hong kong business issue 3

HONG KONG

BUSINESS Connecting You to Hong Kong and China Since 1982*

afTER 38 YEARS

IT IS TIMEfOR a BREaK WITH THE DOLLaR

Display to 31 January 2011 HK$ 40

SPECIMEN

SPECIMEN

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pEG myTHs

+5DiStRESSED aSIan dEbT REPORT nEw waYS

TO FInd a bEd In HKHOw TO ManaGE THE TXT GEnERaTIOn :)

wHaT dO CEOS THInK OF THE MInIMUM waGE?

ONE COUNTRy, TWO CURRENCIEs , THREE RmB maRKETs

ENDING THE pEG

2 HONG KONG BUSINESS | JANUARY 2011

HONG KONG BUSINESS | JANUARY 2011 3

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

Tim Charlton

This issue has some great articles in it, from the growing chorus of leaders who are calling for an end to the peg through to how CEOs really feel about the minimum wage. We are introducing new sections into Hong Kong business, such as our insight piece on distressed debt, in which we will delve deeper into areas of the economy and business life in Hong Kong and try and bring a broader understanding of the issues and current state of an industry that one could expect from a newspaper.

We are also adding columnists to the magazine to bring an ever wider range of opinions on ideas that may be under the surface but not yet in the press. And going into 2011 we will begin our series of lists in Hong Kong, including, I am pleased to say, the ‘top twenty’ bankers in Hong Kong, which we will be researching through word of mouth with our friends in the headhunting and banking industry. If you know anyone who is Hong Kong’s version of a ‘master of the universe’, do let us know and we will put his/her name to our panel of selectors.

We are also trying to find new start up businesses to cover, especially people who have left careers in banking, technology, or retail and are starting up an interesting business with a twist. If you have any editorial ideas, do drop me an email and we would be happy to meet for a quick drink at the Dublin Jack in Lan Kwai Fong. It was as a result of one of those meetings that we met the guys behind airbnb.com who were in Hong Kong to add our city to the list of destinations (page 22). So if you have something to say or an idea for an op-ed column in Hong Kong business, get in touch because we are always looking for fresh ideas.

All the best

fROm THE EDITOREstablished 1982

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CONTENTs

5 mytHspegged off: the 5 myths

INsIGHtdistressed asian debt hard to find20

14

36

COVER STORY34 It’s time to end the HK$ peg The peg is doing more harm than good and many believe it’s time for it to go

36 Pegged off: the 5 MYtHSIt may seem like we are living in unprecedented times, but the present is very much like the past

42 Peacock today, feather duster

tomorrow?

44 Asia’s white line fever

46 New listings rules change pre-IPO

BRIEFING24 Most CEO approve of minimum

wage

26 Octopus fallout hits direct

marketers

28 How to manage the text

generation :)

REPORT30 Rebalancing the key for investors

in 2011 as asset bubbles threaten

32 One country, two currencies, three

RMB markets: what you need to know

51 Central under pressure as tenants

move East and to Kowloon

52 Office space being taken up faster

than new supply

REGULAR16 Abacus

54 Motoring Report

56 Life & Style

58 Last word

OPINION

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

For the latest business news from Hong Kong visit the website

www.hongkongbusiness.hk

REtAILthe rise of the Chinese Consumer


News from hongkongbusiness.hk

Dragonair eyes to recruit 300 more flight attendantsAfter the cabin crew recruited earlier this year completed their training, Dragonair is inviting more high-calibre candidates to join its profes-sional team for their third recruitment day at the end of October. The upcoming recruitment day is organised to cope with the growing volume of passengers, flight frequency increase as well as future busi-ness development.

HK and India agree to expedite tax-cut planChief Executive Donald Tsang invited Indian companies to list in HK bourse as he asked Indian authorities to consider granting visa-free access to HK visitors. Hong Kong and Indian govern-ments agreed to expedite the conclusion of a comprehensive avoidance of double taxation agreement. Mr. Tsang highligh-ted the unique advantages of HK as a global financial centre.

HK sets initial minimum wage rate at $28/hrThe Chief Executive-in-Council has adopted the recommen-dation of the Provisional Mini-mum Wage Commission to set the initial statutory minimum wage rate at $28 an hour. It will come into force on May 1. Chief Executive Donald Tsang said legislating for a minimum wage is a milestone in the protection of low-income workers’ rights.

HSBC completes renminbi trade settlement in BrazilThe lender has settled in RMB across six continents with the deal in the South American country. HSBC on Thursday announced the completion of its first renminbi (RMB) denominated trade settlement transaction in South America. The ground-breaking transac-tion took place in Brazil for Groupo Tellerina, a retailer of house and decoration products.

Survey shows climate change top concern in Hong KongYet, only 15% in HK said they understood a lot about climate change compared to a global average of 36%. The results of HSBC’s fourth Climate Confidence Moni-tor, published on Tuesday, revealed that climate change is one of the top three concerns globally, on at par with economic stability and terrorism.

Cathay Pacific staff to avail annual salary in-crease of 4.5%The airline will also gives year-end salary increment, 13th month pay and further profit share after seeing the compa-ny’s remarkable growth and strong performance. Cathay Pacific Airways announced on Tuesday the year-end salary increment and details of the 13th month pay for its Hong Kong-based staff.

Swire Properties completes 50% stake sale in PCCW TowerThe company was able to in-crease its holding in PCCW Tower from 20% to 50% that ensured a stable future for the building. They announced the completion of the sale in PCCW Tower at TaiKoo Place, Island East to Grosvenor. They will re-tain a 50% interest in the office tower valued at HK$4,388m.

HSBC unveils Risk Con-trolled Greater China FundHSBC remains committed to providing customers with the most diligent investment solu-tions amidst market volatility of Hong Kong investors.HSBC Risk Controlled Fund Se-ries – Greater China Fund pro-vides investors with opportuni-ties to capitalise on the growth potential of the Greater China markets through a unique risk controlled mechanism.

HSBC appoints Rakesh Bhatia Global Head of Trade and Supply ChainOn 1 January 2011, Rakesh Bhatia will move back to Hong Kong to take up the appointment of Global Head of Trade and Supply Chain for The Hong Kong and Shanghai Banking Corporation. He replaces Lawrence Webb who has retired after 29 years with the group while Michael Young is appointed to succeed Mr. Bhatia.

mOsTREaDDaily news: www.hongkongbusiness.hk


ClASSiC in DEtAilED 3D

ShARpnESS AnD ComfoRt

NEW IN TOWN

Audemars Piguet introduces their latest addition to their sophisticated line of wristwatches. Inspired by the 18th century mechanism, Millenary Minute Re-

peater is equipped with the new AP escapement – the double balance-spring – and a hand-wound Calibre 2910 with hand-finished and hand-polished parts. This breakthrough technology by Audemars Piguet reduces energy losses and eliminates the need to lubricate the pallet-stones enhancing its shock-resistance and rating accuracy. Millenary Minute Repeater exudes in-tricate designs. Architectural details are visible through the titanium oval case and sapphire crystal caseback giving an exceptional three-dimensional experience. Finished with a horizontal “Côtes de Genève” motif, this new addition is bound to take the longstanding tradition of Audemars Piguet to another generation.

www.audemarspiguet.com

Perfect blend of sharpness and comfortBased on the concept of yin & yang, the Tai Chi symbol of harmony and balance, SIGLO L&R Scissors is crafted to pres-ent an exquisite design balancing both comfort and sharpness. Utilizing the time-honoured forging techniques used in Japanese samurai swords and crafted with high quality Japanese stainless steel in Seki, Japan, L&R Scissors is pre-cisely forged and polished to give sharp and even cut. The unique shape and de-sign of the steel handle fits comfortably on any finger size and can be used both by the left and right hand.

www.pacificcigar.com

All in onE touCh

1

2The complexity of using multiple re-motes and separate devices to enjoy a high-quality home theater system is no longer a problem.

Bose VideoWave entertainment sys-tem is a revolutionary new product which combines a home theater sound system, 46” 1080p LCD display, and mu-sic system. Backed by 10 years worth of research, Bose VideoWave is currently

the most advanced and consumer-friendly product. Its new click pad re-mote allows users to manage different functions and devices with a touch of a thumb.

Enjoying high-quality cinematic sound and video is now just a touch away.

www.bose.com



SAntA ClAuS iS Coming with RimowA

Small is the new big this season. Mark Levinson’s new Nº53 Power Amplifier has more compact dimensions and lighter weight than other linear counterparts. But despite the small size, Nº53 produces the purest level of sound possible. It has an impressive switching design that has no switching noise which is the result of an extensive research by Mark Levinson. Giving forceful but graceful sound, Nº53 drives audio output into perfection.

www.hksoundconcepts.com

twinklE twinklE littlE StARS

NEW IN TOWN

Rimowa Topas Titanium Cabin Multiwheel gives you ease and comfort in traveling, whether you are bound for a business trip or excited to start your vacation.

Embody the traveler of the future with the Topas Titanium line, your reliable travel partner worthy of second looks. Topas displays beauty inside and out, with its noble metal titanium exterior and polyjacquard interior that keeps contents in place and turbulence-free with sturdy straps and fasteners.

www.rimowa.com

Crystallize Me’s Bao Gallery has intro-duced their new traditional yet con-temporary chandelier. Carefully crafted and designed by a traditional Czech craftsman, the crystals emit a star-like reflection. This masterpiece from the Blue Heaven Collection gives a heavenly journey to a contemporary setting.

www.crystallize.me

5

4 6thE powER of muSiC



twinklE twinklE littlE StARS


Customised managed document service drives long-term cost savings and streamlines processes

corporate profile

Mark Boelhouwer, Vice President of Strategic Marketing, Ricoh Americas Corporation

Massive amounts of printed docu-ments – forms, reports and the like – and the associated waste of natural resources do contrib-

ute to the erosion of a company’s bottom line. But organisations that plan sustain-able growth paths, turn to initiatives that help trim unnecessary costs long-term and change wasteful ways for good, while also transforming employee behaviour that lead

to waste.Ricoh, a recognised world leader in the

Managed Print Services field, is offering its services to enable companies address the issue of cost savings, and its proposition also introduces a collaborative approach that includes a methodical way to changing the behaviour of employees so that per-manent change is achieved by end-users of documents and devices, while sustainable

savings are achieved by an organisation.Mark Boelhouwer, Vice President of Stra-

tegic Marketing, Ricoh Americas Corpora-tion, describes the Ricoh approach as one that extends beyond mere print services.

He explains that the comprehensive document management services offered by Ricoh, is “outservicing’’, in that it combines continuing improvements, sustainable ac-tions, getting the workforce engaged, and


corporate profile

Ricoh Managed Document Services Delivery Approach for improvement and optimisation

improving the processes.In reaching beyond print services,

he points out, the important dif-ferentiator that Ricoh brings, is a change management strategy, tools and processes that will allow a com-pany to design solutions aimed at their employees. What this means is that Ricoh becomes a partner in a company’s journey of improvement, not simply a provider of hardware by the global specialist in the office and production printing markets.

He says Ricoh introduces to a com-pany the change management tools of Prosci, in particular, the popu-lar ADKAR model, which involves, Awareness of the need to change, desire to participate and support change, knowledge of how to change (and what change is), ability to imple-ment the change, and reinforcement to maintain change.

Change managementMr Boelhouwer points out that this change management offering, which takes into account the human side of change, means that employees are well-informed about how they can become more effective and efficient. And by communicating and reinforc-ing that message, implementing change becomes easier and faster.

Ricoh’s change management of-fering has earned third party rec-ognition, Boelhouwer says, adding that Gartner Inc., has named Ricoh as a leader in the Magic Quadrant for managed print services worldwide. The Magic Quadrant, a research tool, analyses how vendors measure against certain criteria in a particular market, and the result is presented in graphical form.

Mr Boelhouwer views the Gartner recognition as a testament to Ricoh’s vision and its ability to deliver on a global scale.

He cites Kraft Foods as one of the most prominent global companies that achieved cost savings as a result of Ricoh’s Managed Document Serv-ices offering, whose core is Managed

Print Services. He says Kraft Foods managed to cut a third of its print expenditure.

He says that Ricoh’s Managed Document Services are offered in four stages starting with a complete evaluation of a client’s output and im-aging environment, and then design, implement, and manage a highly ef-ficient and cost effective process to meet goals and comply with any per-formance indicators set by a client.

This framework means that Ricoh manages the whole print environ-ment. As a result, a company is free to concentrate on its most critical priorities.

Mr Boelhouwer also points that there are services that correspond

to each of the four stages and they in turn are broken down into service modules, and they can be customised depending on the scale of an organi-sation.

He says that the demand for Man-aged Document Services has been rising at corporations across the world.

And for more than a decade Ricoh has collaborated with a diverse range of corporations and demon-strated through a next-level Man-aged Document Services solution that companies – whether they be small and medium-sized businesses or multinationals – can achieve ef-ficiencies in how they manage their documents.

“The com-prehensive document management services of-fered by Ricoh, is outservicing.”

“Gartner Inc., has named Ricoh as a leader in the Magic Quadrant for managed print services world-wide.”


FIRST

It wasn’t long ago that the world looked intently at American consumer spending figures to gauge the health of the Asian

economy. Today it is the other way around, and Hong Kong is at the forefront of Chinese consumer sentiment as so much of the territory’s consumer sales stem from cashed up mainland visitors. October saw Hong Kong retail sales jump 21% over 2009, and the trend is continuing. Sure, some of that is due to Hong Kongers spending up a storm, but it is the mainland tourist and shopping market that is keeping things robust. As HSBC economist Donna Kwok notes, “Record inflows of high rolling mainland tourists have been on hand to give Hong Kong retailers an additional boost. The outlook for the Hong Kong retail sector is positive, paving the path for Hong Kong’s domestic demand growth engine in coming months.”

All of this has helped the China listed retailers put in stellar profit performances over 2010 and the prospects for the sector remain firm. Parkson Retail, a regional firm with

The rise of the Chinese consumerRETAIL

significant mainland operations, reported a solid RMB229 million profit for the 3rd quarter. The group runs its own sales lines as well as by leasing out space to concessionaires. Interestingly, the commission rate it earned from concessionaires was flat at 19.8 %, but the money its own sales made on its own products was lower at 18.1% Perhaps the company should turn over more of its store space to concessionaires.

Gome’s up ante Electrical retailer GOME has adopted some new strategies which are also paying dividends. The group has managed to extract lower prices from its suppliers in return for agreeing to spend more on promoting them in store. The result has been lower cost of sales and higher profits even when the promotion costs are taken into account. The retailer has also shunned the practice of letting the manufacturers place promoters in stores, and has decided to use more of its own staff in its new format stores.

These new changes should lead the group making a margin of more

than 20%, according to BNP Paribas analyst Charlie Chen. Gome is on track to keep opening 150 new stores a year, making it one of the world’s largest electrical retailers.

Not faring so well in this very good time for retailers is the once kong of running shoes, Li-Ning. The company has decided to do a radical overhaul of its brand and logo, but the transition period is proving tough. In order to get more sales it is increasing its discount to retailers by a further 3% on order “to ensure retailers’ profitability of the LI-NING brand,” according to BNP analyst Sarah Xing.

Moreover Li Ning has not been getting a lot of replenishment orders. “Obsolete old logo products in the retail channel limit new order growth. The company expects the old logo products to be cleared by the end of 2011 by adding more discount stores and factory outlets. On the other hand, distribution network restructuring limits store expansion. The company aims to cut the number of one store operators 30% in 2011,” noted Xing.

Retail sales stronger than ever in Hong Kong as retailers change strategies

My Kingdom for a castle

“Electrical retailer GOME has adopted some new strategies which are also paying dividends.”

16 HONG KONG BUSINESS | JANUARY 2011 Cash or credit ?

ABACUS

Cathay Pacific is world famous for its best-in-class Wing and Piers. And now it has a new baby on the block - The Cabin, which is an ultra modern take on what flyers are looking for. According to Cathay Pacific product head Alex McGowan, “The Cabin is the newest addition to the Cathay

Pacific Lounge Collection at Hong Kong International Airport. Its contemporary design uses the finest natural materials, with bianco Carrara marble, black granite and bamboo. High gloss ceilings reflect a range of designer furniture, including the new Cathay Solus Chair. This unique piece of furniture was designed around the needs of the business traveller and offers a private space with table and power. The Cabin introduces a range of innovative dining concepts, including a Health Bar with smoothies, fresh juices and herbal teas as well as a Deli with hot Panini sandwiches.” Health bar, panini sandwiches ? This is one lounge passengers will have cabin fever to stay in.

Cabin Fever @ CXAVIATION

It has always been an adage that what gets de-veloped for professionals eventually ends up with amateurs, and finance is no different. Bond trading, once the domain of ‘big swinging *icks’

in investment banks is now coming to main street in Hong Kong, thanks to HSBC.

The world’s local bank launched the territory’s first retail bond trading platform in November to allow punters to buy and sell bonds and also certificates of deposit.

It makes sense for the bank, which is flush with excess cash deposits, to try and reduce deposits by switching investors into bonds. HSBC’s Online Re-tail Bond Trading Platform offers investment grade bonds and CDs with up to seven currencies for selec-tion. While offering short-tenor corporate bonds and government bonds, the service also matches retail customers’ needs by including reputable issuers and a subscription amount as low as HK$50,000.

No doubt putting in the technology to allow retail investors to trade bonds was not cheap or easy, but it is this kind of technological investment and inno-vation that will really separate HSBC from others. It is interesting to note that in a management re-shuffle, HSBC has appointed Paul Thurston the chief executive of retail banking and wealth management, and that HSBC’s group technology officer will report to him.

So clearly HSBC has some ideas on where it wants to take its wealth management business and the IT department is going to be taking instructions from the wealth management unit, not the other way around ! So it was no surprise when HSBC’s incom-ing CEO said “With the massive wealth creation we see in emerging markets today, the logic for HSBC to build a world-class global wealth business for our customers is absolutely compelling.” Thurston will be moving to Hong Kong to start the transformation, so look for some more changes coming from 1 Queens Road Central in the months to come.

Thurston to shake up HSBC

BANkINg

HONG KONG BUSINESS | SEPTEMBER 2010 15 Con

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he Hong Kong SAR economy, with its close links to the Mainland in trade and finance, has recovered well from the global financial crisis with annual Gross Domestic Product (GDP)

growth running at a healthy 6 to 6.5%.But wages have lagged the overall recovery, with the

average wage rate up a nominal 2.2% in the 12 months to June (the latest figures available) and declining one per cent in real terms after taking account of consumer price inflation.

New figures have also emerged showing that the Hong Kong SAR’s Gini co-efficient – a measure of inequality in wealth – has risen to 0.53, the highest in the Asian region, which has an average disparity of 0.39. Legislation for the introduction of a “minimum wage” passed through the Legislative Council (Legco) mid-way through last year. It is due to come into effect next year at the recently announced rate of HK$28 (US$3.60) an hour.

The announcement of the rate predictably brought outrage from both sides of the debate with worker and union representatives decrying the “low” rate and business warning that it could put some firms out of business. The truth, as is often the case, is less dramatic. The debate over the merits (or otherwise) and the effects of a “minimum wage” (and its close cousin, the idea of a “livable wage”) is as old as the capital-labour divide.

Worldwide, some sort of “minimum wage” is now the norm rather than exception (new Zealand first introduced the idea in 1894) and this fact might have been expected to limit the ferocity of the debate in the SAR. (Even Hong Kong has had a minimum wage for many years in the minimum set for domestic helpers.)

Instead, the local debate has acquired an added edge to it because of Hong Kong’s recent economic performance and its long (and often over-stated) history as a bastion of laissez-faire capitalism.

Ideological debate The idea of a “minimum wage” has always been a hot political, ideological and social issue, but its economic impact has rarely been significant.

It says more about how a community views itself, or wants to feel about itself, rather than being a determinate of its economic prospects.

The basic economic questions remain, however. Set the minimum wage too low and it benefits no-one, so why do it? Set it too high though and there is the risk of lower employment, the failure of firms and economic stagnation. Happily, Hong Kong seems to have been able to steer a middle course through this minefield. It has seemingly established – at least for now - a “Goldilocks” minimum wage, one that is neither too hot, nor too cold.

“T

Month / Year

Labour Wages

-2

0

3/20

07

9/20

07

9/20

08

2

4

6

3/20

08

3/20

09

9/20

09

3/20

10

Year

-on-

year

% c

hang

e in

nom

inal

term

s

Most forecasts suggest there may be a small minority of workers positively impacted by the minimum wage to be introduced next year and some firms may see their wage costs rise somewhat more than others.

This is especially the case in the lower paid service industries such as restaurants, retail and tourism. But the overall impact will be micro-economic and modest, not macro-economic and broad-based.

Where there are impacts they may be unintended and unexpected. Over time, the existing market rate for lower paid work may drift down to the “minimum wage” level as the “minimum” provides a baseline for future negotiations. This would not be the positive outcome employees might have expected from the introduction of a “minimum wage”.

On the other hand, were the level at which the “minimum” has now been set be pushed up over time through political and social pressure this would have a negative medium term impact for employers (in terms of higher costs) and employees (higher unemployment). In the wider debate, it should not be forgotten that Hong Kong’s economic success over the past 60 years was based on the efficient (and profitable) use of capital and labour to produce the goods and services demanded by others.Hundreds of thousands of people were lifted out of poverty as a result and quite a few of them became rich beyond their wildest expectations.

Set against these successes, the debate in Hong Kong over enshrining a “minimum wage” in local law seems something of a sideshow, but perhaps an important one to have nonetheless.

The ‘goldilocks’ minimum wageIAN PERkIN

OPINIONECONOMICS

IAN PERKINIndependant Economic [email protected]

“Goldilocks” minimum wage, one that is neither too hot, nor too cold.

Moving into new location in October:

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www.fl os.com

aÊnewÊvision:ÊKelvinÊLED

KelvinLED_210x280.indd 1 04/10/10 12.21


SALARYSURVEY

2010

he great credit crunch of 2009 has passed and unfor-tunately for distressed debt traders, there is little in the

way of bad debt to be traded in Asia. Many pundits had predicted that the credit crunch would bring with it a wave of defaults due to difficulties in getting refinancing, but in reality, local currency liquidity did much to stave off the damage. Nevertheless Asia’s distressed debt community has found something to cheer about when they recently met in Singapore for Debtwire’s Asia Pacific Distressed Debt outlook 2011 panel discussion.

Australia has proved to be the one bright spot for trading in distressed debt, mainly due to the failure of ma-jor property companies and trusts such as the now-failed Babcock & Brown and Centro. The flood of li-quidity into Asian capital markets has meant that there are few refinancings to be done over the remainder of 2010 and 2011, although 2012 could be challenging as a lot of refinancings are due then. Robert Schmitz, Head

Distressed Asian debt hard to find

INSIghT

of Restructuring and Debt Advisory at Rothschild noted that across the re-gion banks still have the liquidity. “We do see funds coming in and looking but we have not seen the deeply dis-tressed transactions go through.”

Scott Bache, Partner and Head of Asian Restructuring & Insolvency Group at Clifford Chance said that there are deals of a 2007 and 2008 vintage that haven’t been completed because of issues with deal structures. At the same time, many insolvency practices are finding it difficult sim-ply getting debtors to a table in order to have a sensible discussion about how to proceed with a restructuring. “A lot of those debts are going into litigation and no real liquidity with people weary to buy into a litigation work out,” said Bache.

“And in Asia many companies with debt are family-owned and so a lot of these distressed debt deals has been completed privately, which leaves Australia as one of the largest markets in the region. In Hong Kong and Singapore we have a lot of people

who want to take capital and put it to work in Australia,” he added. Few opportunitiesIn contrast to the United States and Europe, the market for distressed debt in East Asia ex-Japan has pro-vided relatively few new opportuni-ties recently, noted Sandor Schick, managing director of Schick & Asso-ciates law firm in Singapore. “There has been another default this year by a so-called “S-Chip”, in this case, China Milk Products, a Chinese company that is listed on the Singapore Stock Exchange.”

“This is the latest of a series of such defaults in the last few years. In addi-tion, one Indonesian company whose secured notes are listed on the SGX, Arpeni Pratama Ocean Line PT, has also just defaulted on its obliga-tion. But, on the whole, there have been relatively few defaults in South-east and East Asia in 2010, and the amount of debt typically involved in such cases has also been quite small compared to the massive amount of debt at issue in certain recent, large-

“There was recently a $100 million placement in a private situation and that is typical of what you will see over the next six months.”

T

No bear market in distressed debt

ShipbuiLding neWbuiLd orderS (dWT mn)

debt US$ billion

debt distressed by country

0

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Number of Company

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ea

30

20

Thail

and

new Ze

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Singapo

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malays

ia

philipp

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Taiw

an

40

50

60

0

10

30

20

40

50

60

hong K

ong

indones

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Japa

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Australi

a

China

scale bankruptcies outside of the re-gion, such as those of Lehman and General Motors. There has thus been limited scope for trading in distressed debt in East Asia.

Some distressed debt trading desks have consequently been examining investment opportunities further afield such as in high yield.”

According to Schick, there is also one rather interesting and high-profile distressed situation currently unfolding in Vietnam, that of Viet-nam Shipbuilding Industry Group (Vinashin).

“Vinashin raises anew an issue which often appears in cases involv-ing state-owned enterprises: will fi-nancial support from the government be forthcoming if the resources of the debtor prove insufficient to meet its obligations? Even in the absence of any legally-binding guaranty, foreign creditors often profess to perceive an implicit sovereign guaranty of the debt of substantial state-owned enter-prises. The government of Vietnam so far has taken all of the appropriate steps in response to Vinashin’s dif-ficulties: it has removed much of the senior management of the company and has also appointed respected ex-ternal financial advisors to assist in a debt restructuring. However, whether the government also determines it to be necessary or appropriate to pro-vide direct financial support remains to be seen.”

Australia still best for debtSo where are the opportunities likely to be in Asia? According to Cameron Duncan, a partner at boutique re-

structuring firm KordaMenthaNeo, which has worked on such deals as Advance SCT and Asia Water Tech-nology in Singapore, the distressed debt investment focus in Asia is ex-pected to continue to be in China and Indonesia, with more opportuni-ties also expected to arise in Thailand and India.

The added perception of risk with opportunities in India is likely to mean that non-India based investors will be more cautious until one or more large indian workouts are suc-cessfully completed. Still, it is the land down under that remains the largest market in the region for traded dis-tressed debt. Law firm Henry Davis York partner Nicholas Dunstone noted Australia is the largest market for distressed debt in Asia following a slew of corporate failures in 2009.

“There has been an unparalleled influx of secondary debt liquid-ity into our market totaling around AU$5 billion since Babcock started trading in 2009. Now Centro and a dozen other names are well covered. The driver for that is that Australia is at the forefront of debt structuring,” said Dunstone. “In Australia the ma-jor banks are sellers of distressed and highly-stressed debt. The major Aus-tralian banks have denied they were involved but actually they are at the forefront of conducting auctions of their debt,” he added.

The problem for buyers of dis-tressed debt, such as the 40 funds that are active in the Australian market, is that now the big deals are all done, there is not much left at the table. Robin Challis, head of special situa-

tions at The Royal Bank of Scotland noted that $1billion “has been traded in Centro in the last ten days.” But the focus is coming back to private place-ments. “There was recently a $100 million placement in a private situ-ation and that is typical of what you will see over the next six months. If you asked me six months ago I would have said not. But now the opportu-nities in the secondary market are worth a lot less,” said Challis.

Burnt by private placementsBut according to Clifford Chance’s Bache, there are people still not pre-pared to go into anything private. “A lot of people in Asia have seen pri-vate deals go wrong and there will be skepticism about the private place-ment market going forward. China is still very difficult in terms of getting control over ownership and you are not able to do a proper restructur-ing. In India a lot of the sponsors are very good litigators.” “What is most surprising is how good Indonesia has been at getting deals done. It’s not at western standards but it’s moving in the right direction,” said Bache. So who is doing the deals? According to Bache, a lot of distressed debt funds are bypassing the investment bankers and putting their own deals together with companies.

“There is still distressed debt here but it’s just not being traded and a lot of the original investors are just hang-ing on trying to work things out.”

If Hong Kong Business readers would like a copy of the report please email Naveet McMahon on [email protected]

“There has been an unparalleled influx of secondary debt liquidity into our market totaling around AU$5 billion since Babcock started trading in 2009.”

INSIghT


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Branding

stream of income. Our community is comprised of users, passionate and eager to explore and enrich the world through the sharing of space.

To date, Airbnb has raised $7.8M in total funding from Sequoia Capital, Greylock Partners, and other prominent angel investors. The capital will be used to fuel product innovation, to accelerate expansion into more cities and countries around the globe, and to advance the company’s rapid growth and hiring of a world-class team.

What are the cultural or other differences in HK compared to the states?Some of the biggest differences that we’ve found, are that obviously the spaces are smaller in HK and the idea of sharing one’s home with guests seems a bit more foreign. Nonetheless, people are finding success and realizing that their space is worth money, however small it might seem. Whether renting a futon or a twin bed, anyone has the ability to host on Airbnb and make some extra money.

What is proving most popular on Hong Kong compared to other places?I think that Hong Kong compared with some other places, provides a much richer and more rewarding local experience. To the uninitiated, Hong Kong might seem a bit overwhelming and is bit harder to discover the hidden gems, off the beaten path, type places the city has to explore. Having a local host to point you in the right direction is a huge boon for visitors.

Who uses airbnb?One of the most encouraging things we’ve discovered, is the degree to which this marketplace offers something for everyone. Whether you are looking to rent someone else’s space, or trying to monetize your own. Our users range from young to old, those with budgets big & small, and hosts renting anything from a small bedroom in Hong Kong, to an entire island in Fiji. Our users tend to be well traveled.

hat is airbnb doing in Hong Kong? With extra space in high demand, Hong Kong is

one of our most exciting markets for growth. We felt it was important to get on the ground in

order to meet and hear from our existing users; while at the same time using the opportunity to spread the word about our company to new hosts and those in the position to profit from renting their extra space. The feedback has been amazing.

How did airbnb get started and who is behind it? Founded by Joe Gebbia, Brian Chesky, and Nathan Blecharczyk, Airbnb begins in the living room of Joe and Brian’s San Francisco loft in 2007. Alumni of the Rhode Island School of Design, they knew that a prominent design conference was coming to town, but that all the nearby hotel rooms had been booked solid. Living the ‘creativity can solve problems’ creed of their alma mater, they decided to offer up their place, along with tasty breakfast and local hospitality, to a few friendly strangers attending the event.

As it turned out, there were many people out there looking for places to stay where the hospitality was genuine and the M&Ms didn’t cost $6. In staying this way, their guests also gained insight into the city from a fresh, local perspective, making for a truly authentic and memorable experience. Two air mattresses, a thousand dollars, three new friends, and many high fives later, the entrepreneurs realized an opportunity.

Offering a diversity of accommodations - from private homes to private islands in over 8,000 cities in 168 countries - Airbnb unlocks the doors to unique spaces around the globe. Now people can discover an authentic, local side of the cities and cultures they visit while providing their hosts with a new

No place like homeVisitors to Hong Kong can now rent a room in someone’s home rather than a hotel room as couch surfing grows up.

W

Brian Chesky, Co-Founder and CEO, Airbnb


So Hong Kong finally has a minimum wage leaving labour advocates happy and not every CEO unpleased. Sure the retail,

logistics and security services will be hardest hit, but it’s harder not to feel sorry for Hong Kong’s overworked and underpaid workers with the least protection. Nevertheless there may be some unintended consequences with some companies contacted by Hong Kong Business Magazine concerned that it may disadvantage fresh job seekers.

Interns need not applyLion Rock Institute communications manager Nicole Alpert said that it was concerned that it may need to shut down its popular intern program, which provides young people with their first work experience. “As a small organisation, we do not have a budget for the program, and students are grateful for the opportunity to work, gratis, for the benefit of the experience and learning on the job. They leave with skills, networks, and experience that are valuable to them - but of no value according to this discriminatory law. The biggest cost is feared in administration, reporting and legal risk that could occur if an extortionate intern decided to abuse the

Most CEos approvE of MiNiMuM wagEsystem using this law. Likely we will have to scale back our program, disadvantaging our young people and harming the Institute’s mission.”

Fair justiceStockbroking firm Quam Group however thought it was about time. Quam Chairman CEO Bernard Pouliot told Hong Kong Business that while the minimum wage doesn’t affect his firm because salaries are way above those suggested for the minimum wage, it will undoubtedly increase the cost in the service industry. “But on the other hand may create more stability for the working force for those service companies. However the cost will certainly be borne by the consumer. It will also force companies to find new ways and methods to increase the productivity of their working force. As a whole, I think it is positive. HK wealth disparity has increased a lot over the last few years and putting more money in the pocket of the employees is fair justice and needed for a harmonious society. I approve totally of this new legislation.

Shipping firm OOCL also said the new minimum wage laws would not affect it, largely because it pays its staff more than the minimum wage Director of corporate planning Stephen Ng said: “OOCL’s business is not affected at all by the minimum wage. OOCL’s people are our greatest assets and all our employees are paid more than the recently set statutory minimum wage of HK$28/ hour.”

The real issue going forward will be how the minimum wage is reset and by whom. If it merely follows the inflation rate, perhaps it will be not much of an inconvenience to Hong Kong’s businesses. But the danger is that as Hong Kong politically develops, more politicians may find it beneficial to start agitating for even higher minimum wages as in the west, with a consequence that labour jobs are shifted to China and Hong Kongers find themselves out of work.

But there are some unintended consequences including how interns are treated, so what do CEOs think?

CEO BriEFing

The cost will certainly be borne by the consumer“

家居潮流博覽第十屆

10th Homex & House Expo24-27/12/2010

香港會議展覽中心１號館攤位 : 1Q29-32, 1P30 & 32Hong Kong Convention and exhibition Centre,Hall 1. Booths: 1Q29-32, 1P30 & 32

Coming Soon香港中環都爹利街１１號律敦治中心一樓112室Shop 112, 1/F, Ruttonjee Centre, 11 Duddel Street, Central, Hong KongTel.:2580 1028 Fax:2580 1068

香港鴨脷洲利樂街二號海灣工貿中心地下六號鋪。(利南道尾，抽水站對面）Unit 6, G/F., Oceanic Ind., Centre, 2 Lee Lok Street, Ap Lei Chau, Hong KongTel.: 28818457 Fax:2881 8477E-Mail : [email protected]營業時間 : 星期一至星期六　由上午11時至下午6時星期日或公眾假期由中午12時至下午6時Bussiness Hours : Monday to Saturday : 11:00 am - 18:00 pmSunday and public holidays: 12:00 am - 18:00pm(Or by appointment)

家居潮流博覽第十屆

10th Homex & House Expo24-27/12/2010

香港會議展覽中心１號館攤位 : 1Q29-32, 1P30 & 32Hong Kong Convention and exhibition Centre,Hall 1. Booths: 1Q29-32, 1P30 & 32

Coming Soon香港中環都爹利街１１號律敦治中心一樓112室Shop 112, 1/F, Ruttonjee Centre, 11 Duddel Street, Central, Hong KongTel.:2580 1028 Fax:2580 1068

香港鴨脷洲利樂街二號海灣工貿中心地下六號鋪。(利南道尾，抽水站對面）Unit 6, G/F., Oceanic Ind., Centre, 2 Lee Lok Street, Ap Lei Chau, Hong KongTel.: 28818457 Fax:2881 8477E-Mail : [email protected]營業時間 : 星期一至星期六　由上午11時至下午6時星期日或公眾假期由中午12時至下午6時Bussiness Hours : Monday to Saturday : 11:00 am - 18:00 pmSunday and public holidays: 12:00 am - 18:00pm(Or by appointment)


The Octopus fiasco wherein customers had their data unwittingly sold on to third party marketers has not unsurprisingly provoked a reaction from

lawmakers. But as is often the case, the response has been worse than the cause, and marketers in Hong Kong could wake up next year to find they have to ditch their databases, change their practices, and find other ways to market. To start with, in October the Privacy Commissioner for Personal Data set out new guidelines which include the right of people to opt out of direct marketing whether done by mail or fax, and any third party marketing can only be done in relation to the reason for the capture of the information in the first place. This means that if someone signed up to ‘win a holiday’, it would technically be a breach of the ordinance for a direct marketer to contact him to offer a credit card.

And finally, the original owner of the data will bear all responsibility for breaches of the ordinance made by an agency. The only saving grace for marketers is that Hong Kong will not legislate an “opt-in requirement” for names, meaning cold marketing to a list will still be legal. So what should direct marketers do?

Know your customerADMA’s Kay Bayliss said Octopus’ mistake was not having a clear understanding throughout the organisation of what their direct marketing practices actually were and how to communicate these externally. “From the Privacy Commissioner’s report into the incident it is clear that under the current legislation Octopus actually did nothing illegal or immoral; however the Commissioner did question if they were collecting ‘too much data’, but the answer to that is very subjective. Customers that signed up to the program were told what they

were signing up for and why the data was being collected, and so some of the responsibility should surely rest with the consumers for not reading the terms and conditions of the ‘contract’ that enabled them to receive benefits and discounts from the program.

“The ADMA’s current view is that any legislative changes should not impact a marketer’s practices if they have been putting the customer first and following globally accepted best practices. First, state clearly and specifically what data you are collecting and what you are going to do with it. Secondly, ‘Say what you do, and do what you say.’ Don’t collect data for one thing and use it for another, and do not start sending communications about a completely different topic to that for which the data was originally collected. Thirdly, always give the consumer the right to choose - no questions asked. The discussion around opt-in and opt-out only becomes an issue if you have been covert in your data collection practices and do not respect the rights of the consumer to choose.”

F5 Digital Consulting’s Gregory Birge noted the recent example of the Octopus data protection fiasco in Hong Kong shows that, once again, marketers need to evolve.

“Marketers need to change their attitude towards consumers and need to communicate the objectives of the data collection clearly and not taking the fine print for granted. Consumers today accept that their personal information is released and expect the receiving companies to protect them. It is the same controversy when Facebook updated their privacy policies.

Companies collecting consumer data need to be honest with what they do with the information and provide the options for consumers to opt-out. However, Permission Marketing needs to be contextual, timed and channel specific.”

oCtopus faLLout Hits DirECt MarKEtErsNew laws every marketer needs to understand will make it much tougher to do business, so what can marketers do ?

CMO BriEFing

Octopus actually did nothing illegal or immoral

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They are individualistic, switched on and more likely to tweet their minds than speak their minds. So how are Asia’s companies learning to manage and adapt

to the influx of Gen Y employees who actually crave feedback and guidance at work ? Driven by results, the young firebrand breed of ambitious Gen Y employees seeks new challenges and craves for feedback and guidance at work. More than that, Gen-Y professionals have a different vision of workplace expectations.

Naturally, the conservative one-size-fits-all model does not work too well while managing this genre of talent. Some organizations have been pro- active enough to tweak the existing strategies and implement an out-of-the-box approach to better manage the new generation workforce.

MaryAnn Vale, Head of Human Resources Asia-Pacific, RS Components, Hong Kong, highlights that most of the newly appointed employees in the organization belong to Gen Y. Keeping the demographics of the workforce in mind, HR has piloted a mentorship program called MIB (Mentor is Buddy) through which it trains non-managerial employees to be mentors for new-generation employees. “Gen Y appreciates open feedback, working with their peers, working with technology

How to MaNagE tHE txt gENEratioN :)

and due recognition. This program involves all these elements - they

receive feedback and coaching from their peers throughout these three months, participate in both e-learning and interactive workshops, and receive open recognition (party style) from their direct managers, peers and even their mentees.

Short attention spanThe Gen-Y attention span tends to be shorter and the program is designed to be interactive and throughout the whole training from start to end, we ask them to articulate “what is in it for me?” for each element and the feedback on this program so far is that they love it. As Gen Y employees tend to prefer a more personable approach, we designed the program to inspire them to see how their actions can serve the needs of new employees. As a result, RS gains retention for both new and current employees - where mentees learn and mentors grow,” she says.

Debashish Chatterjee, HR Director, Honeywell Singapore feels it is important to understand the demands of the Gen Y and manage them accordingly. “They are not afraid to question authority, willing to go an extra mile for pay-for-performance, and demand a meaningful learning curve in their career paths. Naturally, a lot of open communication, both formal and informal has to take place regularly between managers and the new generation employees.

We do this by arranging Town Halls and informal lunches,” he says. Most importantly, a consensus becomes imperative when it comes to implementing change management strategies. “When you want to drive change, it’s imperative to build a consensus with your employees and have them understand the macro picture and the reasons for the change, positive or otherwise…..Gen Y could well be your ambassadors to positive and smooth change management.” An HR spokesperson from Shangri-La Hong Kong observes, “Overall, the younger generation responds well to high performance and fast-track talent development opportunities. To cater to these needs, Shangri-La has in place the International Exposure Program which gives our employees the opportunity to work and learn in our hotels all over the world. Also, leveraging on the experience of the older generation, we have in place a mentorship program that enables the younger generation to learn and benefit from them. Many of our young talents have been matched with more senior mentors and this reinforces their learning. This also gives them a chance to receive feedback and to express their views freely.”

Filia Lim, Head of Human Resources, BT South East Asia, Singapore, is a strong advocate of flexible working arrangements and rationalises BT’s initiative as an engaging strategy that has worked effectively with Gen Y across the globe.

“We are one of the few global companies that allow our employees this convenience. Gen Y typically loves the independence and the opportunity of being agile. Flexible working has worked wonderfully.”

CHrO BriEFing

The workplace of tomorrow requires a new mindset, positive attitude and a flexible approach in dealing with the many challenges presented by Gen Y.

what is in it for me?“

Generation Y more likely to take to facebook than the streets


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AXJ to overtake US+Euro by 2015

Source: IMF, Morgan Stanley Research

rEpOrt: invEsting in 2011

Asia ex-Japan (AXJ) has seen a strong rebound in growth, led by China and India—a story that we have been highlighting for a long time now. The rebound has been driven by domestic

demand, supported by the underlying structural growth dynamics of the region and expansionary fiscal as well as monetary policies. In 2011, we expect AXJ GDP growth to be strong at 7.9%, closer to the trend-line of the trailing five-year average, compared with 9% expected in 2010. Note 2010 had the benefit of a low base effect in 2009 due to the credit crisis.

While growth in the AXJ region has already recovered back to the trend line, output in developed world countries such as the EU and the US is still below pre-crisis levels. In 2011, our global economics team expects a BBB recovery (bumpy, below-par, brittle) in the G3 economies.

Led by AXJ, the share of EM in world GDP on purchasing power parity (PPP) basis has already risen from 37% in 2000 to an estimated 47% in 2010. According to the IMF, EM’s share is expected to reach closer to 50% by 2014. Leading this trend in the EM world would be AXJ, with its combined share in global GDP increasing to 30% in 2015 from 25% in 2010 and 16.8% in 2000. On the other hand, the US’ share is expected to decline to 18.4% in 2015 from 20.2% in 2010 and 23.6% in 2000. Similarly, the share of the Euro area will decline to 12.8% in 2015, from 14.6% in 2010 and 18.4% in 2000.

On The Right Track towards Balanced Growth Formula. The global recession and unprecedented sharp external demand shock have forced Asian countries to face up to the vulnerability in the export growth model. The above-trend global growth of 2004-07 was premised on the imbalanced formula of a debt super-cycle, consumer leveraging in the developed world and a giant export machine in current-account-surplus Asia. US households have now rediscovered the need to save and are unlikely to take on leverage with the same vigor. Asian exporters will therefore find it harder to extract growth beta in the current tepid G3 growth environment. The weakening of Asia’s export model has made it imperative for policy makers to look for alternative growth sources.

Policy makers have so far relied more on the easier path of reflating domestic demand via monetary policy easing and fiscal expansion. Monetary policy has been accommodative with real rates remaining low and fiscal deficit closer to all time wide levels.

Policy makers have increased infrastructure spending and fiscal incentives to encourage consumer spending . Indeed, the current account surplus in the region has already almost halved to 3.8% of GDP during the four

rebalancing the key for investors in 2011 as asset bubbles threaten

quarters ending June-10, from 7.1% during 2007.

To be sure, the need for heavy lifting remains. Efforts to achieve more sustainable long-term domestic demand reflation are at far from desirable levels. The structural factors holding back the region’s domestic demand have been a lack of a social security net, poor public spending support for education and health, low levels of household credit penetration, and low household wealth, which have tended to necessitate higher household savings ratios. An added difficulty comes from the fact that a sizeable portion of savings are held by the corporate sector rather than by households. A closer look at the savings-investment gap for various economies also indicates there is no single solution for Asia’s domestic demand reflation.

In China, private consumption is the weaker link. In some parts of ASEAN, it is the low capex ratio that needs to be worked on.

In Korea and India, we see a model already fairly balanced between exports and domestic demand, but there is still potential to lift investments higher. The good news is that policy makers in the region are moving in the right direction, initiating structural changes to boost domestic demand on a sustainable basis. In China, policy makers are steadily initiating measures, such as a rural pension scheme, provision of low-cost housing and increasing minimum wages.

The governments of ASEAN, Korea and India are also moving in the right direction to support higher investments to GDP.

Everyone has a view on 2011, but we like Morgan Stanley’s and so should you.

“Monetary policy has been accom-modative with real rates remaining low and fiscal deficit closer to all time wide levels.”


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The three markets

Source: Bloomberg, Reuters, HSBC

RepoRt: oFFSHoRe RMB

The initiation of the CNH market in recent months is the most significant development for investors and risk managers with RMB exposure.

The purpose of this primer is to provide a practical framework for understanding how the various RMB markets work and interact, how to decide which is the best market to take and manage risk, and how to interpret ongoing developments.

One country, two systems, three currencies (and four curves) Key is that the CNH is effectively a separate currency that, while it does allow exposure to RMB, is not a perfect proxy to either onshore CNY or the NDF curve. This is because by design there are separate jurisdictions where the RMB can exist, and this division creates separate supply and demand conditions, and therefore three separate but related markets.

What is CNH ?For this reason, in this document we will use RMB to refer generically to the Chinese yuan, irrespective of jurisdiction and market. We use CNY to refer to currency within Mainland China traded in the onshore market. CNH will refer to RMB offshore, primarily traded on the Hong Kong interbank market, while NDF refers to the offshore dollar settled non-deliverable forward market.

The CNY market is largely determined by trade flows, and other onshore supply and demand. However, regulation and government intervention play a large role in how the market operates. Most notable is active currency market intervention to manage supply and demand, and thus the exchange rate. Meanwhile restrictions, for example, limit the extent to which the CNY forward market acts as an interest rate curve.

CNH – the offshore RMB market Hong Kong was the first jurisdiction to allow accumulation of RMB outside mainland China, starting in 2004. The RMB became officially deliverable in Hong Kong on 19 July 2010, with a joint announcementbetween the PBOC and the HKMA. Other than Hong Kong, RMB can be accumulated in other jurisdictions as a result of the expansion of the RMB trade settlement pilot scheme beyond Hong Kong and Macau. However, Hong Kong is the only jurisdiction to date where RMB trading is officially sanctioned and regulated (in other jurisdictions, RMB trading is somewhat a grey area in that it is not explicitly restricted, but neither is it explicitly permitted or regulated).

Combined with the fact that Hong Kong has been the traditional centre of offshore RMB deposits and liquidity, Hong Kong and the CNH market has become the de facto

One country, two currencies, three RMB markets: what you need to know

centre for offshore RMB. Within Hong Kong the regime is fairly liberal. Most

of the management of the market is established at the macro level. Importantly, no intervention occurs (up to the present) to manage the CNH exchange rate. Supply of CNH is indirectly calibrated through the management of the channels through which RMB is allowed to flow from onshore to Hong Kong: resident purchases by individuals, trade settlement, and central bank swaps.

Note that a permitted cross-border transaction is not a CNH transaction. It occurs effectively at the onshore CNY rate, and is sometimes referred to a CNT transaction (the “T” referring to trade settlement). Finally, note that there are few restrictions on CNH account opening in Hong Kong, effectively exposing the market to the universe of offshore demand for RMB. As such, the CNH market has a completely separate set of demand and supply conditions from the onshore CNY.

The non-deliverable forward (NDF) market Before the establishment of the CNH market, the dollar settled nondeliverable forward (NDF) market has been the traditional market from which to take and manage RMB risk offshore.

With onshore participants restricted from participating, this is truly an offshore market. The one link between this and the onshore CNY market is the fact that the NDF fixes off the onshore CNY fix. This link is what separates the CNY NDF and the CNH market.

Everything you always wanted to know about offshore RMB but were too afraid to ask, courtesy of HSBC

“No intervention occurs (up to the present) to manage the CNH exchange rate.”


Imagine two Siamese twins sharing the same blood system – only one has diabetes and is being treated with shots of in-

sulin, while the other is healthy. The insulin in this allegory are excessively printed greenbacks, and the diabetic twin is the US.

Conversely, the healthy twin is Hong Kong, which with its thriving economy, does not need to be treated with monetary expansion – which has expanded four-fold in the past decade – because it is suffering from ‘sugar highs’ in the form of uncon-trollable property prices. Yet that’s what the Hong Kong dollar peg to the US dollar has caused; the SAR’s monetary policy is forced to mirror America’s so long as it remains teth-ered to it.

The Hong Kong Monetary Au-thority (HKMA) announced earlier this year the city’s 26-year-old cur-rency peg to the US dollar would stay. HKMA chief executive Norman Chan said much the same late last

It’s tIMe tO end the hK$ pegThe peg is doing more harm than good and many believe it’s time for it to go By Ajay Shamdasani

year.Franklin Lavin, former US un-

dersecretary of commerce for inter-national trade, thinks the peg is here for the near term because it instills confidence in Hong Kong’s role as a financial centre, and that dismantling the current regime would mean giv-ing up a lot of prestige and stability. “It’s an enormously valuable signal.”

The local currency has been pegged to the US dollar since October 1983. In May 2005, the SAR instituted a trading band to buy or sell should it rise above HK$7.85 or fall below HK$7.75.

Rudi Prenzlin, CFO of the Hong Kong Islamic Index and a former HSBC Swiss private banker, believes the peg now imposes too dear a cost on the city. “The money supply expansion is obvious these days … we’re under-pricing ourselves given our healthy economy,” he says.

Veteran investment analyst Marc Faber believes that the peg has been important in the city’s skyrocket-

ing real estate prices, given that with loose monetary “spectacular asset bubbles” have occurred. “Obviously this can most easily be seen in inflat-ed property prices,“ says Schroders’ Clive Dennis.

Prenzlin thinks Hong Kong needs tighter monetary policy: “Hong Kong is suffering because it’s subject to US monetary and also fiscal policy because when private investors and savers keep dumping the greenback, we suffer too.

Through the peg, Hong Kong “is hostage to US monetary policies” and cannot implement an indepen-dent monetary policy. “Excessive incoming liquidity is all absorbed by soaring asset prices, and not partially by an appreciating currency [as with Singapore, Malaysia, Thailand, China and Japan],” says Faber.

Connie Bolland, managing direc-tor of Economic Research Analysis, agrees: “We’ve surrendered our mon-etary freedom; the Federal Reserve Bank is our de facto central bank and the US needs to deflate its way out of recession following the bursting of the US bubble and the CDO melt-down.” While looser monetary flows are what’s needed in America, she be-lieves they are destructive locally.

However, she notes that while the peg attracts funds – especially those from stronger currencies – it’s not the only factor. For example, since July 2005 to now, the Hong Kong dollar

“Excessive incoming liquidity is all absorbed by soaring asset prices, and not partially by an appreciating currency as with Singa-pore, Malaysia, Thailand, China and Japan.”


eNDING tHe peGhas depreciated 25% against the yuan. “It’s cheaper for mainlanders to enter the Hong Kong property market.”

Similarly, local investors, “com-bined with international investors, are likely to continue to put upward pressure on Asian asset prices,” says Faber.

Looking ahead, she asserts that high-net-worth individuals world-wide “have completely given up on the US administration and its foreign and economic policies,” and they in-creasingly invest their surplus funds in Asia, for its better returns. Last year, commentators predicted the city would cut the peg with mount-ing inflation and surplus foreign funds flowing into the SAR, and the HKMA’s sale of over HK$480 bil-lion (US$61.5 billion) halt currency gains.

Without the peg, Bolland argues, interest rates would not have been as artificially low. “Many countries without the peg can let interest rates or their currencies rise, but we can’t, and this has pushed property prices up,” she says.

Yet, the greenback appreciated this year and the Hong Kong dollar has also risen against other regional cur-rencies. Singapore has tried to tie its currency to a basket of other curren-cies, and some suggest China Beijing may permit the yuan to appreciate.

“Maybe a peg based on a basket of US dollars, Yen, euros and a few other Asian currencies [like Singapore’s] is best,” says Prenzlin. Faber agrees, sug-gesting a link to a currency basket of

currencies “or no link at all” is “more desirable”.

While Prenzlin believes the peg was once beneficial to Hong Kong because of US-China trade, he cau-tions that since Europe is now the mainland’s largest trading partner, “the value-added from Hong Kong [because of the peg] is gone”.

Prenzlin stresses that though the rate has not changed in 27 years, the world has. “We’re much more dependant on China than the US, so a yuan peg is inevitable”. Faber is more pointed, noting Hong Kong to-day has “little to do with the US,” but everything to do with China and the Asian region.

However, the US dollar has lost 40 per cent of its value since 2000 and because Hong Kong, which imports most of what it consumes is tied to a sinking currency’s monetary policy and interest rates, it is essentially im-porting inflation. “The cost to the lo-cal population is felt daily,” says Bol-land.

Some suggest that if Hong Kong’s currency floated, five of its dollars would equal a greenback – much like the Singapore-US dollar exchange rate. Yet Lavin, former US ambassa-dor to Singapore, is not so sanguine about such comparisons.

“Going down that path could cause Hong Kong to lose its ‘halo’ as a pristine financial hub. The value of the currency might go up like Sin-gapore’s, but to say it is cheap to do business here because of a free float-ing currency would not attract com-

panies and investors,” he says.Yet, the yuan may effectuate Hong Kong’s salvation. The Chinese cur-rency has been pegged to the US dol-lar at 6.83 since July 2008.

Though improbable until 2011, should the yuan appreciate, the Hong Kong dollar would likely rise to HK$7.75 to the greenback – compel-ling the HKMA to widen its band.

Prevailing wisdom is that as Hong Kong economically integrates with China, as the mainland economy keeps growing, and as the yuan be-comes freely tradable, the yuan will inevitably become Hong Kong’s me-dium of exchange for daily transac-tions before mid-century. If that hap-pened, the HKMA may peg to the yuan instead.

However, Lavin argues “Any chal-lenge to the [current] arrangement will come from movements with the yuan, and any showdowns it might have with the greenback”. He thinks the peg remains strong for now, but that “adjustment [in its band] and re-calculation” may be necessary.

“If there were economic pressure between Hong Kong and China, then perhaps de-linking makes sense,” says Lavin. The upshot would be grey areas and arbitrage as people head to mainland China for better deal at any given time because of exchange rates,” he warns.

There’s no “intrinsic appetite for change” amongst the local business community, “nor is Beijing looking to end it,” says Lavin. “The peg main-tains Hong Kong’s leadership role as a regional financial hub.”

He believes that finance isn’t just about investment banks but also merchants, traders and exporters. “They have the ability to finance their trade with predictable exchange rates ... the city’s business as a shipping and export hub is also undergirded by the peg which, while it sometimes puts pressure on the local economy, is on balance good.”

The great unknown is whether China will float the yuan. “Ultimate-ly, it’s a political consideration when China will make the yuan convert-ible,” says Prenzlin. “It’s in the cards, but not anytime soon.”

Nevertheless, Faber advises swift action on the Hong Kong dollar, be-cause “slowly [ending the peg] … drives speculation” in Hong Kong dollars.

“Many coun-tries without the peg can let interest rates and/or their currencies rise, but we can’t, and this has pushed property prices up.”

Franklin Lavin Bolland

Prenzlin

Faber


eNDING tHe peG

pegged Off : the 5 Myths It may seem like we are living in unprecedented times, but the present is very much like the past as HSBC’s Richard Yetsenga argues

Q There is no broader asset bubble

uestions about the ap-propriateness of the Hong Kong dollar peg have risen again be-

cause of the boom in local property prices and the rise of the renminbi as a transaction currency in the territo-ry. This is another of those periodic reassessments of the peg that partly reflects a generic distrust of fixed exchange rates, rather than Hong Kong’s particular circumstances.

Property prices have certainly risen, but the gains are less extreme than is often presumed. Moreover, the recent strong steps taken to ensure the property cycle remains orderly suggest that a more cycli-cal approach to macro-prudential policy is useful. There is no broader

asset bubble: Hong Kong’s equity market has gained less than 10% this year, while Indonesia, Thailand and the Philippines have each recorded gains of more than 30%. Also, CPI is expected to peak in the 3.5-4% range over the next two years.

A particular concern seems to be that the growth of the RMB as a transaction currency will cause a flight of deposit transfers from the HKD. Consider, however, that for-eign currencies have typically ac-counted for around 45% of bank deposits in Hong Kong. Any shift into the RMB is more likely to come from other foreign currencies rather than the HKD.

In any case, a sustained shift out of the HKD would ultimately see

Hong Kong interest rates rise. Not only would this rebalance pressures for HKD depreciation, but it would generate precisely the monetary re-sponse that popular argument re-quires at present.

There are also suggestions that, at the very least, pegging to a basket would be a superior currency ar-rangement. Consider, however, that the only deliverable currencies which have meaningful trade or economic relationships with Hong Kong also have interest rates near zero. Re-pegging to a basket, therefore, would do little to increase Hong Kong’s in-terest rates at present.

HKD peg mythbustersMyth 1. The HK and US economies are unusually divergent this cycle In contrast to popular perception, the divergence between the eco-nomic performance of the Hong Kong and US economies at present is not unusual by historical stan-dards. There have been a number of periods when the GDP growth dif-ferential between the two economies has been wide – such as in such as in the late 1980s and notably through


eNDING tHe peG

But this is not alarming

Consumer price inflation remains low by historical standards

the mid 2000s – and even some pe-riods when growth has moved in opposite directions – such as in the US recession of the early 1990s and then during the Asian financial cri-sis in 1997-98.

At present both economies are experiencing a post-crisis recovery and Hong Kong’s growth has yet to notably outstrip that seen in the US.

Myth2. HK prices are unusually buoyant this cycleThe discussion on growth notwith-standing, there are clear differences on inflation and property prices between the two economies. On as-set prices particularly, there is little question that those in Hong Kong have risen strongly over the past 18 months. However, the latest increase in prices is very much in line with what we have seen at a similar stage

of previous cycles.While property prices are close to

the highs of 13 years ago, and seem almost certain to reach that mile-stone soon, the equity market is still well below pre-crisis levels. Even so, on a relative basis the increases have been less extreme than often pre-sumed.

Indexes both equity and prop-erty prices to 100 at the start of each cycle. So far property prices have gained 43% this cycle, compared with 109% between 2003 and 2008,

57% between 1995 and 1997, and 41% from 1993 to 1995. Some fur-ther gains, therefore, would not be out of line with history.

The recent strong steps taken to ensure the property cycle remains orderly, also suggest that a more cy-clical approach to macro-prudential policy can play a useful counterveil-ing role.

More to the point, however, con-sumer price inflation remains quite low by historical standards.

The latest CPI reading of 2.6% yoy is below Hong Kong’s average CPI of 3.1% over the last 20 years, and well below the peaks of 12.5% (1991), 10.4% (1995) and 6.3% (2008) seen in previous cycles.

Our economists foresee a further pickup in inflation to 3.5-4% over the next two years as asset price gains feed through. That said, the inflation

peak this cycle is still expected to be well below historical norms.

It’s also worth pointing out that Hong Kong is not the only economy facing strong rises in asset prices. Since the beginning of 2010 every equity market in the region is higher. The Hang Seng’s gain of 6%, howev-er, is eclipsed by the gains recorded in Indonesia (45%), Thailand (35%) and the Philippines (33%) amongst others.

Furthermore, Korea, China, India and Singapore have all introduced

Asset prices have risen since 2009

measures in recent years to contain strong property prices, suggesting that there is little unique about the gains in property prices being seen in Hong Kong.

Before we move on, it is worth re-viewing some economics associated with a currency peg.

If monetary conditions in Hong Kong need to tighten, and neither the currency nor interest rates are in a position to contribute, Hong Kong’s price level needs to adjust. This occurs through higher inflation for a period. Once the price level has adjusted sufficiently, however, the rate of inflation should return to a lower, more stable, level. In other words, there is no reason to expect loose monetary policy to result in a destabilizing, permanent increase in the rate of inflation.

Myth 3. The rise in HKMA reserves means flows into HK asset markets have been unprecedentedly largeAt present there seems to be par-ticular confusion between gross and net flows into the HKD, and how these flows interact with the HK-MA’s intervention activities. In an environment where there are flows into Hong Kong asset markets, the HKMA only needs to intervene when these asset- related inflows are not offset by other outflows.

Typically, when the HKMA inter-venes to buy USD-HKD (the ‘flow’ channel of intervention) the result-ing liquidity increase generates a decline in HK interest rates, such that some market participants will

It’s also worth pointing out that Hong Kong is not the only economy facing strong rises in asset prices.

Source: CEIC, HSBCSource: CEIC, HSBC. Both series indexed to 100 at start of new cycle indicated by vertical bars. Cycles begin at previous troughs of Hang Seng index.


eNDING tHe peGbuy USD-HKD to benefit from the positive carry. With US interest rates at such low levels, HKMA interven-tion adds liquidity, but this does not generate any meaningful decline in HK interest rates.

The interest channel, as a conse-quence, is muted. So reserves are not necessarily increasing because gross inflows are much larger than normal (though they may be), but because the arbitrage/carry flows are not oc-curring this time. In sum, flows into Hong Kong asset markets may or may not have been unprecedented. We actually just don’t know.

Myth 4. A HKD peg to a basket ofcurrencies would be a superior currency arrangement at presentRunning a currency board against one currency has the advantage of being clearer and more transparent than one against a (defined or unde-fined) basket. Despite this, let’s con-sider whether running a currency board against some sort of basket would be a superior arrangement for Hong Kong in current circumstanc-es. It’s well known that a currency board can only be run against fully deliverable currencies. At present therefore, the universe of potential

candidates for inclusion in the bas-ket would be EUR, JPY, GBP, CAD, SGD, AUD, NZD, CHF, NOK and SEK. The inclusion of smaller cur-rencies that are not used for global invoicing, have little impact on the global economy, and have only modest direct trade relationships with Hong Kong would make little sense. That leaves the EUR and JPY as actionable candidates. Australia and Switzerland comprise only 1% of total trade with Hong Kong, and the UK is only 1.6%. Running a cur-rency basket against the EUR and JPY, however, would do little to in-crease Hong Kong’s interest rates at present, as both are running interest rates close to zero.

Myth 5. The RMB is likely to dis-place the HKD as a transaction currency in Hong KongCurrent market speculation seems

to have solidified particularly on is-sues related to the RMB. The argu-ment seems to be that the RMB will be increasingly used as a transaction currency in HK, causing a flight of deposit transfers from the HKD into the RMB, as investors seek to move from a depreciating currency (the HKD, by virtue of the peg) into an appreciating one. To avoid such an outcome, so the argument goes, the HKMA needs to revalue the HKD.

Unquestionably, a broad expecta-tion of revaluation could temporar-ily stem any deposit shift into RMB. Once a HKD revaluation were to occur, however, Hong Kong would

be left with a stronger currency. Presumably from that point inves-tors might, if the market’s currency framework is correct, again fear that the RMB would appreciate more than the HKD in the future.

Why not take advantage of stron-ger levels of the HKD to shift into RMB deposits at better levels? Giv-en this, a revaluation of the HKD could hardly be expected to solve the problem of currency substitu-tion; if in fact there is one.

So if a revaluation wouldn’t solve a problem of excessive currency substitution, let’s consider how likely such an outcome is in the first place.

For currency substitution to oc-cur there needs to be a shift from HKD deposits into RMB deposits. A shift out of deposits held in other foreign currencies would have little impact on the HKD. Consider the

backdrop. Hong Kong residents have typically kept around 45% of their bank deposits in foreign cur-rency. This proportion has been re-markably stable since 2000, with a range of only 43% to 50%.

It seems more likely that, initially at least, the shift into RMB will be at the expense of other foreign cur-rency deposits, rather than savers’ HKD deposits. In the past two years, USD deposits have fallen modestly, but with both RMB and HKD de-posits rising.

Consider also that the RMB is not easily usable in Hong Kong. Some retail outlets do allow the use of RMB, but almost none display dual prices, nor return change in RMB. In addition, the RMB is certainly not convertible globally.

This, to us, suggests that the pub-lic are unlikely to shift towards us-ing RMB as a day-to-day currency instead of HKD anytime soon, even if they shift to holding more RMB as a store of wealth.

Beyond these points, even if some shift from HKD into RMB depos-its were to occur, consider also the equilibrating nature of the peg. At present there is excess demand for the HKD, which, due to HKMA in-tervention to keep USD-HKD with-in the 7.75/7.85 band, has resulted in injections of HKD liquidity and very low Hong Kong interest rates. If savers sell the HKD, however, USD- HKD should start to shift away from the lower end of the con-vertibility zone, where it is at pres-ent, to the upper end.

Towards the upper end of the band the HKMA will begin to inter-vene to buy the HKD. This will re-duce HKD liquidity and Hong Kong interest rates will begin to rise.

Hong Kong residents have typically kept around 45% of their bank deposits in foreign currency

Barclays says the peg could go within two yearsIt’s not every bank is betting that for better, or as is the case now, worse, the peg is here to stay. One firm’s house view is that the peg will go, and quickly. Barclays’ head of Emerging Asia Research told a Finance Asia conference in October that the peg would probably end within two years, and probably sometime in 2012, which is not coincidentally the day the Mayan Calendar says the world will end. But will de-pegging be an end to Hong Kong as we know it ? China certainly had no problem scrapping the peg and instead managing, or as US lawmakers would see it, manipulating its currency. Since it scrapped the peg in 2005, the Yuan strengthened 24 %. Yet Hong Kong remains ridiculously tied to a sinking anchor. And this will not be the first time Hong Kong has changed its yardstick, having been earlier pegged to the British Pound. Whether Hong Kong will peg its currency to the Yuan or a basket of currencies as Singapore does remains to be seen.

Why not take advantage of stronger levels of the HKD to shift into RMB deposits at better levels?

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any years ago I attended a meeting of the Court of the University of Lancaster. This was not a court in the legal sense, merely a very large advisory body on which numerous local worthies sat. It had no real

power and only met once a year. Its most interesting feature in some ways was that it also had a lot of student members. Lancaster U was a democratic place in those days. The local worthies tended to dress up for the occasion. The students did not. Sartorial cultures clashed visibly.

Naturally the proceedings opened with a speech from the Vice Chancellor. This gentleman wished to reassure the local worthies that there was nothing seriously wrong with the exotic creatures in their midst, so he inserted a few words on the tendency for students to follow the latest young fashions, and all dress the same way. I think Afghan goatskin coats were all the rage at the time. Anyway after the Vice Chancellor had finished one of the students rose to his feet, pointed at the platform and observed that the people on it were actually much more uniform in their dress than the students. And of course he was right. Every man, there were no ladies, alas was wearing a two-piece business suit, a shirt in a respectably pale colour, and a tie.

On the other hand by Hong Kong standards they were a herd of peacocks. The other week I was invited to a do in the Convention and Exhibition Centre. It was a Saturday night, so there were plenty of other get-togethers in progress. Naturally the halls were full of couples heading for the shindig of their choice, and in every case the man was not just wearing a two-piece business suit, but was wearing one in virtually the same shade of charcoal grey. The big shots at Lancaster University were comparatively enterprising: one or two had pale grey, some wore blue, the man from the Buildings Office was wearing a sort of brick colour. In Hong Kong everyone goes for the same funereal near black.

This is depressing. In bygone eras, it seems to me, rich people were expected to display their wealth in an interesting and aesthetically pleasing way by dressing up. Exotic fabrics were encouraged, precious metals welcomed, large feathers admired. What is the point of being rich if you can’t flaunt it?

Creeping monochromeThe idea of monochrome for men seems to have crept in during the 19th century. I fear it probably originated in the UK, where displays of wealth were branded vulgar, possibly because the sort of landed aristocrats who dominated taste in these matters were running short of the money required to pay for it.

There was a rebellion of sorts in the 60s. Men’s clothes took on a wider range of colours. Ties, if worn at all, became big fat things in violent shades. Jackets and trousers flared in places where they had not flared before and I even had a shirt with lace cuffs which fell over my hands in a rather 17th century way. And this was a mass-

produced shirt. People were wearing this sort of stuff. Hair was worn over the shoulders. Colours vibrated. Somehow, though, this all fizzled out.

And I suppose it never reached Hong Kong in the first place. In old pictures of the place local bigwogs are kitted out in the sort of long gown now seen only at Chinese music concerts. Although the photos are black and white I presume the gowns actually came in a variety of colours, as they still do. But this tradition, along with the Mao jacket over the border, has been trampled in the dust. The boring business suit in boring off-black has pretty much conquered the world. Only in Iran is the president not required to wear a tie, and that’s not the sort of association which is going to help the cause of liberation.

Unsuitable in Hong KongLiberation, actually, is what we need. The suit is totally unsuitable for Hong Kong. In summer it is too hot, even if you get a lightweight model ... and if you do get it in a really lightweight cloth it will look awful. In winter the damned thing is not warm enough, and you have to wear a coat. The get-up is uncomfortable and difficult to work in. Indeed one of the ways you can tell when work gets serious is that the workers start discarding the uniform. Jackets are thrown over the backs of chairs, ties are loosened, collars unbuttoned. When people get home we see another give-away - the uniform comes off and is replaced with something cheap, comfortable and cheerful, like a pair of jeans and a tee-shirt.

There are it is true a few exceptions. Many uniformed bodies have a ceremonial summer uniform which is at least white. The Governor used to have a very nice formal white suit with gold trimmings, though for some reason Mr Chris Patten refused to wear it and insisted on turning out in the same boring gear as everyone else. For many years the chief Bomb Disposal Officer of the Hong Kong Police wore outrageous clothes, including a top hat. It seems that a man who is required to play with explosives for a living can choose the clothes he wants to be blown up in.

Elsewhere there are no signs of resistance to the business uniform. Indeed I suppose some people may welcome it. In one of C.S. Forester’s books the hero, freshly demobbed from the Royal Navy, reflects on his sudden need to choose clothes, after years in which he could answer to any criticism of his dress that it came with the job.

It seems most local businessmen are quite happy to go into Sam’s once a year, ask for another of the usual, shut their

eyes and let the tailors get on with it. Their highest ambition is to look like everyone else.

This is disappointing. We would like our young people to think that business is an exciting, vibrant career which rewards initiative and individualism.

Then we dress like a herd of penguins. Think peacocks.

Peacock today, feather duster tomorrow ?Tim hamleTT

OPINIONOPINION

tim hamlettFormer Editor of Sunday Standard and Associate Professor of Journalism

M

A grey flannel suit ? Never !

HONG KONG BUINESS | NOVEMBER 2010 43

lowly but surely, it is happening. Just as the world turns to Asia for its economic survival, the centre of the sporting world is decamping to the region. Sport is now big business,

and the opportunities and potential in Asia appear limitless. You only need to look at a few examples over the past few years to see the attention of the global sports market heading east. The establishment and quick success of the Indian Premier League is such short frame of time. The rise and rise of Asian-based golf tournaments. The capture of a Formula One race by Singapore, meaning that in 2011 six out of the 19 races will be in Asia. The staging of Bledisloe rugby Tests in Hong Kong. The consideration of the Barclays Premier League to stage a 39th match in its season in Asia. America’s National Basketball Association setting up a major operation in China to further its expansion, and the expectation that China will bid for the 2026 or 2030 football World Cup.

Beijing OlympicsAll of these things point to the emergence of Asia as a place where sport is booming. The region has the huge audiences, the money and the passion for the sporting industry to clean up. Hong Kong is one of the locations that is putting its hand up as one of the Asian sporting capitals. In 2008, it staged events as part of the Beijing Olympics and in the past few years it has staged Bledisloe rugby. In 2009, Hong Kong staged the East Asian Games and it is considering bidding to host the 2023 Asian Games. In 2013, the territory will host a British and Irish Lions rugby match, the first time the Lions have played in Asia, and it may be part of a co-hosting bid with Japan for the 2015 Rugby World Cup. A Hong Kong individual owns Premier League football club Birmingham City, while former Manchester United and England star Nicky Butt now plays for South China FC.

But Hong Kong is not alone. It is facing stiff competition from the likes of Singapore, Japan, India and China as the centre of the Asian sports market. Singapore has recently hosted the Youth Olympics Games, and won an award as the world’s best sports city, while India had the Commonwealth Games in Delhi.

Why are countries and cities in Asia scrambling

for a piece of the growing sports pie? It’s pretty simple. According to Kenny Hau, regional business director of GroupM agency ESP, continued consumer affluence is “elevating sports as a vehicle for entertainment, leisure and business networking”. “Sports tourism is a major drive for regional hubs seeking to promote image and investment opportunities and this has become a major funding source over and above brand investment,” he says. Sport can be used as a vehicle for many things – tourism, hospitality, nation-building and ultimately revenue as fans buy their favourite sports star’s jersey, apparel and associated products. Companies pump millions into sport to promote their brand and sell

their services. Broadcasters and media owners make millions out of showing and covering sport.

With the centre of influence moving to Asia, local economies becoming the world’s growth engines and Asia having a growing

and increasingly affluent population, we have only scratched the surface of the development of its sports market. More Asian-based sports events will be created in the future, while competitions in other regions will increasingly be staged in Asia. Hong Kong has thrown its hat in the ring for a slice of this rich sports business cake. Only time will tell how much it receives.”

Asia’s white line feverjohn DaviDson

In 2011 six out of the 19 F1 races will be in Asia.

‘The consideration of the Barclays Premier League to stage a 39th match in its season in Asia’

OPINION

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John davidson

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ad 3.pdf 27/7/2010 14:36:29


he Stock Exchange of Hong Kong Limited recently announced interim guidance on pre-IPO investments, pending consultation on possible amendments to its Listing

Rules. Under the interim guidance, the Exchange will generally require, except in very exceptional circumstances, that pre-IPO investments must be completed either (a) at least 28 clear days before the date of the company’s first listing application or (b) 180 clear days before the first day of trading of the company’s securities. Pre-IPO investments are considered completed when the funds are irrevocably settled and received by the company.

General principles: fair and equalThere is no bright-line test under the Listing Rules as to what is permissible or prohibited in relation to pre-IPO investments. Practical guidance is available from precedent cases and a series of Listing Decisions issued by the Exchange. The concern about pre-IPO investments has always been whether IPO investors are being treated fairly and equally if the terms of the pre-IPO investment are different from or even better than those offered to IPO investors.

The guiding principles of the Listing Rules are that all investors in a public offering should be treated fairly and equally, and that the process should be conducted in a fair and orderly manner.

The requirement to treat all investors equally can present a challenge for companies (and their advisors) who have recently raised capital privately or taken on additional investors when these companies begin preparing for an IPO. However, these general principles may cause uncertainty and inconsistency in terms of what is permissible and what is not for pre-IPO investments.

In evaluating a pre-IPO investment, the Exchange has applied the above “fair and equal” test which

involves assessing a totality of factors. The following key questions will be considered in assessing whether the pre-IPO investment is fair and equal to new investors in the IPO: Is the pre-IPO investment just another tranche of the IPO in disguise? Has the pre-IPO investor taken sufficient investment risk? Are there sufficient reasons to justify the terms of the pre-IPO investment? One factor which has been

determinative is whether the pre-IPO investor is providing strategic value to the business rather than acting as a pure financial investor, thus justifying preferential treatment over IPO investors.

By way of example, a company in severe financial distress may provide justification for more favourable pre-IPO investment terms.

Based on an analysis of previous Listing Decisions, the following features of pre-IPO investment will be rejected: * Delays in making payment of an agreed investment until a time when the prospect of a listing becomes certain or at milestones of the listing approval process; the key will be how early money actually changes hands and whether the pre-IPO investment is dependent on any aspect of the listing process; * Exit or “repurchase” options in the event listing does not occur; * Guaranteed discounts to the IPO price; * Price reset mechanisms based on post-listing share prices, because it could lead to unfair on “toxic” post-listing dilution; * Veto rights on reserved matters, because such rights cannot be extended to other shareholders and are not suitable for listed companies; * Rights for a particular investor to nominate directors, because such rights cannot be extended to other shareholders; and * Negative pledge and anti-dilution rights.

What’s Next?The interim guidance has provided some clarity as to when pre-IPO investments must be completed. The Exchange aims to start consultation on possible amendments to the Listing Rules in the near future.

As the regulatory approach and market practices develop, it remains to be seen whether and if so what comprehensive guidance will emerge for pre-IPO investments.

Should there be questions concerning pre-IPO investments, companies wishing to make listing application are encouraged to consult the Exchange in advance.

New listings rules change pre-IPO gameDuncan abaTe

OPINION

Waiting for the next IPO

‘A company in severe financial distress may provide justification for more favourable pre-IPO investment terms.’

OPINION

duncan a.W. abate Mayer Brown JSM Partner

T


ight now, enterprise mobility is the new buzzword in business, particularly in consulting and financial services, and organisations are investing heavily in

it. In fact, according to a new report by Global Industry Analysts, Inc., the global enterprise mobility market may reach US $168 billion next year.

Additionally, enterprise mobility has been quite resistant to corporate cost-cutting resulting from recent global financial market difficulties; in fact, large organizations as a whole have increased their year-on-year enterprise mobility investments. For example, a recent Forrester survey shows CIOs and IT leaders are making mobile expansion a priority, with 16 percent of them calling it “critical priority” and another 46 percent calling it “high priority.”

So how should you go about creating a mobile environment ?

Step 1: Analyse your workforce – does your staff need to be mobile?Lost sometimes in all the clamour is probably the most fundamental question – is this really a benefit for your staff? Not every organisation needs to be mobile. Even at Standard Chartered, for example, there are a number of positions that must be on site, ranging from branch operations to IT, audit, administration and more. Is your organisation largely sales-based, or do the majority need to be in the building on a daily basis? A few influential people pushing for smartphone accessibility is not always the best reason for upending your IT department and spending months fitting all of your critical software and functionality into a device, no matter how cool it may seem.

Step 2: Choose a platform – what will work best for your organisation?At Standard Chartered, we chose to go with iPhone for a 15,000-person global deployment. This was not because the iPhone is “trendy” right now.

Our decision was based on an honest assessment of the functionality and security we required, coupled with the ability and commitment to make bespoke apps to help financial consultants work better. Right now Apple, Android and BlackBerry are all creating compelling platforms and solutions.

Step 3: Research your customers and your employees – what applications will help them?What type of applications do your employees need in order to better serve their customers? What applications are best left to being done on a full-size computer? Again, be realistic.

Step 4: Be creativeOnce your organization has decided to make the leap, don’t just expect that the job is done. Just as on the internet, without good content, users are not fully engaged, and it’s unlikely that the perfect apps and tools for your specific organiaation are out there already.

At Standard Chartered we admittedly went a bit above and beyond in this department, as we have not only created consumer apps with Frog Design, but have actually founded our own application studio in San Francisco to make customised apps for our employees and organization. Not all enterprises may want to go this route, but it’s important to keep all doors and possibilities open when looking for ways to make tools and applications which are as useful to your workforce as possible.

Step 5: Ensure consistencyFinally, to make this work, it has to be a long-term commitment. Organizational buy-in is key, not only for the excitement of the launch, but over several years as your mobile strategy goes through its phases.

bY ToDD schofielD

OPINION

Would you like a loan with that ?

We founded our own application studio in San Francisco to make customised apps for our employees and organisation.

cio vieW

“

Why StanChart bought 15,000 iPhonestodd schoFieldGlobal Head of Moblity, Standard Chartered

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“

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Hong Kong Business.pdf 1 11/25/2010 11:48:03 AM

RePORt: HONG kONG PROPeRty

Leasing demand was largely driven by expansion and relocation requirements in 3Q10. Latham & Watkins expanded internally by one floor (12,126 sq ft, net) in One

Exchange Square; Chanel leased the top two floors of Hong Kong Club Building (11,498 sq ft, lettable); Daiwa Capital Markets expanded internally in One Pacific Place; while Leighton Construction expanded by taking a floor (16,290 sq ft, lettable) in Three Pacific Place.

With vacancy rates further tightening and rental gaps between various sub-markets widening, a new round of decentralisation has started to emerge. Of the 1.04 million sq ft (net) of net absorption achieved in the market during the quarter, 588,100 sq ft (net) was recorded in Hong Kong East and Kowloon East. Demand in Central increased sharply; up to 187,300 sq ft (net) for the quarter and more than double the 78,800 sq ft (net) posted in 1H10. The robust demand recorded in the quarter saw the vacancy rate in the overall market decline from 5.5% at end-2Q10 down to 4.7% by end-3Q10.

The investment market was largely dominated by strata-titled sales with several wholefloor properties sold during the quarter. Among the more notable were the sale of two floors in Cosco Tower for about HKD 578 million; a floor in World-Wide House for about HKD 300 million; and a floor in Bank of America Tower for about HKD236 million.

SupplyKerry Properties’ 354,700 sq ft (net) Kerry Centre

central under pressure as tenants move east and to Kowloon

in Hong Kong East was the only new Grade A office development completed in 3Q10. About a half of the building, which is the only new Grade A office supply to be completed on Hong Kong Island in 2010, will be self-occupied by the developer.

Asset Performance Rents increased across all sub-markets during 3Q10. Backed by the sharp pick-up in demand and declining vacancies, Wanchai/Causeway Bay rents led all sub-markets, growing by 9.9% q-o-q while rents in the overall market rose, on average, by 7.5% q-o-q.

Capital values also continued to rise across all sub-markets, with Wanchai/Causeway Bay leading the way, in terms of growth; up by 10.1% q-o-q compared with 7.6% q-o-q in the overall market.

12-Month OutlookLooking ahead, we expect leasing demand to continue to strengthen. With concerns of below par economic growth in some Western economies, an increasing number of multinational firms are turning their attention onto Asia for growth.

We also expect the emerging decentralisation trend to gather momentum, especially as the rental gap between core and non-core area markets widen further.

Central, will however, still enjoy relatively strong levels of demand, especially from smaller-to-medium sized banking and financial services companies who need to leverage on their office address and whose size requirements are better able to absorb the higher rents.

Along with declining vacancy rates, we expect rents to continue to trend higher over the next 12 months.

In the investment market, the prospect of further rental growth will justify investors entering the market despite capital values in some districts already being at historic record highs.

Hong Kong East and Kowloon East the big winners as companies ‘decentralise,’ according to Jones Lang LaSalle.


Financial Indices Physical Indicators

With vacancy rates further tighten-ing and rental gaps between various sub-markets widening, a new round of decentralisation has started to emerge.


Property market fundamentals continue to improve across Asia-Pacific, underpinned by stronger economic conditions and business confidence. Take up of space is strengthening

and in some markets corporate occupiers are finding that space is in short supply.

More markets enter cyclical rental upswingOffice sector: Aggregate net absorption of office space across Asia Pacific’s Tier I cities increased by 27% q-o-q to 1.5 million sqm in 3Q10. New supply additions amounted to 1.3 million sqm, a 12% increase on the previous quarter. In the major financial centres, Hong Kong and Singapore both recorded strong net take-up of office space, while contraction in space came to an end in Tokyo.

Rents are now increasing across many office markets in the region, with residual declines in a few centres including Seoul, Taipei and some Southeast Asian locations. In 3Q10, net effective rentals in Tokyo increased for the first time since 1Q08 (+3.7% q-o-q), due to shorter rent-free periods. Net effective rents strengthened the most during the quarter in Singapore (+10.9% q-o-q in Raffles Place) and Beijing (+10.9% in the CBD), closely followed by Hong Kong (+8.6% in Central). Rents were flat or fell moderately in most major Australian cities during 3Q10, though rents in Melbourne have been rising for three successive quarters. Looking forward, rents are likelyto rise the fastest in Hong Kong and Singapore during 2011, with increases of between 15 and 25%. Rental growth is expected to pick up in Tokyo, while growth

office space being taken up faster than new supply

momentum in China’s Tier I cities is likely to slow from the hectic pace of recent quarters.

Retail sector: Improving labour market conditions and stronger consumer confidence are underpinning retailer demand in the region.

Demand for new mall space has been particularly strong in China as more international brands continue to set up new stores, though retailers in Hong Kong and Singapore have become more cautious due to high rentals. Rents were either stable or increased in most markets in 3Q10. As in previous quarters, markets in Greater China showed the largest rental growth (Beijing +4.3% q-o-q, Guangzhou +2.0% q-o-q). Most markets are expected to record positive rental growth over the next few quarters, though rentals in most Indian locations are expected to either remain largely flat or post residual declines due to the large supply-demand imbalance.

Residential sector: In 3Q10, leasing demand strengthened in the luxury and high-end residential markets in Greater China and Singapore, but remained subdued in most South East Asian markets.

Luxury rents in Hong Kong saw the biggest increase (+4.0% q-o-q), while rents in Singapore and Chinese Tier I cities generally rose by about 2% q-o-q. With corporate expansion resuming and an increasing number of expatriates in markets such as Greater China and Singapore, luxury rentals have entered a cyclical upswing with single digit growth expected for most markets over the next 12 months. Hong Kong and Singapore are likely to see even stronger growth.

Industrial sector: The regional industrial market continues to improve on the back of encouraging trade and retail sales figures.

Rents are starting to increase in the markets of Greater China, as well as for high-tech and conventional industrial space in Singapore.

Capital values and investment activity both move upwardThe AP investment market continues to strengthen, underpinned by more buoyant investor confidence. Direct commercial property transaction volumes for Asia Pacific amounted to USD 18.2 billion in 3Q10, an increase of 14% q-o-q.

Which helps explain why rents are rising, according to Jones Lang LaSalle

RePORt: ASIA PAcIfIc PROPeRty

Rental and Capital Value 3Q10 Grade a office

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New generation Porsche Cayenne was recently launched and is available to test drive at Porsche Centre Hong Kong.

The milestone launch marked the arrival of China’s premium SUV line in Hong Kong. It was held at The Forecourt of The Hong Kong Jockey Club, Happy Valley, with 300 media representatives, VIPs and valued customers. The new Cayenne S, Cayenne S Hybrid and Cayenne Turbo versions bring an enhanced level of performance and luxury to a model that is already renowned as one of the most popular premium Sport Utility Vehicle (SUV)s in the Hong Kong and China markets. With an exceptional combination of performance and luxury, the new Cayenne demonstrates the authentic pedigree of a true Porsche sports car.

The success story of the Cayenne in Hong Kong began with its launch here in 2002, and since then it has proven to be premier performance SUV in the local market.

We will never forget our first sighting of the Cayenne. It was a shock. After all, we knew what a Porsche looked like; a low, ultra-sleek coupe. Then we saw the large, square, four-door Cayenne and could not believe it was a Porsche. But, to our surprise the high-end motorists in our fair city soon loved it. The Cayenne quickly became the family car during the week and the SUV at weekends.

Sales of the Cayenne worldwide did much to sustain the Porsche company. Utilising innovative light-weight construction and improved driving technology such as all-wheel drive, the new Cayenne models offer advanced efficiency and performance in their respective segments.

PowerFor example, equipped with a 4.8-litre V8 power-unit, the high-torque Cayenne S was shown to display a significant decrease in fuel consumption, down in this case by 23%.

Yet the engine output has also increased to 400 bhp versus the former 385 bhp, with a higher top speed of 258 km/h and an acceleration rate of 0-100 km/h in 5.9 seconds. Through the use of light-weight materials on the body and other key components, Porsche has reduced weight on the Cayenne S by up to 180 kilos even though the wheelbase on the new models has been extended by 40 millimetres over previous versions.

HybridThe Cayenne S Hybrid is the first production Porsche to use hybrid drive and appears at the cutting-edge of low emission technology. The electric motor doesn’t just replace the combustion engine - it supports it, benefiting both driver and the environment. Fuel consumption is just 8.2L/100km and CO2 emissions are reduced to 193g/km. A sophisticated full parallel drive system matches the 333bhp three-litre supercharged V6 to a 47 bhp synchronous electric motor to produce a combined output of 380 bhp, propelling the Cayenne S Hybrid from standstill to 100km/h in an impressive 6.5 seconds and a top speed of 242 km/h. Drive is transmitted through an eight-speed Tiptronic S transmission featuring Auto Start/Stop.

At a speeds of up to 130km/h the Hybrid Manager can shut down the petrol engine and allow the car to glide almost silently along. The Cayenne S Hybrid offers the performance of an eight cylinder engine with fuel economy far in advance of most six cylinder engines, simultaneously lessening the environmental impact and heightening your driving pleasure.

TurboInnovative design features were also clearly expressed in the top-of-the-range Cayenne Turbo.

This most powerful of the new generation Cayenne uses a 4.8-litre, V8 biturbo engine, delivering a maximum output of 500 bhp to offer an exceptional top speed of 278 km/h and the capacity to accelerate from a standing start to 100 km/h in a breathtaking 4.7 seconds. Alongside this impressive performance profile, it consumes 23% less fuel than the previous version of this model. The new Cayenne Turbo again follows the principle of Porsche Intelligent Performance that expresses itself across all the model lines: more power on less fuel, with greater efficiency and lower CO2 emissions. To the point: the Cayenne S and Cayenne Turbo are not only the best in their class, they are also the most impressive of all Cayenne models so far produced by Porsche.

After years of successful sales, the latest version of the famous Porsche Cayenne SUV has reached our shores. By ROGER BOSCHMAN

success story

MOtORING RePORt


>

After years of successful sales, the latest version of the famous Porsche Cayenne SUV has reached our shores. By ROGER BOSCHMAN

success story

Unitary, fully-galvanised lightweight all-steel bodyshell; driver and front passenger airbags operating in two stages; thorax side airbags for driver and front passenger; curtain airbags extending across the roof frame and the side windows from the A to C pillar; five seats.


LIfe & StyLe

The best in Private DiningYin YangG/F, 18 Ship St, Wan Chai, Hong Kong, +852 2866 0868This tiny, three-table restaurant in Wan Chai is the brainchild of Margaret Xu. Using locally-grown and organic produce from Hong Kong, Yin Yang is proof that good things come in small packages and that healthy Chinese food can be as delicious and inventive as the high-class fare served in Michelin-starred restaurants.

Commune Lab1/F, 28 Elgin Street, Central, Hong Kong, +852 2147 9020Posto Pubblico’s working kitchen transforms into Hong Kong’s hottest private by-appointment-only dining room at night with chef AJ Bellarosa serving up global fusion cuisine alongside the restaurant’s organic produce from farms in the New Territories.

Le Marron12/F, Ying Kong Mansion, 2–6 Yee Wo Street, Causeway Bay, Hong Kong, +852 2881 6662Serving classic French cuisine in a charming environment, Le Marron is one of the city’s most delightful French restaurants. From classic duck confit to braised lamb shank, mussels and baked chocolate pudding, this is winter comfort food at its most refined.

TBLS7th Floor, 31 Hollywood Road, Central, Hong Kong, +852 2544 3433Quite possibly the hottest table in the city and with only 16 covers a night, TBLS’ tasting menu combines the ingredients of classic home-style American cuisine (think mac and cheese or grits) with refined cooking methods and offers a cheeky take on classic comfort food.

Nothing says “I’m an insider” more than a cheeky booking at one of the few, and secretive, private kitchens springing up around Asia. Here are a few of the best.

Recommended by QUINTESSENTIALLY, the world’s leading luxury lifestyle group with a 24-hour global concierge service. Contact [email protected].


Private Affairs45 Joo Chiat Place, Singapore, +65 6440 0601Look past the slightly odd location and instead focus on the food at Private Affairs, which serves an Asian-inspired take on classic European dishes with a splash of molecular gastronomy. Enjoy a pre-dinner aperitif in the second floor lounge before heading down to the main dining room to enjoy the inventive cuisine of chef Paul Ng.

HONG KONG BUSINESS | NOVEMBER 2010 57


The effect of the economic downturn on discretionary spending has been well documented, with many reports finding consumers tightening their belts while they ride out the financial tsunami. But boosted by a surge in first half net profits by the likes of Richemont Group and Burberry, it appears that the demand for luxury goods has picked up after a lacklustre 2009.

In a recent KPMG study on luxury trends and attitudes in mainland China released in May 2010, over one-third of participants expect to spend less on luxuries due to the recession, but most of these said they would rather spend less on brands perceived as more luxurious than switch to cheaper brands (KPMG, Luxury Extends its Reach across China).

The Rising Perception of LuxuryThe report suggests that the rising perception of luxury is one factor in consumers’ attachment to certain brands. Creating strong brand message and image that customers can relate and aspire to, alongside providing an engaging retail experience is one way to develop this loyalty.

Over the past five years in Asia-Pacific, we have seen our members tastes develop and they now seem to have a greater preference for bespoke experiences and items. The pursuit of exclusive and hard-to-get products is not only a sign of spending power, but also insider knowledge and connections.

Bespoke SellsLee Coleman, managing director of Quintessentially Gifts, says one trend she has noticed is the growth of accessories vs clothing. We are often asked to source a limited-edition watch, rare handbags or accessories such as a designer scarf as opposed

to haute couture. That said, we’ve also worked with top designers to create limited-edition dresses for our members, or given them access to couture pieces hot off the runway. The experience is built around sourcing some of the most exclusive and hard-to-find items you’ve never thought of, for some of the world’s most discerning consumers.

The Digital AgeAnother big trend we have seen is the growth of e-commerce. While Google’s boutiques.com aims to revolutionise the online shopping experience by using complex algorithms to predict the fashion items and styles consumers will and won’t like, traditional luxury brands are also buying in to the online world. Burberry will soon launch a Burberry Bespoke service, which allows customers to purchase, design and personalise a classic Burberry trench coat from their global e-store. Ralph Lauren’s entertaining and expensive 4-D light and sound shows held in London and New York celebrated the brand’s 10th online retail year in the USA and the launch of the e-store in the UK.

Meanwhile Net-a-Porter, which was sold to Richemont, the Swiss luxury goods group earlier this year in a transaction that valued the online fashion emporium at an estimated GBP 350 million, proves that a savvy online strategy can reap rewards for successful e-companies. Natalie Massenet, who founded Net-a-Porter in 2000, continues in her position as executive chairman

while Richemont hope to use the platform to develop their own e-business platforms on the back of Net-a-Porter’s success over the past decade.With an excellent product, exceptional

service and innovative marketing strategies, luxury brands who find

a way to relate to consumers and engage their loyalty will enjoy a

commercial and competitive edge over brands who fail

to do so over the next few years.

Emma Sherrard Matthew is the Asia Pacific CEO of Quintessentially,

the world’s leading luxury lifestyle group with a global concierge service.

lasT WorD

The rising perception of luxury will have a lasting effect on the retail landscape

“Google’s boutiques.com aims to revolutionise the online shopping experience by using complex algorithms to predict the fashion items and styles consumers.”

emma sherrarD maTTheW

The future is bespoke for luxury

HONG KONG BUSINESS | SEPTEMBER 2010 59 SINGAPORE BUSINESS REVIEW | NOVEMBER 2010 31

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