5%, a record unprecedented in the recent history of China and other major economies. It’s sufficient to say China is a construction-led economy. In 2010, China’s cement consumption surpassed 1,800mt, which is around 55% of global consumption and about 25 times more than US consumption. With average consumption of 1,400kg per capita, China stands well above the world average ex-China of 300kg. History shows that such high consumption is hard to sustain for a number of years and ultimately leads to a construction crisis sooner or later. In 2010, China has built around 1.8 billion square meters of new residential floor space, which is the equivalent of Spain’s housing floor space stock. This construction has already provided accommodation for 60 million people while the urban population has merely increased by c. 20 million. If China were to keep its current construction pace over the next five years, the 9 billion sqm in new housing area built would provide accommodation for 300 million more people by 2015. Therefore the available floor space stock in China will be able to accommodate an urbanization rate of 65-70%. But according to IMF’s forecast, it will be not until 2030 for China’s urbanization to reach that level. How can the central

Cement consumption per capita (kg)

Source: SG Cross Asset Research, US Geological Survey, Italcementi

“If China’s cement consumption per capita keeps its current momentum, sooner or later China’s construction bubble will reach its end game.”

government punish those farmers migrating ever so slowly to the cities? Obviously, China will have more and more cities like Ordos, a modern Chinese Ghost Town photogenically praised by the Time magazine. If China’s cement consumption per capita keeps its current momentum, sooner or later China’s construction bubble will reach its end game. Economic bubbles are unsustainable. It works like a Ponzi scheme. When it first starts, the excess liquidity unleashed by the central banks will drive the asset prices higher and higher. There will be more and more people and money buying into the game assuming the price will keep rising. Back then the leverage is not a problem. But when the great deleveraging is beckoned, there will be a stampede towards the exit. That’s when any Ponzi scheme collapses. Let’s make no bones about the fact that China’s investment-fueled growth including the construction binge is just a Ponzi scheme. The myth of China’s transition towards consumption-led economy At this stage, China can’t rely on excessive investment to propel its growth much longer. So, what about seeking the growth more and more from the demand side of the economy: the foreign and domestic demand? Well, that path looks rather bumpy as well. As to foreign demand, China’s export growth clearly is decelerating recently as the major customers--EU and the US--are both fighting on the edge of a double-dip recession. It is immoral to accelerate the export growth while trade partners are drowning in their debt crisis. It is also rather dangerous while those trade partners are fighting for their survival and won’t hesitate to start a trade war to defend their lifelines. China can sincerely hope that EU and the US soon bounce back from the economic abyss to become their best customers again but that won’t happen for a long time. I agree with Ray Dalio that this economic crisis is a great deleveraging, which will take more than a decade to unwind. According to UBS Wealth Management Research’s report, the great deleveraging will likely play out through to 2020. The ratios of debtHONG KONG BUSINESS | AUGUST 2012 27

ANALYSIS: CHINESE ECONOMY to-incomes must go down in EU and the US. Sorry, China, no more easy fuel for your export growth. Now that’s too bad. The Ponzi scheme of investment growth and the export growth are both collapsing. What’s left for China to seek the growth then? Domestic demand aka private consumption? It looks promising but not very convincing. Let’s examine the structural reasons why China’s domestic demand will have its work cut out in refilling the role for economic growth left vacant by collapsing investment and export. First, contrary to what many choose to believe, China’s trade surplus is not caused by Chinese consumers’ high savings rate, but has much to do with their deteriorating disposable incomes which lag far behind GDP growth and inflation. According to the All China Federation of Trade Unions (ACFTU), workers’ wages/GDP ratio has gone down for 22 consecutive years since 1983. It goes without saying that the consumption/GDP ratio is shrinking all the while. Meanwhile, Aggregate Savings Rate has increased by 51% from 36% in 1996 to 51% in 2007. Don’t jump to your conclusion yet that Chinese consumers have been over-tightening their purse strings. The truth is far from conventional perceptions. According to Development Research Center of the State Council’s report, that increase is mainly driven by the government and corporations and not by households. For the past 11 years, Household Savings Rate has only increased from 19% to 22%. Even India’s Household Saving Rate of 24% is higher than China’s right now. All the while, government and corporations’ savings rate has increased from 17% to 22%, which accounts for nearly 80% of the increase

China’s Export Growth

on Aggregate Savings Rate. For the past decade, Government’s fiscal income is growing faster than GDP or Household Income. In 2009, the fiscal income was 687.71 billion yuan, and achieved an annual growth of 11.7% while GDP growth was 8.7%, Urban household disposable income growth was 8.8% and agriculture household disposable income growth was 8.2%. It is obvious that the state and corporations have taken too much out of national income and hence they continue to weaken the consumers rather than empower them. Second, the state enterprises and crony capitalists have heavily dominated the income distribution. The deteriorating income inequity makes it harder for GDP growth to trickle down to overall consumption. In 2010, the net profits from two central enterprises (China Mobile and Petrol China) outstripped the net profits from the top 500 private enterprises combined. Meanwhile, central enterprises only contribute 30% of GDP, and provide 20% of national employment while the private enterprises contribute 70% of the GDP and provide 80% of the national employment. Adding fuel to the fire, monopoly enterprises also account for 55% of national wages and salaries. The widening income gap will skew more and more national income towards corruption, rent seeking, capital flight, asset investment and speculation. Thus the consumptionside of economy will be continually weakened. The biggest problem for China is how the state, central enterprises and crony capitalists wield too much power over the national economy, have too much monopoly power over wealth creation and income distribution,


% of nominal GDP

50% 40%





and much of the GDP growth and vested interest groups’ economic progress are made on the expanse of average consumers stuck in deteriorating relative poverty. If these problems aren’t solved, the faster the Chinese GDP growth, the less Chinese consumers will be able to support the over-capacity expansion, and the more export momentum China will need to sustain its growth. This is a vicious circle of global imbalance. Even the revaluation of RMB can’t break it.

“The unsustainable economic bubbles and collapsing demand are the root causes plaguing China’s economy.”

The end game is coming There you have it: the unsustainable economic bubbles and collapsing demand are the root causes plaguing China’s economy. PBOC’s current maneuvers won’t fix any of it. As I said previously, those alchemy recipes of central banking will only sustain the over-leveraged economy and avoid the systematic short-circuit of debt financing for now. Other than that, there won’t be much liquidity invested in capacity and job-intensive projects since there’s little demand to go around and the economic return on credit will deteriorate. If these structural deficiencies aren’t properly addressed by the central government, things will get worse. More frivolous rate cuts and RRR cuts and other central banking gimmicks are sure to come, but to no avail. The chain reaction will be accelerated, and China will face its end game: the dark side of a great deleveraging. Dee Woo is a Standing Director at Beijing New Century Research Institute for Multinationals, a citizen economist, and a citizen diplomacy activist.


Consumption Gross Fixed Capital Formation


YoY Growth







-20% -30%























Source: Bank of Japan









Corporate Feature

Investment-linked insurance: Combining the best of protection and investment

A retirement plan can seem remote and distant for the young. Yet, effective use of wealth management tools and an early start in saving for our retired life do give us a head start in achieving our goals and enjoying lives.

Investment-linked insurance: ideal for the young For younger readers, the returns of relatively low-risk products might not match their expectations. Wealth management for the young means building wealth as early as possible. As such, higher risks for higher returns are not too much of an issue. This is why more young people are taking part in investment activities in recent years: wealth is accumulated through monthly contributions on investment tools such as stocks, funds and similar products. While it makes no harm for young people to invest early, protection needs should not be neglected. If we lose our ability of work as a result of an accident, our plans would be significantly affected, not to mention the relevant medical expenses involved. Amongst various products available in the market, I think investment-linked insurance products are the most suitable means for young people to save for their retirement. Investmentlinked insurance products are a type of insurance solution, but they are different from traditional life insurance products. Policyholders of traditional life insurance pay a premium and the insurance company provides protection in return. Investment-linked insurance products, however, emphasise on investment returns: premiums paid by policyholders are used to purchase unit funds of their choice, and the returns are reflected by fund performance. In short, these products can be seen as a combination of insurance and investment. Products becoming more investmentoriented Investment-linked insurance products have undergone certain changes as they evolve. In the early days, policyholders of these products are provided with a fixed amount as their life protection. In the case of death, the policy’s beneficiary will be entitled to the claims of this protection amount or the total value of the investment funds, whichever is higher. Part of the monthly contributions paid by the policyholder is used to pay the policy’s premium, and the remainder is used for fund investment. In the past few years, certain investmentlinked insurance products have become investment-oriented. The protection amount of these products is represented by the value of the investment fund. All of the premium, after deducting certain administration fees, will be fully vested on investment funds, such that policyholders can accumulate their wealth through dollar cost averaging. In the early days of investment-linked insurance plans, only less than 10 funds were on offer for policyholder’s selection. The number of funds available over the past few years has surged to a few dozens,

Jim Costello, Director and Head of Wealth Insurance, HSBC or even over 100 – they now cover most of the investment market. Making investments while enjoying personal protection Readers might question, as far as saving is concerned, what is the point of investing through insurance instead of making direct fund investments? After all, banks do offer quite a wide selection of monthly fund investment plans. To answer this question, let me illustrate the differences with a simple comparison. First of all, the choices available for a monthly fund plan might not match with investment-linked insurances: as the amount involved in a monthly plan is relatively small and the administration fees are comparatively higher, there are only limited funds to choose from the investment market. On the contrary, as insurance companies have contracts with fund houses, policyholders can use very little money to buy funds of their choice. Moreover, insurance companies can regularly review the funds portfolio, adding different alternatives to meet market needs. In terms of choice, investment-linked insurance do offer a better variety of funds. In addition, a subscription fee is charged as customers purchase funds. In the extended period of investment, we usually need to switch

“ I think investmentlinked insurance products are the most suitable means for young people to save for their retirement.”

funds to cope with changes in the market. This would, again require switching fees, even when the switch is done with the same fund house. As a result, the cost for investment becomes higher. At present, most investmentlinked insurance products do not charge subscription fees or switching fees, nor would they limit the number of changes on the fund portfolio. This provides higher flexibilities for the policyholder. Although policyholders still need to pay administration fees on investment-linked insurance products, I still consider it worth it for the overall flexibility they offer. The most important of all, is the protection provided by investment-linked insurance products. I want to stress that personal protection should not be ignored as we invest. Investment-linked insurance products are able to achieve such an effect. Most investmentlinked insurance products do not only provide life protection, but also other additional benefits, for example, waiver of premium on disability benefit and payor’s benefit, etc. With the waiver of premium on disability benefit, the insurance company will pay future premiums on behalf of the policyholder until the end of the premium payment period in the unfortunate event that the policyholder becomes permanently disabled, easing the policyholder from worries behind. The payor’s benefit, on the other hand, are tailored for policies taken out to cover a child aged 18 or under. In the event of death or disability of the payor, future premiums will be paid by the insurance company to ensure policy continuation, and to provide the payor’s child with an extra level of protection. Article by Jim Costello, Director and Head of Wealth Insurance, HSBC HONG KONG BUSINESS | AUGUST 2012 29

ANALYSIS: HK PEG The argument for ditching the peg is the practical one that Hong Kong could do better. “The peg is a very robust exchange rate arrangement. It doesn’t need to be “fixed.” But the Fed doesn’t set monetary policy with Hong Kong people in mind. Hong Kong people are, on average, 12% poorer than they would be if the HKMA ran monetary policy like the Central Bank of China, Taiwan’s central bank, “ added Condon.

Burning the peg the hot issue But the issues, as always, are not as clear cut.


“Ditching the peg would make it possible for the HKMA to have an independent monetary policy and it could target lower inflation. ”

expectations,” noted Condon. The peg ditchers’ stand Ditching the peg would make it possible for the HKMA to have an independent monetary policy and it could target lower inflation. But the real benefit, reckons Condon,it is in dealing with demand shocks like the Global Financial Crisis that an independent monetary policy really proves its worth. Demand shocks hit real expenditure and monetary policy can cushion nominal expenditure from the hit. “Hong Kong’s monetary policy is set by the US Fed. In the GFC it allowed Hong Kong’s nominal expenditure to contract virtually in lock step with the 7.9% from peak-to-trough contraction in real expenditure,” he noted.

So what next ? In the future as China’s economy grows Hong Kong’s economy will become more tied to it. “In that case it may be worthwhile for the HKMA to switch currency regimes and set the HK dollar to a renminbi or basket peg. Since the PBoC sets its monetary policy to smooth the mainland’s business cycle, if the HKMA ties its currency to the renminbi then this would also smooth Hong Kong’s business cycle. Hence the only reason to switch currency regimes is to stabilize the business cycle, not to make people richer or whatever,” added Chan.

Fig 1 Hong Kong Nominal GDP

Hong Kong Nominal GDP 600,000 500,000

Actual 1975-83 Trend (20.5% growth) 1984-2Q97 Trend (14.3% growth)

HK$ millions


ack in 2010 Hong Kong Business Magazine ran a front page cover story calling for an end to the peg. At the time we were a lone voice in the wilderness, and plenty of smart folks told us why abandoning the pegs would be a bad idea. But the last two years has seen the damage done by the peg to Hong Kong only increase, and our voice is not so alone. When former Hong Kong Monetary Authority (HKMA) chief Joseph Yam raised the argument a lot of people in Hong Kong put de-pegging back on the agenda. The runaway inflation that Hong Kong has experienced, especially in property prices, is wreaking havoc with people’s lives. The peg effectively means that monetary police in Hong Kong is decided by ‘Helicopter’ Ben Bernanke, and as ING economist Tim Condon points out, Norman Chan could do a better job for Hong Kong people than Ben Bernanke has done. Chief Joseph Yam raised the issue of the peg’s suitability for Hong Kong when he said it made the territory more vulnerable to asset price inflation. But it may not just be assets but also general inflation. “We also think the peg has made Hong Kong more CPI inflation prone since the GFC. Low short-term interest rates imported from the US via the peg sustain expectations of property price inflation that feed CPI inflation

A flawed argument But ditching the peg still has detractors. Alaistair Chan, an economist with Moody’s Analytics, reckons these views are “flawed.” The HKMA should set its monetary currency policy to suit its objectives and maximize welfare, he said,  and at this point it is in Hong Kong’s interest to keep a currency peg with the dollar. “Monetary policy generally cannot raise or lower living standards; all it does is smooth the business cycle. So it is wrong to say that Hong Kong people are poorer now than under a different regime.”

400,000 300,000 200,000 100,000 0

Source: EMED, ING Bank Source: EMED, ING Bank

3Q03-2Q08 Trend (7.2% growth) post-2008 Trend (7.4% growth)

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Living in Asia after the bust

The tale that has been told in countless books and, dare we say, business magazine articles, is one of an ever rising Asia that will one day achieve income parity with the West and live happily ever after. But what if it doesn’t work out that way?


hat if Asian economies stall half way, never able to close the productivity and income gap with the West? What if they are caught in a no man’s land of no real growth, no real income gains, and increasing price inflation that makes the lower orders feel like they are actually going backwards? What if the promise of a better tomorrow becomes undeliverable, and the reality of a harsher today unbearable for half of the world’s population? For those living memory of poverty, the prospect that they may have reached the highest rung on the ladder out of hard times and may actually be sinking back is scary. And made worse by the fact that there is little they may be able to do to affect their lot in life. From Singapore to Manila, workers are beset by limited prospects of a higher salary tomorrow whilst incessant inflation at 5 % or more erodes their recent gains and leaves 32 HONG KONG BUSINESS | AUGUST 2012

“Malaysia, Thailand, Sri Lanka and the Philippines have not improved their position relative to the US in 4 decades!”

them struggling for answers and a future. Five years after the economic crisis began, and far from the war cries of Europe, the forgotten economies of Asia are beginning to resemble adolescents who never flourish into adulthood, never able to really enjoy the sweet taste of the fruits of their labors. This, then, is the Asia of today, but is it the story of tomorrow? Asia’s tiger economies have slowed from high single digit growth rates to low single rates or even negative over the last five years, but once this global crisis is over will they resume their growth? Middle Income trap As Frederic Neuman, an economist at HSBC notes, it is easier to grow fast when poor, hard to do so when rich. “Lurking beneath all of this is the middle income trap. History shows that in some countries growth slows so much as they mature that they never break onto higher

ground, forever stuck in a range where per capita income doesn’t rise meaningfully further.” All countries in Asia are no doubt better off than they were 40 years ago, but how are they going in the “catch-up to the west” stakes? To answer this, Mr Neuman and his team compared PPP income as a share of US income, all expressed in logs, in 1970 and in 2009. What the data shows is that remarkably Malaysia, Thailand, Sri Lanka and the Philippines have not improved their position relative to the US in 4 decades! This suggests extreme policy failure. Next come the countries of China, India, Indonesia, and Vietnam, which have improved their relative incomes somewhat, compared to the US and have graduated from low income to middle income status. Korea, Taiwan, Singapore and Hong Kong have moved into the high income bracket while only Australia, New Zealand and Japan have stayed rich. So is just a

ANALYSIS: ASIAN ECONOMY case of ‘same as it ever was‘? Not quite. Asia has undoubtedly made a lot of progress, according to Iwan Azis, head of ADB’s Office of Regional Economic Integration. “The financial sector has improved since the Asian Financial Crisis in 1997; fiscal consolidation has taken place, ‘self defense’ through building up foreign reserves has been strengthened, and in some countries the restructuring of the real sector is continuing,” he noted. He also emphasized that the mere fact that Asia remains relatively strong even 5 years after the crisis is a clear testimony to the success of efforts made after the 1997 crisis. Red Flags The current deceleration of growth in Asia will not end the “double track growth,” but at the same time it should raise some red flags in the region, said Azis. “Here is where the policy response matters a lot, because at the end of the day it is not the severity of the crisis but the policy response that determines the final outcome. If the current growth deceleration is accompanied by a reduction in the risks emanating from bubble creation, excess dependence on exports, and the transition associated with the process of adjustment towards more domestic demand and regional demand, then the growth slowdown should not be a major concern; it may even be something the region should seek.”

He added that Asian economies also need to tackle the increase in income inequality. In some countries, he said, there are concerns about polarization and effective economic and social policy measures will be needed, supported by adequate fiscal support where required. “When all these policies are done in coordination, or cooperatively, the likely net benefits can be higher than if done unilaterally. Given the resources, the rising degree of integration and cooperation, the region’s continued open economy, and the improvements made since the Asian financial crisis, there is no reason why breaking out of the middle income trap is not possible for those Asian countries currently struggling with that threat.” But Professor Markus Brückner of National University of Singapore believes that the question is not whether Asian economies will ever catch up with the West. “I think that given the historical experience from reversals of fortune, this will happen with near certainty. The question is rather: when will Asian economies achieve income parity with the West?,” he reckons. So are countries fates predetermined in some kind of country eugenics program they wherein their peoples cannot escape their destinies? “I don´t see what that pre-determined fate would be,” added Professor Brückner. “I believe that whether Asia will continue to grow will

Latest per capita income (in 000s)

Source: PWT, World Bank, CEIC, HSBC; NB: constant USD for 2011, PPP for 2009

Markus Brückner

Iwan Azis

depend, to a large extent, on policy choices (in particular with regards to the protection of property rights; openness to international trade; and financial sector regulation).” “Just because a country has been trapped in the middle or low income bracket, doesn’t mean it can’t break out in the coming decades,” reckons Mr Neumann, who cites The Philippines which has recently experienced a structural improvement in growth, with the economy expanding much faster over the last few years than, say, in the 1970s or 1980s. “Still, as a first guide, this analysis highlights that even in Asia, a region accustomed to higher, and more sustained, growth rates, such as Latin America, for instance, it cannot be taken for granted that countries swiftly graduate from one income bracket to another. Development is a long and arduous process.”

Latest per capita income (in 000s)

Source: PWT, World Bank, CEIC, HSBC; NB: constant USD for 2011, PPP for 2009


Company Snapshot: CATHAY PACIFIC

Financial turbulence ahead for Cathay

Cathay Pacific cries mayday Losses persist in 1H12 with darker storm clouds ahead.


athay Pacific was badly hit by slowing demand, declining yields, and stubbornly high fuel prices this year. Maybank Kim Eng analyst Wong Chew Hann notes, “All the airlines we track reported significant profit declines in 1Q12, and some fell into losses. The main culprit was higher fuel prices (+13% YoY), along with weak passenger yields and a challenging cargo market. Most airlines saw their load factors decline by 1-4ppts YoY.” Dark skies persist CIMB analyst Raymond Yap notes that Cathay Pacific felt the heat of a significant drop-off in premium yields as the beleaguered finance sector accounts for some 60% of premium travel demand at its Hong Kong base. Yap adds that Cathay faces headwinds in its passenger and cargo business, with the all-important premium class facing further yield pressure, adding to the headwinds at the economy class. “And though passenger demand continues to do well, that is only because it is supported by lower fares,” says Yap. He adds that cargo demand was especially weak not only to Europe, but also to the United States. Barclays analyst Patrick Xu expects the airlines to report a loss for the first half of 2012. With cost-saving measures kicking in, hopes of a marginally better second half may be expected. But Xu warns that earnings will not see a sharp turnaround with the 2012 full-year projection for Brent crude oil at US$120 per barrel. Xu adds: “Unlike our full-year 2012 estimate of -90% y/y, the consensus has massive downside to the earnings estimates and is essentially expecting a drastic turnaround in 2H12 from


probably loss-making in 1H12 to approximately +20% y/y rebound in the earnings in 2H12, which we believe unlikely.” Cost-cutting measures Maybank Kim Eng’s Wong notes that Cathay Pacific’s management made a profit warning that 1H12 results are below their targets and will be disappointing. The company has already reduced capacity target to 6%-7%, and may look at cutting capacity further, says Wong. Yap, “Cathay will now concentrate on more profitable short-haul routes as high fuel prices have destroyed the economics of long-haul flights.” Capacity growth cuts are concentrated on the long-haul flights to Europe and US as capacity is drastically reduced from 7% to a mere 2%. On the other hand, capacity growth at short-haul Dragonair will see an acceleration from 7.3% to 9.2% growth. Barclays’ Xu notes that Cathay has already resorted to cost-reduction measures such as upgrading its fleet to more fuel-efficient models, freezing hiring of ground crew, offering cabin crew unpaid leaves,

cancelling all non-essential business travel, and cutting marketing and IT budgets. According to Yap, Cathay will accelerate the retirement of its B747 passenger and freighter fleets. Impairment charges for this will most likely hit 1H earnings of the company. Cathay currently has a fleet of 21 B744s and will retire a total of nine planes: three in September 2012, five in March-November 2013 and one in January 2014. These will be replaced with the incoming B777-300ER aircraft, of which 22 are scheduled for delivery between 2012 and 2015, says Yap. “On the cargo side, Cathay will remove three B747-400BCFs from service this year, which will be replaced by deliveries of three B747-8Fs this year and two next year. The reduction of the B744 fleet utilisation is also expected to lead to maintenance cost savings.” Gloomy outlook “While the retirement and removal of the B744 passenger and freighter aircraft will benefit Cathay over the long term, Cathay will take a near-term hit. It highlighted that the deregistration of one B747-400BCF will lead to a US$250m impairment charge against 1H12’s P&L. This is in addition to the US$250m impairment of the B747-400BCF fleet booked in 2H11. Furthermore, accelerated depreciation for the two other BCFs that will be decommissioned this year will hit the 1H12 performance by a further HK$50m,” reckons Yap. Barclays expects the cost-cutting measures to take effect in 2H12, slightly raising Cathay’s operating margin. “We however, have no confidence in a substantial turnaround of the business in 2H12, with our commodities research team pinning Brent 2012 average at US$120 per barrel, 5% even higher than the throat-cutting US$114 in 1H12,” warns Xu.


legal briefing

Hong Kong’s landmark decision on vessel ‘control’

Hong Kong’s Court of First Instance made history for defining the meaning of ‘control’ of a vessel in the arrest of ships.

The Facts: In the case Chimbusco Pan Nation Petro-Chemical v The Owners and/or Demise Charterers of the Ship “Decurion”, the former claimed over US$4M for unpaid bunkers supplied to 11 vessels which they stated belonged to a fleet ‘controlled’ by Argentinean shipping giant Maruba SCA. Kennedys partner Anthony Woo explained that Chimbusco argued that Maruba was liable for the unpaid invoices, despite that it was Maruba’s subsidiary who placed the orders; all the invoices were issued to a different company, South Atlantic; and 10 of the 11 vessels were on time charter to yet another company, Clan S.A. Against this backdrop, Chimbusco successfully arrested the Decurion in Hong Kong and subsequently secured an order for its sale. Maruba, represented by Kennedys, intervened before distribution of the sale proceeds and applied to the court for a declaration that the court had no in rem jurisdiction over Chimbusco’s claims in respect of bunkers supplied to the 10 vessels other than the Decurion. The Meaning of Control According to Reed Smith Richards Butler partner Ronald Lee, the issue was whether the 10 vessels were under Maruba’s ‘control’, despite Maruba was neither the owner nor charterer, and was not in possession, of the 10 vessels. Woo said that Chimbusco argued that despite Maruba, South Atlantic and Clan S.A. being separate legal entities, the court should look behind the corporate veil and examine the evidence suggesting that Maruba was the ultimate mother company of a group of companies that controlled certain shipping operations of the fleet. On behalf of Maruba, Kennedys argued that the court should not be involved in an extensive exercise of fact-finding; the person said to be in control of a vessel must be the time charterer of such vessel, by virtue of Clause 8 of the NYPE time charter that it had entered into with the owners of each vessel. The decision According to Norton Rose Hong Kong Partner Jim James, the Hong Kong Court of First Instance has adopted a narrow test in defining what is meant by the word ‘control’ in relation to ship arrest provisions. ‘Control’ of a vessel, he said, is to be taken to mean legal control exercisable by contract, e.g. time charter. In a judgment handed down on 4 May 2012, the 36 HONG KONG BUSINESS | AUGUST 2012

Jim James

Woo Anthony

Ronald Lee

Honourable Justice Reyes explained that a loose or ambiguous test would result in uncertainty which would be commercially undesirable. James said that the judgment reflects the common practice in the shipping industry and clarifies the scope of actions in rem. It is also in line, he added, with the general position in Hong Kong that the corporate veil will only be pierced in exceptional circumstances such as fraud. “From a supplier’s viewpoint, comprehensive due diligence and greater caution in negotiating the terms and conditions of agreements is indicated in order to ascertain the identity of a contracting party and whether it has ‘control’ of the vessel. ‘Control’ may be demonstrated by its ability to instruct the person in possession of the vessel in relation to the vessel’s operations; contractual relationships are a prime indication of this,” said James. Consequently, James noted that the limited jurisdiction for ship arrests for recovery of debts arising from the supply of goods and services to vessels remains constrained by the test of ‘control’, now clearly stated, and may result in more stringent due diligence by suppliers in future.

“Being in control of group companies who may have control of the ship is not the same as having control of the ship itself. Lee meanwhile added that the Judge considered that ‘control’ would include the ability to tell the registered owner of a vessel what to do with the vessel. However, Chimbusco was unable to demonstrate such control by Maruba over those 10 vessels because the ability to direct the master and crew was expressly conferred upon the charterers under the relevant time charters. “There was no room for saying that, despite the control conferred on Clan, some other party such as Maruba also controlled the 10 vessels. Chimbusco was therefore only entitled to arrest the Vessel in respect of bunkers supplied to the Vessel, but not to the other 10 vessels,” he said. “The decision must be welcomed by shipping community. A loose and abiguous test of ‘control’ as contended for by the Plaintiff would widen the possibilities of maritime arrests and introduce a high degree of uncertainty in shipping affairs. In the light of this decision, it is expected that arresting parties will become more cautious in their attempts to arrest vessels,” he added.



Patrick Chovanec Am I a China bear?



here are two schools of thought on the Chinese economy right now. The first says “It’s always darkest just before the dawn.” The second says “It’s always darkest just before it goes pitch black.” It’s clear that China’s economy is slowing. But what happens next is far from clear, and the subject of much debate. The conventional wisdom at the moment, among officials and economists, runs something like this: China’s economy is slowing alright, perhaps a bit too much for comfort, but it’s mainly a self-induced slowdown driven by the government’s own cooling measures. GDP growth is still above Premier Wen’s target of 7.5%, and is destined to improve in the 2nd half of the year as the government switches gears to re-stimulate the economy. The slowing inflation rate gives them plenty of room to ease. The real estate market has already bottomed out, and the banking system is stable. I disagree with virtually every single element of the conventional view I’ve just outlined. Indeed I am worried because contrary to stereotypes, I do not consider myself a “bear” on China. In that respect, I would like to make a few points. 1) I don’t hate China. I’m not “rooting” for China to “crash and burn.” I realize that at least a few of my Chinese readers, when they hear me harshly criticize policy or make dire warnings, might conclude that — as an American — I’ve caught an acute case of China-envy and would love nothing better than to see China taken down a notch. In fact, I am so critical not because I want the worst to happen, or believe it must happen, but because I hope and believe the worst can be avoided, if clear-sighted, courageous choices are made. My wife is from Beijing, my son was born here, and we are all tied by blood and affection to a whole host of relatives in China whose struggles and aspirations we share. On a less personal level, no matter what you think about China’s current form of government, or the implications of its rising global influence, the complex challenges and opportunities posed by a strong and prosperous China are

“I’m not “rooting” for China to “crash and burn... I am so critical not because I want the worst to happen, or believe it must happen, but because I hope and believe the worst can be avoided.” infinitely preferable to the terrible dangers and uncertainties the world would face if China were to “collapse” or just lose its way in confusion. 2) I’m not a “Perma-Bear”. In other words, I’m not the kind of commentator who has been warning of China’s imminent crash for so long that eventually I’m bound to get it right. For most of that time, I would have described myself as a China “bull.” I’ve seen an incredible transformation of an economy, an astonishing burst of wealth creation. I’ve worked for private equity funds that invested in promising Chinese companies and helped them grow. In the past, the problems — bad debt, inefficient state industries, protected markets — were outweighed by even more positive developments: 38 HONG KONG BUSINESS | AUGUST 2012

Bearish Chinese economy

the wholesale privatization of small and medium state enterprises, China joining WTO and committing to more open markets, foreign investors taking an active stake in reforming state-run banks. But something changed in the past few years, when China adopted state-managed stimulus and money-printing as a model for permanently boosting economic growth. I don’t see myself as inherently a “bull” or a “bear” on China. The fact is, I see plenty of promising areas where China can achieve huge productivity gains and realize meaningful growth — but I don’t see that happening as long as China keeps trying to insulate favored market sectors from economic reality. 3) I’m not “talking my own book”. Former Morgan Stanley strategist Stephen Roach warned CNBC viewers to ignore skeptical concerns about China’s economy. “Beware of people who say things like this,” he told the anchor, “Oftentimes they’re just talking their own book.” In other words, they’re talking down the Chinese economy because they have taken short positions that will pay off if it tanks, or merely if market sentiment turns negative enough. I don’t know about other people, but I can assure you that when I express concern about the Chinese economy, I am NOT talking my own book. I own (one) property in Beijing, which we bought at a reasonable price. My wife’s career, with a global investment bank, rides on the health of China’s market. Virtually all of our income is in RMB, and there are barriers to moving it out of the country. In short, I have no reason for talking down China, and plenty of reasons for wanting China to get things right. Keep that in mind as you read my “bearish” Tweets, or consider my negative outlook for China’s property market or my skepticism towards China’s renewed stimulus efforts. I would much prefer to see a very different fact pattern and reach far different conclusions. Of course, my worries may prove overblown, my facts incomplete, my vision faulty. In which case, I’ve at least given everyone food for thought. As Yogi Berra said (which I’ve stolen unapologetically from Fred Thompson’s latest blog post): “Predicting is tough. Especially about the future.”

Corporate Feature

Save Now For Better Future Enhance energy efficiency with CLP Power

Mr LM Chow, Director of Marketing and Customer Services of CLP Power


ong Kong sets for bright future if we make sure future generations enjoy a healthy and sustainable environment. In fact, CLP Power Hong Kong Limited (CLP Power), the largest electricity company in Hong Kong, shares the same mission. The company is dedicated to providing the city with reliable power supply and actively promoting energy efficiency and conservation. This year, everyone in Hong Kong – from enterprises to individuals – can join the drive for greater efficiency as part of the Save Now For Better Future campaign with CLP Power. The goal is clear: to create sensible, more sustainable lifestyles by using a number of easyto-implement energy efficiency measures.

Tailor-made energy conservation solutions One of the great things about energy efficiency and conservation is that every bit helps. That means even the smallest changes can quickly add up, making a big difference to society and the environment, and also helping homes and businesses to save energy and money. The trick is identifying all of these small opportunities in everyday life, and capitalising on them. That is exactly where CLP Power’s pioneering GREENPLUS Programme comes in. “Launched in August 2010, GREENPLUS Programme is designed to help enterprises learn about energy efficiency,” said Mr LM Chow, Director of Marketing and Customer Services of CLP Power. “It provides tailor-made energy saving solutions and advices for SMEs and nonprofit making organisations, empowering them to save energy and costs, raising their awareness of energy conservation as well as changing their electricity consumption practices,” he said. Many businesses have begun to achieve significant savings. At the recent GREENPLUS Recognition Award Ceremony, a total of 29 organisations were singled out for outstanding performances in energy conservation. They included SMEs, non-profit making organisations, schools and contractors that implement energy efficiency and conservation solutions. Furthermore, the programme is supported by

the GREENPLUS Resort and GREENPLUS Gallery located in Yuen Long and Pei Ho Street respectively. These business centres showcase the latest renewable energy technologies that are ideal for outdoor settings. They are the valuable resource for businesses looking for affordable energy saving solutions. The business world has always been a major energy consumer. However, today there is a wealth of professional advice – including free-ofcharge information from CLP – to help enterprises become more aware of energy efficiency and introduce effective conservation measures that can reduce costs and protect the environment. Optimise electricity consumption at home Energy conservation can also start at home. “CLP Power has extended its energy efficiency and conservation promotion to households with the launch of Eco Optimizer. The service is now widely used by more than 6,000 families, leading them to more energy efficient lifestyles,” Mr Chow continued. Eco Optimizer is easy to use. Simply log on to and input information on home and electricity consumption habits. Eco Optimizer will promptly assess the energy consumption pattern at home, and offer a tailor-made energy saving plan that suits each customer’s needs. Online means service anytime People never realise their needs until they seek for help. That’s why CLP Power is launching

“Today, with more than 700 members from all walks of life, GREENPLUS Programme is helping customers reduce power consumption by an average of 10-20% a year.”

The Energy Savings Calculator in the CLP HK Mobile App

One-stop E-services – an online tool designed to provide a comprehensive range of customer services anytime and anywhere, via electronic media such as the web and smartphones. It can support services such as new customer enquiry, account activation, customer-specific information and account termination. And, of course, it also offers energy saving information, so customers can work on improving energy consumption profile whenever they have time. The CLP Power customer website (www. has always been a popular portal, efficiently managing account information update and offering appliance purchase and installation tips, along with energy conservation advice. Now, it has been joined by a new smartphone app designed for both the iPhone and Android platforms. Available to registered customers, the new CLP HK Mobile App provides features such as bill and electricity consumption checking and self-report meter reading. As the weather changes, users will also receive comprehensive information on energy efficiency, such as daily green tips, purchase guides to energy saving products, as well as ‘Green Walker’. “CLP Power will continue to promote energy efficiency and conservation, aiming to help people from all walks of life to learn more about how to enhance energy efficiency, reduce unnecessary costs and save now for better future,” said Mr Chow.

CLP Power opens its GREENPLUS Resort to promote energy efficiency HONG KONG BUSINESS | AUGUST 2012 39

Regional EConOmy Briefing: INDIA Annual increase of nominal GDP and General Government Debt to GDP

Liberalize or not?

With the power out, could it be any worse? Debate rages on whether India should undo some progress it had made to liberalize economy.

India enjoyed GDP growth of over 7% on the average in recent years but concerns over its sustainability are now mounting amid a global economic slowdown. Analysts are looking at some policy stagnation risks as the economy dangles within a weak political context. Still on a pessimistic note, Standard & Poor’s (S&P) warns that India might have to go backwards in its economic policies and undo some of the progress it had made to liberalize its economy since the early 1990s. S&P’s analyst Joydeep Mukherji says such a retreat might be in line with the more interventionist economic policies many developed countries pursued in response to the recent global economic crisis. The future of economic liberalization “The combination of a weakening political context for further reform, along with economic deceleration, raises the risk of the government taking some modest steps backward from economic liberalization in the event of unexpected economic shocks,” he says. Mukherji cites as example the fact that a growing trade deficit, along with the need to boost fiscal revenues, contributed to the government’s decision to raise minor trade barriers in its recent budget. Similarly, a widening external deficit, combined with slower growth at home, he says, could tempt the government to modify industrial policies in order to tilt the playing field in favor of domestic producers at the expense of import. Furthermore, the government had been reducing its equity stake in public sector banks and exposing them to market forces, greater competition, and pressure from minority shareholders from the private sector. However, Mukherji notes that the government has retained majority ownership of those banks, periodically injecting public funds into them to boost their capital levels and sustain 40 HONG KONG BUSINESS | AUGUST 2012

f--Forecast. ©Standard & Poor’s 2012

their rapid asset growth. A persistent slowdown in GDP growth, meanwhile could result in a rise in nonperforming loans to both public and private sector borrowers, says Mukherji, adding that the government could respond by nudging the public sector banks to respond in a less commercially-oriented manner. High risk to reform process Other economists however disagreed with S&P. Moody’s Analytics senior economist Glenn Levine believes that there is no risk of policy reversal as the benefits from these pro-growth policies have become clear over the past decade. There is, however, a high risk that the reform process will now stall as the political benefits of opposing such legislation have been expertly exploited by the BJP and Mamata Banerjee since the 2009 election. “The policy stagnation and political stasis of the past three years has deterred both local and foreign investment and crushed business confidence. GDP growth of +8% doesn’t just happen. It needs the correct policy environment in place. And right now the necessary policies and pro-growth mindset just aren’t there,” says Levine of Moody’s. Coface concurs, saying that it is unlikely considering the positive communications now being heard from the Finance Ministry, i.e a pledge to allow 49% in aviation and insurance by this financial year-end. Coface insists there will be slow progress in structural reforms, in the context of a weakened Congress Party after the local elections in March 2012. “There are still governance shortcomings, especially corruption. Several scandals hit the headlines in 2011, notably about the organization of the Commonwealth Games and the granting of mobile telephone licenses. The lack of transparency in the financial results of medium-sized businesses and the absence of group consolidated accounts are still worth noting,” says Coface. According to Coface, external multilateral agencies and governments have been constantly reminding the government of India on the perils of not putting forth economic reforms, easing of monetary policies and corruption or lack of transparency that have kept foreign institutional investors away.


Tim StaermosE The coming American diaspora

by Tim StaermosE Chief Investment Strategist Sovereign Man


hen I was in Indonesia’s Lampung province, I was following a sprightly Chinese woman, well into her 70s, as she showed me around her thriving home appliances and furniture shop. It was an amazing thing to see. The three-story shop-house was both the family home, and business premises. Yet every available space was stacked high with goods for sale, including family kitchen and living space. When I asked her whether her business had always been here, she held her hand out, palm flat to the ground, about 2 ½ feet high and said, “Since I was this tall.” No doubt, her ancestors had been among the wave of Chinese economic refugees who moved to South East Asia in the late nineteenth century to work as laborers for the British and Dutch colonial powers. To this day, more than ten million of their descendants remain in Singapore, Malaysia, Indonesia, and the Philippines. And in each country, they’re disproportionately successful. Two days later, back in Hong Kong, I got to talking with the owner of my favorite Lebanese restaurant. He and his brothers fled their homeland during the civil war.  They eventually ended up in Hong Kong where they run several successful businesses. I asked him whether the current euro malaise is affecting things back in Lebanon in any noticeable way. He said, “You know, the Lebanese always complain how tough they have it. When I go back

economic refugees who find better opportunity abroad, even those who send remittances back home.

Here come the Americans!

The real score In the US, real median incomes have not grown since 2007. Those on the lower rungs of the income ladder have fallen backwards. Net household wealth remains some 37% below its peak. All gains since 1992 have been wiped out. For the first time ever, a new generation of Americans faces a bleaker economic future than their parents. This shocking reality may be new for the US, but it’s an old song for most of the world. Countries rise to prosper, and countries decline. It is the natural order of things. As the waves of migrant workers and “In the US, real median incomes have business owners can attest, there is always you can do to combat domestic not grown since 2007. Those on the lower something economic challenges. As Simon likes to say, ‘this time is not different.’ rungs of the income ladder have fallen Whenever there is a great upheaval, backwards.” ambitious, productive people leave their homelands and put down roots where they can find safety and better opportunities for and I’m in some fancy restaurant talking to the themselves, their families, and future generations. other diners, they complain. Yet they’re there, Today, that means countries like Singapore, Chile, spending hundreds of dollars.” Brazil, southeast Asia, etc., all of which we write “The secret with us Lebanese is there are only about frequently in this column. 3.5 million at home, and 15 million overseas. So With long-term prospects for freedom and everybody has a brother, or an uncle, or a cousin economic opportunity back home so sparse, who’s helping out sending money back.” maybe it’s time to begin thinking in this new The current slump in the US and Europe direction: internationally. could easily lead to a similar wave of Diaspora– HONG KONG BUSINESS | AUGUST 2012 41

ANALYSIS: China’s shadow banking

All you need to know about China’s fragile $2.2 trillion shadow banking system Is the world’s third-largest economy in jeopardy because of the country’s shadow banking system? By Matthew Boesler


t is clear that the Chinese economy is slowing, and some think the risks of a hard landing are rising substantially. If economic growth in China continues to slow, rising and sudden defaults on loans made in the country’s shadow banking system could threaten to bring down China’s traditional banking sector and throw the world’s third-largest economy in jeopardy, according to Bank of America Merrill Lynch China Strategist David Cui. The hodgepodge web of nonbanks that comprise the shadow nexus in China includes pawn shops, underground banks, various wealth management products, trust companies, and guarantors – many of which don’t take deposits to insure against risky lending activities and operate completely beyond the eye of regulators and authorities. What follows are highlights from Cui’s comprehensive report examining China’s shadow banking system.


“The amount of loans made by shadow banking entities amount to 25% of all the loans made in China.”

Why the shadow banking system in China is so important The sheer size of the system is overwhelming. At an estimated 14.5 trillion RMB ($2.2 trillion) according to BofA, the amount of loans made by shadow banking entities amount to 25% of all the loans made in China by the traditional, regulated banking sector. The system is also highly leveraged. Shadow lenders make most of their money by borrowing from regular banks at low interest rates and lending out at higher interest rates to riskier borrowers. No deposits at these institutions means they are highly vulnerable to loans gone bad, especially given the types of less-thancreditworthy clients who borrow from shadow banks. Cui walks through the shadow banking system in China and takes a look at the institutions that comprise it and the unique risks posed by the activities of each. Shadow banking entity #1: The investment trust industry Investment trusts are basically

companies that manage other people’s money by lending it out to finance various business projects or property loans on the one side and, on the other, guaranteeing a certain percentage return to the investors. Cui says his team at BofA has “noticed early signs of stress in the system, e.g. at least three property trust products had failed to meet their repayment schedule and had to be bailed out”. Furthermore, he estimates that leverage in the investment trust entities “remains high, often reaching 10-15x.” Not only is the trust industry highly leveraged, but also highly concentrated. Of the 62 Chinese investment trusts, 10 of them account for half of all assets under management industry-wide, and 20 account for 72%. The huge issue in Cui’s mind is the total lack of transparency in the investment trust industry. Only two of those 62 companies are required to disclose any sort of investment returns. This leads to investment “pooling,” wherein a trust will take an investor’s money and invest it in multiple projects at the same time. Bottom line: If property prices and other investments turn sour and highly-leveraged, highly-concentrated investment trusts have guaranteed a certain level of returns to investors, they will have to be bailed out or they will face collapse. Shadow banking entity #2: Pawn shops There are over 4,000 pawn shops spread across China. They will probably provide the earliest warning signal that the system is melting down, according to Cui. Pawn shops will show up on the radar first because of the nature of their lending business: most borrowers seek loans from pawn shops for extremely short periods of time, and for the typical borrower, it only takes one to three days to secure a loan. So, with the pawn shops, it’s all about short-term lending. And, being pawn shops, they accept all sorts of collateral against these short-term loans – everything from cars and jewelry to financial securities like stocks and bonds, and property. Bottom line: The property is a big issue, because if volatility in

ANALYSIS: China’s shadow banking China’s property market continues and property prices take a further tumble from here, thousands of pawn shops will be left holding the bag on defaulted loans backed by collateral that is heavily discounted in value. Shadow banking entity #3: Guarantors China has guarantors of over 19,000 different businesses. They provide guarantees on loans to risky borrowers, making it more palatable for traditional banks to lend to those who are less creditworthy than the average client. The upshot here is that guaranteeing loans to risky borrowers isn’t that great of a business to begin with since a guarantor makes probably half the rate on a given loan that a pawn shop does, for example. Cui surmises that “the biggest risk in the industry is guarantors are acting more like a lender rather than focusing on their core guarantee business.” What do the guarantors do to make money instead? They literally take a portion of the loan they are guaranteeing from the borrower they are guaranteeing and lend that money back into the shadow banking system to other underground borrowers. The net effect, of course, is amplified leverage within the shadow nexus. Bottom line: When those new shadow loans blow up (potentially due to any of the four triggers mentioned at the beginning of this article), it is the clients – who are supposed to be guaranteed by the guarantors in the first place – that end up footing the bill. Cui writes that “many of their

clients have been sued by their banks for loan repayments although the borrowers claim that their guarantors have been using the fund,” and that “some of these borrowers are now seeking help from the municipal government of Beijing to negotiate for a loan extension with the banks.” Shadow banking entity #4: Underground banks Cui calls underground banks “arguably the most unstable shadow banking sector”. And the commodities business is currently a major player in this area. Letters of credit – trade finance agreements in which a bank pays the seller of a commodity and then goes and collects payment from the buyer of the commodity – are booming, and they are off-balance sheet vehicles, meaning they don’t factor into the traditional banking sector’s balance sheet leverage ratios and regulations regarding loan quotas. Cui points out that many of the companies that are shut out of the official loan market are resorting to securing letters of credit from banks using copper and other commodities as collateral. Bottom line: Cui says these practices in the steel market are potentially explosive because “local warehouses, unlike those four or five well regulated in bonded areas, often provide multiple bills of lending to traders so they can obtain loans from different banks using the same steel inventory.” Shadow banking entity #5: Wealth management products Wealth management products set

Guaranteed loan split - by loan size (2010)

Source: NDRC, BofA Merrill Lynch Global Research

“Lorem cement consumption per capita keeps its current momentum, sooner or later China’s construction bubble will reach its end game.”

up by traditional banks have some characteristics that are similar to trust companies that cause concern, and there are rumblings that a lot of the industry could be operating one big Ponzi scheme. Indeed, the biggest problem with wealth management products in China is that by and large, no one has any idea what they are investing in or what kind of returns they generate. Cui writes, “So in theory, the bank can invest up to 70% of the fund in areas we have zero information on.” Bottom line: Pooling is a big concern. Cui says banks will “issue multiple WMPs with various durations, pool the funds together, and invest in various areas with different durations jointly and pay out ‘expected’ returns from the pool.” Cui continues: “According to some industry insiders, some banks have been using new WMP proceeds to cover losses from previous products in the pool – in our view, this is not fundamentally different from a Ponzi scheme. However, the music may stop at a certain point if/when WMP asset size stops expanding.” The underlying problem facing all the institutions that make up China’s colossal shadow banking system is a slowdown in growth. In fact, we wrote about four major triggers that could bring down China’s shadow banks, all of which stem from continued economic weakness, just like the one China is currently experiencing. The four triggers are 1) (Illegal) Ponzi schemes falling apart; 2) a wave of defaults in highly-leveraged loans within the shadow banking system; 3) more turbulence in the Chinese property market; and 4) shrinking corporate sector earnings. Given the shadow banking system’s enormous size, importance to the real economy in terms of the credit it provides, and the numerous feedback loops back into the traditional banking sector, China could face major issues if it starts to look like no one is able to pay anyone else back. Matthew Boesler is a reporter for Business Insider. Previously, he hosted Benzinga Radio, a business news and investing program. He holds a bachelor’s degree in economics from the University of Michigan. HONG KONG BUSINESS | AUGUST 2012 43



uxury cars have always been a significant mainstay in the Hong Kong market, and none more so than Mercedes-Benz which leads the luxury brands by quite a substantial margin. In 2011, Mercedes-Benz and its super-luxury brand Maybach delivered around 5,100 cars to Hong Kong customers, according to Zung Fu Company Limited’s Michael Leung -- an amazing tally when you look at some of the prices. Says Leung, “If you include Maybach and smart, it is more. And in these economic times, I think that’s quite impressive.” Supercars Three supercars, with almost identical basic prices, have been launched recently: the McLaren MP412C, the Ferrari 458 Spider and the Mercedes-Benz SL65 all start at HK$3.9 million. That, of course, is before you start to ‘personalize’ them and prices climb even more. McLaren and Ferrari both say that the average customer – if there is such a thing – spends around $4.4 million. They all have big engines to propel them, but the 3.8 liter V8 unit in the McLaren benefits from the addition of twin turbochargers. Both the Ferrari and the McLaren are mid-engined, while the mighty 6.0 liter V12 in the SL65 is front-mounted, driving the rear wheels. While it is pointless to try to compare them, they are both exciting and beautifully engineered. All three cars make extensive use of carbon fiber and exotic metals in order to save weight. Some parts of the SL are produced in magnesium, but high-strength steel tubes are integrated into the A-pillars for safety reasons. Three vastly different machines, but all eminently desirable. McLaren is new to the game, but is already making inroads into Hong Kong’s buoyant supercar market. The EU recently proposed new legislation that will lower the permissible noise levels of cars. The legislation, however, contains a clause for powerful, lowweight performance cars, which will be beneficial to both Ferrari and McLaren, which channel the exhaust note into the cockpit,

MOTORING REPORT according to the ‘mode’ setting: race mode gives you a loud, throaty roar under hard acceleration. One car that defies categorization is Porsche’s four-door sports model, the exciting Panamera. Apart from the Cayenne SUV, this is Porsche’s first four-door sports car. Opinions vary on its styling but generally, it has been well received. The Panamera GTS features considerably more power than the standard model, upgraded brakes, and a body lowered by 10 millimeters. The power unit in the GTS is a modified 4.8 liter naturally-aspirated V8, delivering a healthy 430 bhp, while the torque output now peaks at 520 Nm. All-wheel drive and Porsche’s unique PDK transmission give the GTS unparalleled performance without any interruption in power flow. The 0-100 m/h sprint takes just 4.5 seconds, while it will go on to a heady maximum of 288 km/h. Active suspension and a wider rear track complete the upgrades featured in the Panamera GTS. Porsche Centre Hong Kong’s General Manager Derek Tong says, “The Panamera has been a great success in Hong Kong since its launch in late 2009. Building on this, the new Panamera GTS offers an even higher level of driving dynamics and performance, yet without compromising comfort and everyday practicality. “Enhancements include increased power from its normally aspirated V8 engine, a more ‘performance’ focused gearbox tuning as well as a sportier suspension setup. It’s a continuation of the GTS concept from the Cayenne GTS and 911 Carrera GTS (997) vehicles, and is targeted at those drivers who want that little more in sporting performance. Customers who have driven the car have been amazed at how much sharper the car feels. It’s a great car.” Tong adds that he is optimistic for 2013 sales: “We are positive about 2013, especially given the new Boxster and 911 models. On that note, 2013 is also the 50th birthday of our icon, the 911, so it will be an exciting year ahead.” It may not be possible to categorize the Panamera GTS, but it is a very impressive machine.

“the new Panamera GTS offers an even higher level of driving dynamics and performance.”



BMW M6 Convertible

BMW M6 While perhaps not strictly coming into the confines of supercar, the new BMW M6 Convertible, which was launched in Hong Kong in early July, is a very special motor car that appears to tick all the boxes. This is the third-generation M6 and is available as either a coupe or this stylish convertible. The M6 Convertible will reach the benchmark 100 km/h from rest in a little over 4.3 seconds and go on to an electronically-limited 250 km/h. All this effortless power – and torque – is provided by a sophisticated V8 engine equipped with twin turbochargers. This unit is mated to BMW’s high-torque 7-speed dual-clutch transmission. An active differential optimizes power transfer between the rear wheels. Luxury Brands While Mercedes-Benz – and to some extent Lexus and BMW –

Mercedes Benz SL65 46 HONG KONG BUSINESS | AUGUST 2012

dominate the luxury market, Jaguar is increasingly getting more than just a look in. Its current range is in a word: superb. Designed by a team led by talented Scots-born stylist Ian Callum, whose CV includes such gems as the Aston Martin DB7 and the Vanquish, as well as the first aluminum-bodied XJ, this latest XJ Sport is a complete departure from Jaguar’s rather staid image of the past. Says Callum: “The XJ is much more than a limousine. Its power and potential mean it can outperform many so-called sports cars. The new Sport and Speed Packs allow customers to enhance that sporting dynamism even further and create an XJ that looks as good as it drives.” Powered by an advanced five-liter, supercharged V8, the XJ delivers a massive 502 bhp of available power at 6,000 rpm and 625 Nm of torque between 2,500 and 5,500 rpm. However, the acceleration from rest to 100 km/h is mighty impressive and achieved in just 4.9 seconds; remarkable for a car of this size. Part of the

“MercedesBenz – and to some extent Lexus and BMW – dominate the luxury market.”


MOTORING REPORT reason for such a relaxed pace is the low overall weight of just 1,915 kg, achieved by a light but immensely strong and rigid aluminum and magnesium body structure, built using the latest aerospaceinspired technology. The combination of this lightweight and the new generation, technically advanced, supercharged V8 engine delivers sensational agility and performance, as well as outstanding fuel efficiency and class-leading emissions. Jaguar says that when the very first XJ appeared in 1968, it was considered revolutionary; the new car had to recapture the sporting spirit of the original. Certain cosmetic and functional additions are integral within the latest XJ Sport. The result of extensive research in the wind tunnel and on track, the front of the car gains an aerodynamic splitter beneath the bumper to direct air beneath the car to reduce lift, and at the rear the boot lid lip has been extended to ensure a clean separation of air from the trailing edge of the bodywork. The new XJ Supersport, in long wheelbase form, sells for $2,368,000. Popular Compacts In recent years, two reminders of motoring-times-gone-by have been introduced and – perhaps remarkably – have both become a huge success. The MINI, launched in 2002, has gone on to become a bestseller in virtually every developed market, while the Fiat 500, although emerging later than the MINI, has similarly been extremely well received and is now sold in over 110 countries. Fiat claims the 500 and its variants has now sold almost 1M units. Further variants – four-wheel drive, estates and others – are planned for the future. The MINI initially appeared in the guise we knew and loved in the early sixties and seventies; now there are numerous variants, including a very pretty convertible, a coupé and the Countryman.


Jaguar XJ Supersport

“Jaguar is increasingly getting more than just a look in. Its current range is in a word: superb.”

This latter model is built in Austria by a part of the Canadian conglomerate, Magna Steyr. The Ford Fiesta became the top-selling model in Britain in June, and although it is not yet available in Hong Kong, the equally good Focus is in, and a new performance model will shortly become available. The 2013 Focus ST will arrive in Hong Kong in Q3 this year. This limited-version Focus ST, which is equipped with a 2.0 liter


MOTORING REPORT EcoBoost engine with 250 bhp, has entered a pre-order period with a retail price of around HK$350,000. Apart from the excellent power output, the ST is very torquey in mid-range, accelerating with ease without the need to constantly downshift. Inchcape Far East, which now distributes Ford, along with Toyota and Jaguar, says it has two high-performance MPVs – the S-Max and Galaxy - in Hong Kong. The Galaxy features a 200 bhp gasoline engine, complete with turbocharger, mated to a six-speed, dual-clutch automatic transmission. Major features are factory-fitted leather seats, nine airbags, side air curtains and a driver’s knee bag. The Sony audio system is also pretty special with nine speakers, while there is a multimedia system in the rear. The S-Max, similarly features the turbo two-liter motor, and is pretty much the same throughout as the Galaxy. Prices are HK$299,900 for the S-Max and $339,900 for the Galaxy. Electric Vehicles Electric vehicles, or EVs are touted as the next-generation, planetsaving form of transport, but to date there is only one currently available in the Hong Kong market: the Nissan Leaf. Mitsubishi has brought in a limited number of its MiEV, but the Leaf is more readily available. The other option, of course, is a hybrid. Toyota kicked it off in 1997 with the first-generation Prius and has continued the trend with its Lexus hybrids, the RX450h and the LS600h. The RX450h is its superb hybrid SUV, while the LS600h is its magnificent sedan. Recently, Toyota has added the Prius C to its line-up, a new hybrid small car. The Lexus RX450h uses a 3.5 liter 24-valve gasoline V6, combined with a sophisticated electric motor. In normal conditions, the SUV operates in front-wheel drive mode, but if any slippage is detected the rear wheels are automatically powered by the electric motor. Regenerative braking is incorporated, as is a complete stop of the motors at a standstill, automatically firing up the gasoline engine when the accelerator is pressed. In addition, by linking Bluetooth technology with the multi-

Ford Focus ST

Nissan Leaf

“Lexus RX450h uses a 3.5 liter 24-valve gasoline V6, combined with a sophisticated electric motor.”




The leather-wrapped interior of Range Rover Evoque

purpose head-up display for navigation, speed, audio streaming and climate control, the RX ultimately gives the most technologically advanced system to ensure a smooth and safe journey. There are too many features on this vehicle to list, but suffice it to say, it is one of the best around. Managing director of Crown Motors Limited, Cedric So says: “First introduced by Toyota Motor Corporation 15 years ago, hybrid technology has become widely accepted and recognized as mature, successful and reliable. With its cumulative global sales of hybrid vehicles topping 4 million, Toyota has established its market leading position in hybrid technology development, especially Lexus which has achieved a leading position in the luxury hybrid market.” The new RX450h sells for $725,400, which equates to $800,400 less a $75,000 government subsidy for an environmentally-friendly vehicle. Recently, an electric Fiat light van has been launched in Hong Kong. Whether it succeeds or not depends on its marketing, but it does seem an ideal solution as a local delivery vehicle only requires a limited range and can be successfully recharged back at base. New SUV Generally 4x4s are not described as sleek; if it were, it would be the new Range Rover Evoque. Instead of the square, non-evocative lines of the majority of SUVs, the Evoque looks more like a sports car. The rear sloping roof is unusual for any SUV but it restricts little of the headroom in the back; in fact, the rear passenger compartment is spacious and roomy. Power comes from a two-liter, turbocharged four cylinder engine, mated to a six-speed automatic transmission. Many rival brands offer six-cylinder power plants in SUVs this size, but the Evoque turns out a healthy 236 bhp, while maximum torque is a respectable 340 Nm at just 1,750 rpm. The 0-100 km/h sprint takes just over seven seconds and maximum speed is a shade over 215 km/h. More 52 HONG KONG BUSINESS | AUGUST 2012

Range Rover Evoque Prestige

“Generally 4x4s are not described as sleek; if it were, it would be the new Range Rover Evoque.” than adequate for the roads of Hong Kong. While few 4x4s venture off-road these days, with the majority of owners sticking to highways, the Evoque respects the original Land Rover tradition and would be equally at home in the mud or on asphalt. According to Land Rover’s official website, a leading magazine said: “Easily the best work credited to designer Gerry McGovern’s studio, the Range Rover Evoque is first and foremost a design triumph. The company has demonstrated an uncanny ability to find increasingly small and sometimes tiny holes in the market and fill them with capable off-road vehicles whose style expertly complements their serious substance.” Says Joseph Lau, general manager for Land Rover Hong Kong: “The Range Rover Evoque is a great success for Land Rover since our launch in December last year. It has helped to make a double increase of Land Rover total sales for year-to-date (YTD) June 2012 as compared to the same period in 2011. “This Range Rover Evoque Prestige edition will create another highlight for the model. It shares the same exceptionally attractive exterior design, and combines it with unique alloy wheels, dramatic premium bright finish details as well as Range Rover’s Oxford leather-wrapped interior to distinguish from other models – a unique feature of the Prestige which brings the ultimate ride comfort and luxurious experience to the driver and passenger by the sight and touch of the finest materials.”



Mazda 5

“the Mazda 5 and Mazda 8 - have been earning their popularity in Hong Kong for a long time.”

Mazda 8

Mazda’s MPVs “Mid-range motor cars represent the core portion of the motor market in Hong Kong, and its volume performance does play a crucial role in the motor industry. In recent years, the mid-range market has become more competitive with an aggressive pricing strategy of European brands and the new addition of others in Hong Kong,” says Gary Cheung, CEO of Mazda’s Hong Kong distributor, Vang Iek Motors (HK) Limited. “Among mid-range motor cars in Hong Kong, the MPV enjoyed great popularity; its sales accounted for about 20 percent YTD of the total number of private cars sold and over 15 percent growth in the MPV market. The popularity of MPVs lies in its versatility, so in various market segments they do have their own audience. For instance, the usage is not only limited to private buyers, but can also be used for commercial, public, or even logistics purposes. “Our two MPV products - the Mazda 5 and Mazda 8 - have been earning their popularity in Hong Kong for a long time, and will be continuing to be our signature products to compete in this important MPV segment. “The Mazda 5 is just right for small families that want the convenience of a minivan, but don’t feel the need for a full sized MPV. The Mazda 8 is a luxurious multi-purpose vehicle with a first-class cabin for eight. The Mazda 8 surrounds the driver with a feeling of quality and its passengers with an experience of bliss.” Mazda Hong Kong has gone from strength to strength in recent years, thanks mainly to an excellent lineup of vehicles. The overall market sales and passenger car sales up to the end of June recorded an increase of 1,175 units or 6.2 percent and 1,257 units or 8.3 54 HONG KONG BUSINESS | AUGUST 2012

percent, respectively. The passenger car segment, which comprises five categories, showed a slight improvement in sedan, MPV and SUVs. “Hatchback sales was the only segment that showed a slight sales drop. We anticipate such momentum will be sustained till late this year. The award-winning CX-5, the Mazda 3, Mazda 5 and Mazda 8 will be our signature products to compete in the market,” added Cheung. Cheung commented on the future of hybrids, which most of his immediate competitors appear to be endorsing: “It has long been a motor trend that it is a requirement for greater fuel economy and lower CO2 emissions, advanced engine technologies, reduced weight and greater ‘driving dynamics’. These requirements should not be only limited to small cars but should also apply to luxury cars. Then, the next question should be, is hybrid our next step? “Currently, 95 percent of the world uses gasoline or diesel engines and by 2020, 90 percent still will. In this fact, Mazda saw an enormous opportunity: if Mazda could find a way to make the internal combustion engine work better, it could make a big difference to how much fuel the world uses and how much CO2 is emitted. Mazda’s solution is the SKYACTIV-G gasoline engine, a 2.0-liter marvel that produces 10- to 15 percent more low/mid-range torque, along with 15 percent lower fuel consumption and emissions than our previous 2.0-liter engine without reliance on a hybrid system. “We believed the SKYACTIV TECHNOLOGY will be the next trend to answer the fuel economy demands without having to resort to hybridization or related battery-based technologies.”



Hong Kong’s Vintage Havens While Chinese antiques are easy to find along the Hong Kong Hollywood Road’s plethora of specialist shops, here are some unusual vintage retailers that are sure to turn up the perfect one-of-a-kind gift. Museum Context

Shop 246, 2/F Prince’s Building, 10 Chater Road, Central, +852 2152 0820 This eclectic shop oozes a boy’s own charm with brown leather footballs, model sailing boats and planes, traditional games, old posters and nautical bits and bobs to inspire your own adventures on the high seas. Many pieces are high-quality vintage replicas. Owners Andrew & Alice McRae (both designers) have also scoured the UK for fabulous original pieces: for a Jubilee throwback, take a look at Players cigarette cards from the coronation in 1937, or a photographic portrait of the Queen & Duke of Edinburgh from 1977. And when you’ve filled your shopping bag, pay up at the 100-year-old till. Vintage Concept

Shop 7 – 8, G/F, Lyndhurst Tower, 1 Lyndhurst Terrace, Central, +852 2522 2070 Shop G5, G/F, Goodfit Commercial Building, 7 Fleming Road, Wanchai, +852 2833 2083 A must-visit for fans of horology, Vintage Concept has a dazzling collection of secondhand luxury watches, with brands like Patek Philippe, Audemars Piguet, IWC and Omega lining the shelves, though the star of the show is Rolex. Many pieces represent great savings on more recent makes, but if you’re looking for something along a retro line, there are wonderful finds from the 1960s, 70s and 80s. The oldest that is currently in stock is a “Prince” watch from the 1930s, priced at HK$65,000. Manks

3/F, The Factory, 1 Yip Fat Street, Wong Chuk Hang, +852 2522 2115 Manks brings a clean, understated Scandinavian aesthetic that blends perfectly into the urbane Hong Kong lifestyle, and while they do represent modern designers, they also have some stunning antique pieces, a unique style in a city where the Oriental prevails. From 1960s table lamps, to Art Deco ceramics, to an entire late 19th century library suite, Manks’s eye for decorative chic is wide-ranging and timelessly elegant. Fotographiqa Lok Man Rare Books

6 Chancery Lane, Central, +852 2868 1056 While Flow on Hollywood Road is perhaps best known among Hong Kong’s second hand bookshops, just down the street is another shop for people who love the physicality of books as much as they do reading them. Lok Man Rare Books is a bibliophile’s dream of rarefied volumes, from old travel books, magical children’s stories, landmark scientific treatises, spellbinding occult tomes, thrilling sci-fi adventures and more. Many are first edition collectables, some are signed, and all are objects of great loveliness. With such a range of subject on the shelves, Lok Man is sure to dig up something to pique the interest of any taste, making this a perfect stop for personal gifts.

56 HONG KONG BUSINESS | AUGUST 2012, +852 9357-9537 Fotographiqa is a labour of love by vintage camera geek Jon Maloney, who established the business not only as a means of dealing in his beloved Leicas, but also as a way to connect to fellow photography buffs. The company motto reads, “We dream, we talk, we swap stories; we find cameras for people.” Eccentrics in the digital age, Fotographiqa and its clients are folk who love the look and heft of chrome and leather machines, who want to develop their techniques manually and intimately, rather than take 500 technically perfect shots in a day. Current cameras in stock include an extremely rare WW2 Leica IIIC K with an even rarer Carl Zeiss Jena 35mm f/2.8 Biogon lens converted for US Army use (metric to imperial conversion).



1 in 10 leaders expect their business to be worse off 16% (53%) Worse

38% (8%) Better



(39%) Same

of business leaders think their business will be the same or better in 2012 (Q3 2011 results in brackets) Source: Ipsos Business Consulting online survey Note: Data are from responses by business executives across all industries

Developing markets in Asia Pacific are more likely to invest in gold/silver or other precious metals

In Asia Pacific, investing in stocks is most prevalent Source: The Nielsen Global Survey Decoding Global Investment Attitude

Budgets are increasing (against 2011 figures in brackets)

Source: The Nielsen Global Survey Decoding Global Investment Attitude


Increased activity for 2012 with a year on year increase in 2009, 2010 and 2011


Increased activity for 2012 but still less than 2011


25% Very likely

32% Quite likely

15% Definitely 27% Not very likely 1% Not at all likely

72% are planning on new investments in their business (49% in Q3 2011)

Source: Ipsos Business Consulting online survey Note: Data are from responses by business executives across all industries



No change from 2011


12% (5%)

Less activity in 2012

Source: Ipsos Business Consulting online survey Note: Data are from responses by business executives across all industries

For more information contact: Ipsos, Tim Hill ( &Tim Hill (; Nielsen, Jackie Helliker (; Nielsen 58 HONG KONG BUSINESS | AUGUST 2012



Hong Kong Business Aug-Sept 2012  
Hong Kong Business Aug-Sept 2012  

August-September 2012 issue