LI, Tao @ Hong Kong

Chinese companies are increasingly interested in forming joint ventures in their overseas expansion drive, given the mounting protectionism witnessed in more markets over the world, instead of making outright buyout of companies abroad, said Clifford Chance, an international law firm that provides legal advice on M&A activities.

The overseas merger and acquisition (M&A) activities are becoming even more “challenging” these days as companies have indicated that regulatory hurdles topped the charts preventing them from making outright acquisition of assets in foreign countries directly, according to an Economist Intelligence Unit survey carried out on behalf of Clifford Chance released on Tuesday.

About 37 percent of respondents said this year that they would consider joint venture or partnership in an overseas investment, compared with the 32 percent who planned to opt for the traditional M&A, said the report. Compared with a similar survey conducted by the UK-headquartered law firm in 2010, the results showed that 34 percent of respondents were interested in forming joint ventures in their overseas expansion versus the 39 percent who preferred M&A.

“The tendency for Chinese companies becomes more obvious in their overseas investment in recent years,” said Roger Denny, a Hong Kong-based partner from the law firm.

In the report released two years ago, 47 percent of the Chinese companies surveyed said they would prefer to proceed with joint ventures or alliances, in comparison with the 27 percent who said they would prefer outright acquisitions. However, Clifford Chance didn’t provide the latest data for comparison. Denny said the alliance-type approach had definitely become more popular with Chinese companies.

Chinese companies were traditionally cautious with direct buyout as they had less experience in overseas investment. They are afraid to fall victim and would be discriminated in another jurisdiction when they formed a joint-venture or alliance that would effectively help them acclimatize with the local experience of their counterpart.

Despite Chinese companies making an increased number of cross-border acquisitions over the years, they are facing an escalating harsher regulatory environment abroad as major economies have been steadily increasing their controls over M&A transactions in almost all the sectors.

The overseas buying sprees of Chinese companies have also raised concerns abroad. Some of them are having trouble in obtaining approvals from local authorities for various reasons. They include Huawei Technologies Co Ltd, the Chinese telecommunications equipment supplier which had failed in repeated attempts to secure deals in North America amid suspicions over the company’s background.

China’s four biggest State-owned banks are very cautious with overseas expansions these days, and they will only consider “strong and reliable opportunities” abroad given the high regulatory barriers, said Martin Rogers, another Hong Kong-based partner of Clifford Chance.

However, an increasing preference over the formation of joint ventures does not mean the momentum of M&A carried out by Chinese companies abroad will retreat, Denny added.

According to a PricewaterhouseCoopers report released in January, the M&A deals climate on the mainland proved its resilience despite the challenging global economic times, with the mainland outbound M&A deals climbing to a new record of 207 in 2011, up 10 percent year-on-year, while the $42.9 billion value of the deals, represented a 12 percent increase from 2010 levels.

http://www.chinadailyapac.com/article/companies-go-slow-mas-abroad-survey

Hong Kong’s economy slowed further in the first quarter of this year, with the real GDP posting a slight growth of 0.4 percent — the slowest pace since the global financial crisis — as exports slipped amid a difficult external environment, the government said on Friday.

Total exports of goods dipped by 5.7 percent in real terms in the first quarter of 2012 over a year earlier, down significantly from the 3 percent expansion in the fourth quarter of last year, dragging the whole economy to record the slowest quarterly year-on-year growth since the fourth quarter of 2009 when the economy expanded 2.5 percent. This was despite the domestic sector including private consumption continuing to display strength, according to the government.

The 0.4 percent GDP expansion was also lower than the 1.1 percent median forecast in a Bloomberg News poll of 16 economists.

The slight year-on-year expansion has been viewed against the relatively high base of comparison in the first quarter of 2011 when the GDP increased by 7.6 percent, according to the government. On a seasonally adjusted quarter-to-quarter comparison, real GDP also expanded a tepid 0.4 percent in the first quarter of 2012.

“The lowest point in Hong Kong’s 2012 growth trajectory is likely playing out right now, but real momentum will unlikely be regained until the second half of 2012,” Donna Kwok, Greater China economist from HSBC, commented on the figures released on Friday.

The government economist Helen Chan said slower global economic growth is expected this year given that the EU economy is already in recession. She pins her hopes on a brighter economic outlook in the second half given the better-than-expected US economic performance and firm mainland economy.

Local consumption demand will stay buoyant backed by the favorable income and employment conditions, and the city’s economy is poised to gradually regain momentum in the coming quarters, particularly in view of improved export orders and vibrant inbound tourism.

Chan warned the local investors to stay cautious as the financial and the property markets are believed to be “volatile” for the rest of the year.

Hong Kong’s property market has revived since February, with overall residential prices posting a 5 percent quarter-on-quarter gain during the first three months and the number of transactions surging 36 percent from the preceding quarter.

“It is an unhealthy situation,” Chan said in a press conference. “We are very concerned with the property sector, and we will initiate further government measures to prevent the housing bubble if necessary,” she said.

Hong Kong government’s economic forecasts for 2012 as a whole kept unchanged. It maintained its forecast that GDP would grow 1 percent to 3 percent this year, down from 2011’s 5 percent, and expects inflation to average at 3.5 percent this year, lower than the 5.3 percent increase last year.

As inflation is clearly cooling down and domestic demand is still holding up, HSBC’s Kwok said the bank remained comfortable with its forecast of 3.3 percent GDP growth this year.

A Hang Seng Bank report published on Wednesday said it maintains the 3 percent GDP growth forecast for 2012 as a whole.

http://www.chinadailyapac.com/article/citys-growth-slowest-q4-2009

Hong Kong’s securities regulator on Wednesday launched a public consultation paper, proposing to impose both civil and criminal liabilities on IPO’s sponsors if they provide false information in prospectuses to investors in the city.

Sponsors of stock listings could face the same civil and criminal liability as company directors if a listing prospectus is found to have misled investors, the Securities and Futures Commission (SFC) said in the proposal, which means sponsors will be fined up to HK$700,000 and jailed for as long as three years once convicted.

The head of the market watchdog also consolidated codes of conduct for sponsors in the paper, requiring them to only submit an IPO application when the vast majority of it is completed for due diligence, and to publish the prospectus’ first draft on the website of the city’s stock exchange to “encourage quality first draft and (to) make vetting more efficient” at a very early stage.

Public investors rely on sponsors to act as key gatekeepers of market quality, and the proposal is intended to enhance investors’ confidence in the quality of disclosure and the market as a whole, Ashley Alder, chief executive of the SFC said during a media briefing on Wednesday.

In Hong Kong, IPO’s sponsors are usually investment banks or corporate finance houses, which are responsible for preparing a company’s listing documents and performing due diligence to ensure that they comply with the city’s listing rules.

The kickoff of introducing new sponsor regulations comes after rows over the quality revelation of some listed companies in the city. The SFC last month revoked the corporate finance license of Mega Capital (Asia) Co for the listing of Hontex International Holdings Co in 2009, and imposed a fine of HK$42 million upon it, after the regulator’s probe uncovered materially false information in the prospectus.

Last year, the SFC inspected a total of 17 IPO underwriters and uncovered various problems, including unsatisfactory due diligence and inadequate internal systems and controls over the sponsors’ work, according to the Wall Street Journal.

These sponsors, who currently meet the required standards, will be little affected by these proposals, said the SFC, which added that many prospectuses submitted to the SFC are poorly prepared with incomplete application drafts, or they are lengthy and full of legalistic descriptions, which are barely readable by common investors in the market.

“And big names behave as badly as small ones,” said Charles Grieve, senior director of Corporate Finance from SFC, on Wednesday.

It is the second attempt in a decade by the SFC to introduce legal liability for IPO sponsors. In 2005, the watchdog had proposed similar rules, but they were aborted after bankers strongly objected to them.

Alder on Wednesday said this time the new proposal had received “mixed to active” responses from the banks that the SFC had been in touch with. Alder, nevertheless, said he is unable to provide a timeline when the new plan will be enforced as it is still at an early stage.

The public consultation will go on for two months to conclude in early July.

http://www.chinadailyapac.com/article/tougher-laws-proposed-ipos

Despite global economic uncertainties continuing to stymie investors’ appetite for commercial properties in most parts of the world, the mainland and Hong Kong markets remain rosy on rising expectation for rental and capital value gains, according to a survey by the Royal Institution of Chartered Surveyors (RICS).

The commercial property market on the mainland has maintained strong momentum into the New Year with demand continuing to outstrip supply in spite of government cooling measures introduced throughout the whole of last year, according to the quarterly survey released by RICS Global Property on Thursday, which is based on responses from a combination of senior management of large occupiers, service providers in particular RICS members as well as property professionals in different regions.

“The recent cooling down in the property and construction market on the mainland is perceived as a healthy adjustment to the economy as a whole,” said Kenneth Kwan, chairman of RICS Hong Kong, who believes that the temporary market adjustment is to make the growth more sustainable in the long run.

The rising demand in the first three months in a market where available spaces are basically unchanged has fed the much higher rental expectation for the next quarter after strong growth was recorded last year.

The survey also noted that investment enquiries were unchanged from last quarter while capital values are expected to rise further in the second quarter this year. Compared with the robust demand on the mainland, the report finds that the local commercial property market was “less buoyant”, with respondents reporting a modest growth in occupier demand alongside similar gains in rental expectations.

A number of the major traditional international occupiers have moved away from the prime Central area due to surging costs, while many top companies are still reluctant to relocate outside the area because of prestige perceptions, the reduction in connectivity and staff services, said the report.

It contrasts to an earlier report prepared by Cushman & Wakefield in mid-April, in which the property consultant forecasted that office rentals in Hong Kong would extend their slide in the second quarter of 2012 after falling 5.2 percent in the first three months as “demand shrinks sharply in the prime business district” amid lukewarm market sentiment and a consolidation in the financial sector.

However, the RICS survey believes that rental will rise in the second quarter this year, citing the picking up investment enquiries these days after stabilizing from the previous quarter.

The report, nevertheless, pointed out that the prevailing international profile of Hong Kong as a core location for corporate occupiers is increasingly under threat due to direct competition from alternative cities, including Singapore.

“One of the primary challenges facing city leaders in Hong Kong is how to increase the attractiveness of office locations outside of the central business distinct to both corporate occupiers and their staff. If undertaken successfully this would mean businesses could afford to keep back office staff in Hong Kong and provide alternative to relocating to cheaper cities overseas,” said the report.

http://www.chinadailyapac.com/article/mainland-and-hk-markets-still-rosy-rental-and-capital-value-gains-rics-survey

Hong Kong had the highest number of private residences under construction at the end of the first quarter, 4,000 more units compared with the previous quarter, representing the highest number ever in almost eight years (30 quarters), since the fourth quarter of 2004, according to a research report.

The report, compiled by realtor Centaline Property Agency Ltd, shows that the city’s total new private home supply will reach 64,000 units in the next three or four years, with new home completion to achieve the government’s 20,000 annual target after 2016.

“Since the government resumed land sales in 2010, the low private home supply situation has been reversed in the city,” said Wong Leung-sing, Centaline’s director of research.

“The number of unconstructed homes on approved land banks has risen above 13,000 in the past consecutive quarters, reaching 15,000 in the first quarter of 2012,” said Wong, who added that the total home completion figures are expected to be 10,577 and 15,844 throughout 2012 and 2013, respectively.

The relatively fast new home supply has also been absorbed quickly in the market. Over 85 percent of the new homes completed in 2011 have been sold out, while 40 percent of total new residential apartments are expected to be completed within the year although some deals have also been sealed in the first quarter of 2012, said the report.

The number of new homes completed in a year always differs from the actual transaction data recorded in the same year as the total figures could also include apartment sales that were concluded a year earlier during presales, Midland Realty Chief Analyst Buggle Lau said, adding that the number of residential units that developers decide to launch make the real impact on the market.

“The developers are likely to launch as many as 15,000 to 16,000 new homes in the market this year, a notable increase from the 9,000 units last year,” said Lau.

In October 2010, Chief Executive Donald Tsang had announced that the government targeted an annual supply of 20,000 apartments through maintaining a relatively fast pace of increasing land supply to stabilize the city’s home prices.

During the budget speech on Feb 1 this year, Financial Secretary John Tsang, without imposing any further curbs, announced that government will provide residential sites good for 30,000 private homes in the new fiscal year over the 20,000 units estimated for the current fiscal year, in a bid to maintain a healthy property market.

“Hong Kong’s home prices have surged too much during the past few years. While the government lacks effective administrative tools to curb the price hike, the plan of boosting land supply is unlikely to see any changes in the following years,” a senior economist from Royal Institution of Chartered Surveyors (RICS) told China Daily. He declined to be named.

http://www.chinadailyapac.com/article/citys-private-housing-rises