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Dispatch (Asia edition)
| by Peta Tomlinson, Nazatul Izma Abdullah, Sonia Kolesnikov-Jessop 08 Mar 2007 Topic: News |
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China has announced major financial reforms which economists believe will steer the Mainland towards a more competitive, well-governed financial market. These include a restructuring of the Agricultural Bank of China (ABC), the last of China’s Big Four banks, which could pave the way for another blockbuster initial public offering (IPO). After the January National Financial Work Conference, a high-level meeting held every five years, Premier Wen Jiabao announced China would:
Hong Liang, Goldman Sachs’ China economist, says these changes, if implemented, will be positive for China’s long-term growth. Liang forecasts a short-term gain for the corporate bond market, and describes the abolition of the loan growth target as ‘a small positive step as managing quantitative monetary targets in China is becoming increasingly difficult, and inappropriate, given the rapid structural changes and increasing openness of the economy’. David Dollar, the World Bank’s country director for China and Mongolia, says the restructuring of the ABC requires careful assessment of experience learned from the earlier restructuring of three state-owned commercial banks, the Bank of China, the Industrial and Commercial Bank of China, and the China Construction Bank. According to Dollar, the need to strengthen corporate governance before the IPO is vital. ‘China should consider further opening up the ABC to private and strategic investors by giving them a bigger role in equity stake and decision-making,’ he said. ‘The ABC has a particularly large network and staff so that managing it well is a real challenge and could benefit from a strong strategic partner.’ Dollar adds that impressive progress has been made in risk mitigation and effectiveness of regulation and supervision. ‘What is still missing is expansion of small and micro lending, which will require easier entry, especially into rural markets, and reduced transactions costs. ‘The Government can play a role in providing the needed public infrastructure, such as legal reforms in introducing modern secured transactions framework, consumer credit information reporting and legal framework that helps contract enforcement. But most important of all is to ensure that soundly governed financial institutions operate in a competitive environment under effective regulation and supervision.’ The Year of the Boar came in with an almighty charge as Malaysian stocks surged further following the Chinese lunar New Year celebrations in February. The continued influx of foreign funds pushed the Kuala Lumpur Composite Index (KLCI) to an almost 14-year high of 1,278 points on 21 February, and the resurgence of retail interest helped boost volume to a record high of 4.7 billion shares trade valued at RM4.07bn. The consensus among most analysts is that the bullish market outlook looks poised to continue on the back of the country’s strong economic fundamentals and a wave of potential mergers and acquisitions. In February, Credit Suisse stated in a research note that it is maintaining its overweight rating on Bursa Malaysia (KLSE) as a more than 20% return is achievable given a rising ringgit, net dividend yield of 3.6% and 2007 estimated earnings growth of 17.6%. According to The Edge, Credit Suisse said a significant improvement in liquidity and sentiment had opened Malaysia to the investment world, causing a scramble for exposure. As the licensed investment adviser Capital Dynamics Sdn Bhd put it: ‘Foreign funds are beginning to fall in love with the KLSE again.’ But what goes up must inevitably come down, sooner or later, especially if the buying spree is overdone. Risks are primarily from external markets. To gauge accurately the performance of the KLSE over the next 12 months, advises Capital Dynamics, see how the global economy will perform in that period. The US economy is expected to continue its current trend of ‘gradually slowing down’, stated Capital Dynamics, but lower oil prices and an expansionary monetary policy will mean that any US recession will be shallow and short-lived. It rates Europe as having a decent year and China will slow down while retaining its position as the global engine of growth. Portents are therefore rosy for a prosperous porcine year on the KLSE. The Singapore Government delivered a generally pro-business Budget in February, announcing a cut in corporate tax of two percentage points to 18%, effective from 2008, as well as offering exemptions and deductions that it says will make the country one of the most competitive places in the world to do business – especially for small companies. The Government will also, from 2008, raise the partial exemption threshold, the amount of a company’s income that is exempt from tax, from S$100,000 to S$300,000. Companies will get a 75% exemption on the first S$10,000 of their normal chargeable income and a 50% exemption on the next S$290,000. This means that close to 80% of taxable companies in Singapore will pay an effective tax rate of less than 10%. The Government announced other moves to reduce the tax payable by companies. It will now allow all borrowing costs that are akin to interest, which will include certain guarantee fees and bond discounts, to qualify as tax-deductible expenses. It will also remove the ‘sunset clause’ for new companies, which means that start-ups will enjoy a tax exemption on the first S$100,000 of their chargeable income, for a full three years, regardless of when they qualify for the scheme. ‘This is a Budget to usher in a new era of globalisation, as the Government seeks to incentivise global and hub entrepreneurship in Singapore,’ noted Owi Kek Hean, KPMG’s head of tax. Employers’ Central Provident Fund (CPF) costs will be increased, however small and medium-sized enterprises (SMEs) will receive a rebate on labour expenses for two years to effectively offset up to 45% of the additional CPF cost in the first year. Singapore posted a small budget deficit of S$1.3bn for the 2006 financial year ending March 2007, which is expected to be reduced to S$700m for the 2007 financial year. To compensate for the cut in corporate tax, the Goods and Services Tax will rise by two percentage points to 7% from July, bringing in an additional S$1.5bn each year. While business associations welcomed the budget goodies, economists warned the Goods and Services Tax increase could curb consumer spending and push up inflation. Malaysia has traditionally been one of the world’s most open economies. But openness reached new heights when the country’s total trade volume breached the historic trillion ringgit threshold. Total trade peaked at RM1.07 trillion for 2006, a 10.5% increase over 2005. Growth was well above the World Trade Organisation’s projected 7% growth in global trade for 2006. Exports – from key sectors including manufacturing, agriculture, minerals and fuels – amounted to RM588.95bn for 2006 while imports stood at RM480.49bn. Notably, the shift in Malaysia’s export profile from primary commodities to petroleum was a major factor accounting for the growth in trade volume. Nevertheless, the rise in commodity prices, such as crude palm oil and rubber, also boosted exports. On the import side, the maturing of the strong manufacturing sector spurred demand for intermediate and capital goods and pushed import growth up by 10.7% to RM480.5bn. Other key fillips for trade include the growing diversity of Malaysia’s trading partners. Although Malaysia’s traditional trading partners are Japan, the US and Europe, it has significantly increased trade with ASEAN member countries, West Asia and China, as well as with emerging economies in Latin America, south Asia and eastern Europe. As a result of the landmark trade figure, Malaysia also registered its highest ever annual trade surplus of RM108.45bn, as well as 10 consecutive months of trade surplus. Going forward, one of the risks to Malaysia’s export competitiveness could be the strong ringgit, which traded near a 10-year high at RM3.4925 to the dollar as of 21 February 2007. Unemployment in Australia remains at a 30-year low, according to the Bureau of Statistics, but while that may be good news for the Federal Government in an election year, others are asking: at what cost? In a distinctly un-Australian code of conduct, workers there are now reported to be putting in the longest hours in the industrialised world, more than the super-efficient Germans, more than the Americans, who only get one or two weeks’ annual leave, more even than the Japanese, who are famous for a phenomenon known as karoshe, or death by overwork, says Clive Hamilton of the social think-tank, the Australia Institute. Hamilton cites finance professionals as among the ‘worst offenders’ for staying too long in the office, not necessarily because of job insecurity, nor the need to put food on the table, but because of ‘affluenza’. ‘Their incomes are growing healthily, but people want more in their lifestyle aspirations, and will work longer to achieve it,’ he said. The about-face on Australia’s iconic laid-back lifestyle can be traced to the mid-1990s, when an ‘incredible debt binge’ began. Levels of personal debt skyrocketed as middle to high level Australian income earners became ‘intensely materialistic’ and hungry for luxury goods. Yet they are not satisfied: in an Australia Institute survey, half of the respondents claim they still cannot afford to buy what they need. This backs up findings from an earlier study by the institute, which found that only 5% of the very wealthy Australians call themselves ‘prosperous’, while many more millionaires say their financial position is only ‘reasonably comfortable’. But Hamilton says that money does not buy happiness. Studies show that people who are pre-occupied with money are prone to having a worse quality of life, be less happy, and be more likely to suffer psychological disorders. In Australia’s financial sector, he says get-rich-quick celluloid villain Gordon Gekko’s infamous ‘lunch is for wimps’ comment ‘does seem to be prevalent’. ‘My advice to the financial sector, more than any other profession, is that they should get a life,’ he said. Lessons learned from high profile US scandals and the resultant Sarbanes–Oxley Act have filtered down to Hong Kong, where businesses are more attuned to the risk of corporate fraud, KPMG has found. But recognising and doing are not mutually inclusive. The latest KPMG Fraud and Misconduct Survey indicates that 89% of Hong Kong respondents have implemented a fraud strategy, up from 43% since the last survey in 2003. ‘A majority of our respondents had fraud systems in place, but the survey suggests some complacency concerning the effectiveness of those systems,’ said Grant Jamieson, principal of forensic, KPMG in Hong Kong. ‘Compliance with, or use, of those systems may still be weak. In some cases, companies may simply be unaware that fraud is occurring.’ Jamieson says that when you drill deeper, cracks begin to show. Only half of Hong Kong respondents conduct background checks on prospective employees, and even fewer (45%) screen their suppliers and third parties. Only 32% of companies surveyed conduct fraud awareness training, while just 23% have specific fraud detection strategies. As few as 10% have an external reporting hotline, a mechanism for monitoring fraud. ‘It seems that many Hong Kong firms are missing the main components of fighting fraud, which are a code of ethics, screenings and background checks, and a “declaration of interest” policy,’ Jamieson said. The survey also found that the risk of fraud when doing business in the Chinese Mainland remains a concern for Hong Kong-based firms – 43% of which claimed to have been the victim of fraud in connection with their China operations. A perception of corruption persists, it seems, with respondents citing payroll fraud, theft of plant and equipment, giving kickbacks or bribery, false invoicing, and accounts receivable fraud as the most likely forms of fraud in their China operations in the next two years. However, Jamieson says corruption in China is no worse than in any developing economy, and that firms should simply factor that into their China strategy. ‘Fraud control mechanisms should be tailored to the market you are going into,’ he said. in brief...
Free for all
Core adequacy ratio for banks cut
Oil fuels inflation
Confidence high
Biomed output drive pays off
Rich get richer
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