LI, Tao @ Hong Kong

Depreciating US$ makes city living more expensive

George Davey recently led a group of Australian wine makers to find potential business opportunities at the Hong Kong International Wine and Spirits Fair held earlier this month.

Davey, deputy director-general with the Department of Industry and Investment for the state of New South Wales in Australia, said he was proud about the quality of Australian wine and not at all concerned about their sales. However, he admitted that the prices of Australian wine sold in Hong Kong this year are de facto rising due to the strengthening Australian dollar.

As a result, the very same bottle of Australian wine sold in Hong Kong this year is likely to be priced notably higher than last year, as the Australian dollar this year has appreciated more than 10 percent on its way to hitting a 28-year high against the US dollar.

“We actually kept our actual export prices unchanged,” Davey told China Daily.

This is just a typical example of how “imported inflation” is now affecting prices in the city as a depreciating Hong Kong dollar makes it much more expensive to purchase goods from overseas.

But the city’s currency has been pegged to the US dollar through a fixed exchange-rate for almost 24 years, so there is a feeling in the city that prices hikes are inevitable. This is especially so now that the US dollar is progressively weakening against a majority of currencies – particularly its trading partners.

And not only that, but Hong Kong buys a high proportion of its goods from overseas.

“Hong Kong imported more than 70 percent of goods for self-consumption from Euro-zone, the mainland, Japan, South Korea and Singapore,” said Irina Fan, senior economist at Hang Seng Bank. “Except for the euro, Hong Kong dollar has depreciated almost 3 percent to the yuan and yen, 4 percent to the won, and 9 percent to the Singapore dollar this year.”

Hong Kong’s services sector contributes more than 90 percent of the city’s gross domestic product (GDP) – so the heavy dependence on the imported goods makes the city vulnerable to currency swings.

According to data compiled by Bloomberg, the US dollar has weakened in the past three months against all 16 major market currencies. And the situation is likely to continue, in part due to the US quantitative easing monetary policy.

Earlier this month, the US Federal Reserve decided to pump an additional $600 billion into their financial system in an effort to lift the weak economy. The US dollar then sank to a new nine-month low against the euro and also declined against other major currencies.

“The continued weakening of the US dollar is accentuating imported inflation for Hong Kong, which imports the majority of energy resources, raw materials and product components that it uses for both self-consumption and onward processing purposes,” said Donna Kwok, economist for Greater China at HSBC.

The city’s underlying inflation hit a 19-month high of 2.3 percent year-on-year in October, hit hard by a 3.4 percent rise in food prices – the steepest rise since March 2009, which was “most likely due to the recent sharp spike in mainland food prices,” said Kwok.

The Chinese mainland is one of the most important food export destinations for Hong Kong, but its own food prices climbed 10.1 percent year-on-year in October, according to the National Bureau of Statistics.

Although Hong Kong appears to have escaped relatively unscathed from the sharp food-induced price spikes that the mainland has experienced in the past few months, Kwok indicated that there are clouds on the horizon as the city’s food price CPI typically lags that of the mainland’s by three to four months.

“It means that it’s more a question of when – not if – as to whether food inflation will pick up further,” she added.

Mo Pak-hung, an associate professor of economics at Hong Kong Baptist University, also predicted mounting inflation pressure in the city.

“It will become even harder to expect moderate-priced foods from the mainland in the future,” said Mo. “Counting on the revaluation of the yuan – say 3 percent to 5 percent a year – food imported to the city from the mainland is likely to continue to hike at a two-digit pace in the coming years.”

Another troubling factor arising from “imported inflation” is the fact that when overseas firms increase their prices, it is not just that importers have to pay more for goods. It also increases net inflation in their own market.

One example of this is the rally in global food prices over the past few years. World wheat and maize prices have risen 57 percent, rice 45 percent and sugar 55 percent over the past six months and soybeans are at their highest price in 16 months, according to a UN report.

Global commodities prices have also rallied to two-year highs, partially due to the effects of the weak US dollar. Silver, soybeans and copper jumped to levels last seen in October 2008 as investors moved money into hard assets in anticipation that the massive economic stimulus plan announced by the Federal Reserve will continue to weaken the dollar, according to an earlier Associated Press report.

Hang Seng’s Fan said that since salaries generally could not catch up with the spike in prices, the majority of people living in Hong Kong are likely to see a big increase in the cost of living.

“In Hong Kong, where the economy is slowing down and inflation pressure is adding up, life for the low-income group will definitely become even more difficult,” Fan added.

China Daily

(HK Edition 11/27/2010 page3)

http://www.chinadaily.com.cn/hkedition/2010-11/27/content_11617692.htm

BaWang International (Group) Holding Ltd, China’s largest herbal shampoo maker, fell as much as 6 percent in Hong Kong trading Tuesday. Nelson Ching / Bloomberg

Guangzhou-based BaWang International Group Holding Ltd, a maker of herbal shampoos, fell as much as 6 percent in Hong Kong trading Tuesday after saying that sales turnover in the July to October period plunged about 31 percent compared with the same period in 2009.

As a result, the company may post a “substantial” fall in its earnings for full-year 2010, BaWang said in a statement filed to the Hong Kong Stock Exchange.

BaWang said the sales decline was due to the “dioxane incident” of three months ago.

On July 14, Hong Kong-based Next Magazine reported that samples of BaWang’s anti hair-loss formula shampoo contained tiny traces of dioxane, a cancer-causing substance.

The company said these rumors have “adversely affected the performance of the group during the past few months including a decrease in sales, and the additional costs for sales and marketing promotional campaigns in relation to the restoration of consumers’ confidence in the group’s products.”

After news of the decrease in sales, BaWang’s share price tumbled immediately on Tuesday, eventually closing down 5.67 percent at HK$3.16, compared with a 2.67 percent decrease on the city’s benchmark Hang Seng Index.

“After the contamination rumors, BaWang could hardly win back the hearts of consumers, especially when its products are totally replaceable in the market,” said Alvin Chung, associate director at Prudential Brokerage.

Shares of the Hong Kong-listed company fell by 23 percent between July 14 and 16 after the report appeared. On July 16, China’s State Food and Drug Administration clarified that the very low-level of dioxane contained in its herbal shampoo products were not a threat to the health of consumers.

However, sales of BaWang brand shampoo and hair-care products by volume have declined 50 percent between July and October after news of the scandal, according to earlier reports.

Chung said the concept of herbal shampoos made BaWang an attractive product when it was initially listed in the city. Although the safety of BaWang’s products have been given the nod by the relevant authorities on the mainland, consumers have lost confidence in the company and its products.

“I believe the impact of the scandal on the company will last for quite a while. Even if it is not losing money, I am not expecting it to make a big gain,” Chung added.

Jessica Le of OSK Research nevertheless took a bullish view on the stock due to BaWang’s business diversity plans.

The company plans to launch Chinese herbal household cleaning products under the brand name of “Doctor Gao” at the end of 2010, including hand wash, laundry, and house cleaning products.

Its herbal drinks performance was also in line with its target, according to Le. By the end of October, BaWang herbal tea had more than 100 distributors with a distribution network that had penetrated into more than 50 cities in southern China.

“We also believe current valuation provides a good opportunity for investors to enter the counter,” said Le. She set a target price of HK$3.87 per share, an upside of 23 percent.

China Daily

(HK Edition 11/24/2010 page3)

http://www.chinadaily.com.cn/hkedition/2010-11/24/content_11598505.htm

Analysts said that the measures taken by the Hong Kong government to curb property speculators are likely to be effective in the short term.

The government imposed new measures Friday in a bid to cool the city’s red-hot property market by imposing heavy stamp duties on some transactions and tightening mortgage restrictions.

Financial Secretary John Tsang said that homes sold within six months of purchase starting today will be subject to a punitive stamp duty of 15 percent. Those resold within six to 12 months will have an extra stamp duty imposed on it of 10 percent, while those sold between 12 and 24 months will be charged 5 percent.

Meanwhile, Hong Kong Monetary Authority Chairman Norman Chan announced that down payments on homes costing more than HK$12 million will be increased to 50 percent from the previous 40 percent. Those costing between HK$8 million and HK$12 million will increase to 40 percent from 30 percent.

“The special stamp duty will immediately cool the market and investment activity will disappear completely for the short term,” said Nomura International analyst Paul Louie.

He also said that the government’s measures were “very significant” and “much harsher and punitive than the market had expected.”

He said the tougher rules could result in a 40 percent drop in transaction volumes of private secondary apartments over the short term, and with speculators out of the picture, stabilize prices in the near term.

“Short-term speculators will no longer be able to make any money from the resale of properties since we can hardly expect home prices to rise by as much as 15 percent within six months,” said Wong Leung-sing, associate director with Centaline Property Agency.

Wong added that imposing punitive stamp duties on speculators who flip properties within a short period of time is the first time such an approach has been taken in the city.

Chong Tai-leung, an economics professor at the Chinese University of Hong Kong, agreed that the new measures will help curb short-term speculative activities in an effective manner.

He said since most speculators resell their properties within two years, the extra stamp duty will very likely curb speculation in the short term.

“But there is also a chance that speculators will include the tax in the selling price by pushing up the asking price,” said Leung.

Centaline’s Wong agrees, saying that a further home price hike seems inevitable due to ample liquidity in the market and a short supply of homes.

He aslo said that the additional measure to raise down payments on residential properties may still miss the target.

“Hong Kong banned bank loans to tame home prices in 1997, but it was unable to stop those speculators who paid up in cash. Lifting the required down payment on a wider bracket of properties could hurt those really aspiring to buy homes,” Wong added.

Donna Kwok, greater China economist at HSBC, said that the measures are likely to have a more long-term effect.

“This is the most creative and carefully crafted move from the Hong Kong authorities since 2009 for tinkering with demand-side factors in the property market, because the scope of motive has been widened,” Kwok said. “As a result, this latest set of measures will likely have the biggest and most lasting impact that we’ve seen yet for cooling Hong Kong property prices.”

Dow Jones contributed to this story.

China Daily

(HK Edition 11/20/2010 page2)

http://www.chinadaily.com.cn/hkedition/2010-11/20/content_11580997.htm

Company says its products can help control food prices

Bluestar Adisseo Nutrition Group, the French animal-nutrition feed additives producer backed by China National Chemical Corp, said Wednesday that it sees huge potential for business growth on the mainland.

The company believes that its products can help raise the productivity of the country’s animal husbandry amid tight meat supply that has helped fuel inflation.

“Methionine could reduce the cost of poultry breeding by more than 20 percent, which will not just benefit the farmers but also help control prices amid an environment of price hikes,” said Bluestar Adisseo Chief Executive Officer Jean-Marc Dublanc at a video press conference for the company’s Hong Kong initial public offering (IPO) later this month.

Bluestar Adisseo is offering 2.3 billion shares, or 25 percent of the company, at HK$3.50 to HK$5.25, its term sheet shows. At its upper end, this would amount to HK$12.08 million ($1.56 billion).

The company will use 40 percent of the IPO proceeds to expand and upgrade its European plants, and another 40 percent to develop its feed business.

Bluestar Adisseo’s featured product, methionine, is an essential amino acid and a basic building block in the formation of proteins. It cannot be synthesized in the body but only assimilated indirectly through edible meat.

Methionine is now mainly used in feed to promote the growth of poultry and livestock, shorten feeding cycles, and increase the quantity of lean meat.

However, due to high technical barriers, there are only five licensers of methionine production technology in the world, and the market is concentrated among four main players which control more than 90 percent of global market share. Bluestar Adisseo ranks second.

Bluestar Adisseo also produces a diverse range of animal nutritional products including vitamins and enzyme. Its principal revenue is nevertheless more reliant on the sales of methionine, which accounted for 61.6 percent, 61.9 percent and 63.8 percent of its total revenue respectively between 2007 and 2009.

According to a new report from Global Industry Analysts released this year, the mainland is the second-largest manufacturer of animal feed, as well as being among the largest consumers of methionine in the world.

However, there is no methionine producer on the mainland currently, which has “an estimated annual demand of 120,000 tons,” according to Xi Yuxin from China National Bluestar Group, which bought Adisseo Group for $480 million in 2006. China National Bluestar group is a unit of China National Chemical Corp.

“In fact, methionine’s popularity has been stymied by the high cost of importing it,” said Dan Chen, managing director of China Banking at Deutsche Bank, who added that the current dearth of Chinese producers will leave more room for Bluestar Adisseo to profit after it localizes production and lowers its costs.

The company announced in August 2009 that it plans to build a methionine plant in Nanjing, the first plant of its type on the mainland. It is expected to be operational by the second half of 2012 with an annual production capacity of 70,000 tons.

Robert Lu, chairman of Bluestar Adisseo, expects the group’s net profit to rise at a rapid pace after the IPO in Hong Kong, due to the enormous prospects on the mainland market.

“Nutritional feed additives are definitely a very interesting concept for Hong Kong investors,” said Linus Yip, a strategist at First Shanghai Securities.

“The good performance of other France-based companies like L’occitane after their listing may embed confidence on the local investors,” Yip added.

China Daily

(HK Edition 11/18/2010 page3)

http://www.chinadaily.com.cn/hkedition/2010-11/18/content_11567306.htm

The demand for luxury goods has never gone out of style in affluent Hong Kong, but now mainlanders are joining in on the act. And their significance to the local market is increasing.

According to a report released recently by Bain & Company, the mainland’s luxury goods market is expected to grow 23 percent to 84.3 billion yuan this year. But it is also a well known fact that the amount of money spent on luxury goods by mainlanders outside of the mainland is even greater still. And a lot of it is being splashed about in Hong Kong.

Though specific numbers are difficult to find, James Tien, chairman of the Hong Kong Tourism Board, said in April that visitors from the mainland spent HK$83.47 billion in 2009 – or a whopping 70 percent of total visitor spending for the year.

“The Hong Kong retail market would be absolutely devastated if mainland consumers stop visiting,” said Kevin Lai, an economist at Daiwa Capital Markets Hong Kong. “Half the crowds in those shopping areas would disappear.” Meanwhile, Emperor Watch & Jewellery Ltd, one of the major players in the city’s luxury good retailing sector, is capitalizing on these new developments.

“The mainland customers’ purchasing power is surprising,” said managing director Cindy Yeung. “Ten years ago I was wondering if they could help with our business. Nowadays they’ve become the main force for our sales growth in Hong Kong.”

Hong Kong’s free trade policy has given it the well deserved reputation of a “shopping heaven”, where products are usually sold at cheaper prices compared with other markets that impose import duties.

Yeung said that since Emperor only sells luxury watches and fine jewelry which are normally in the price range of tens of thousands of Hong Kong dollars – if not more – the price discrepancy due to import duty actually becomes rather modest.

All their salespeople have to converse in Mandarin properly as 70 percent of customers visiting their shops speak it, Yeung said.

“Hong Kong people still love luxury goods, but as there is a fast growing demand from the vast population on the mainland, the city locals’ contribution to our business inevitably slides all the way down these days in comparison,” Yeung added.

The mainland is currently the world’s second-largest luxury goods market, accounting for 27.5 percent of the global market, according to Bain & Company, which has forecast that China will take the top spot within the next five years.

The Asia-Pacific Wealth Report 2010 released in September also pointed out that the “rich” population on the mainland – defined as those who own more than $1 million of disposable assets – grew 31 percent last year to 477,000, the second largest in Asia following Japan’s.

“The number of rich people in China grew the fastest in Asia, and it will continue to maintain its strong growth momentum,” said Wilson So from Merrill Lynch Wealth Management Asia-Pacific who prepared the report.

Although the introduction of the Individual Visit Scheme in 2003, which allows mainland travelers to visit Hong Kong on an individual basis, has made shopping in the city far more convenient, Emperor has not been content to rest on their laurels. Realizing the potential, they started opening stores on the mainland two years ago.

Since opening its first shop in Beijing, Emperor currently operates 37 retailing outlets in 11 mainland cities. These include Shanghai and Guangzhou as well as some second-tier cities such as Suzhou and Kunming.

The younger generation on the mainland has also become a target market due to their strong awareness of watch branding and jewelry design.

Emperor is planning to open more shops in second-tier, or even third-tier cities such as Hohhot, in the coming years.

“And I wouldn’t mind openingmore than one store in a single second or third-tier city at a later date, like Shenyang,” said Yeung. “In a country where the the number of wealthy people is growing fast, there are just too many business opportunities for us to explore,” she added.

China Daily

(HK Edition 11/13/2010 page3)

http://www.chinadaily.com.cn/hkedition/2010-11/13/content_11544609.htm