Economy

THE DRAGON DECELERATES12 January 2015

THE DRAGON DECELERATES China’s gross domestic product growth in 2015 is expected to

be the lowest in a generation. While still expanding at a clip of 7 percent or more, the repositioning of the Mainland’s economy has important implications for business in Hong Kong and around the world. It also creates stronger demand for CPA skills, as Jemelyn Yadao and George W. Russell report

January 2015 13

PHOTO: AFP

Economy

14 January 2015

M ost countries would be envi-ous of 7 to 7.5 percent gross domestic prod-uct growth,

but predictions that China might expand in that range during 2015 have been accompa-nied by a sense of foreboding.

While much Mainland economic data released over the past year has pointed to a slowdown, fears were exacerbated last month by figures suggesting 2014 growth might fall short of China’s 7.5 percent target, and the prospect of 2015 showing the weak-est full-year growth since 1990.

The Chinese economy’s relative durabil-ity compared with that of other major mar-kets has failed to instil confidence. “China’s economy continues to grow faster than other large economies, but fresh data show that growth is losing steam,” says Fredrik Häh-nel, Senior Vice-President of SEB, a Stock-holm-based financial group, in Shanghai.

Things could be much worse. In the past few years, a number of financial commen-tators have warned that China’s economy would crash – and the country has defied those fears, instead managing a softer eco-nomic landing. “The China growth para-digm is shifting towards a new normal, which is slower but sustainable growth,”

says Eric Chaney, Chief Economist at the AXA Group in Paris.

The prospect of a decelerating Mainland economy is worrisome for foreign compa-nies that have increasingly looked to China for growth. From Swedish truck manufac-turers to German precision machinery mak-ers, exporters to China are concerned about the depth and duration of the slowdown. “Northern European companies have a less than positive view on the business climate,” Hähnel adds.

The concern is worldwide: Australia’s Bureau of Resources and Energy Econom-ics last month forecast a 10 percent drop in commodity exports, largely due to reduced

“If the current property market slump in China takes a turn for the worse, it is possible GDP growth will fall below 7 percent.”

PHOTO: AFP

January 2015 15

China demand, while in Singapore, Prime Minister Lee Hsien Loong said that the is-land nations’ economic outlook for 2015 is “modest,” given China’s weaker expansion.

Inside China, there are fears that the slowdown will put pressure on the sensitive job market, threatening social stability. “It will be difficult, especially for the millions of graduates each year,” says Kenneth Yeo, Head of Specialist Advisory at BDO and a Hong Kong Institute of CPAs member.

Hong Kong too faces repercussions, given its economy’s tight integration with that of the Mainland (see For Hong Kong, a mixture of caution and calculation on page 16). “If economic growth in China continues to de-crease, Hong Kong’s exports might possibly fall, investments would probably shrink, and its financial markets might even become more unstable,” warns Roy Lo, Managing Partner of ShineWing (HK) CPA and an Insti-tute member.

Front-line fightersThe slower growth is beginning to affect In-stitute members in a sense that their skills are more in demand. “In a broad sense, China’s era of exponential growth is coming to an end,” concludes Jordi Chu, Financial Control-ler at Harbour Plaza Resort City in Tin Shui

Wai and an Institute member. “For business in China, 2015 will probably be a year of trial.”

Accountants are advising vigilance when it comes to assessing the health of Mainland vendors and other business part-ners. “Hong Kong CPAs should help their companies frequently assess the financial and bankruptcy risks of their key Chinese customers and suppliers,” says Kenneth Lam, Vice President of Finance at Airbus China in Beijing and an Institute member.

Macroeconomic indicators should also be examined carefully, suggests Daniel Wan, Managing Director and Chief Financial Officer of Shui On Land in Singapore and an Institute member. “I believe that CPAs can assist their companies to mitigate the slowdown impact by monitoring overall economic development, government policy and market reactions.”

  With the yuan facing a depreciation risk, Lam also advises paying attention to for-eign currency movements. “Closely monitor yuan exchange and interest rates against your company’s base currency,” he says, add-ing that CFOs should revisit their company’s long-term investment strategy in China and diversify their risk elsewhere if appropriate.

Some companies might also re-examine their human resources expenditure in Chi-na. “With the increasing staff and welfare

costs in China, it is time to reconsider shift-ing certain managerial positions back to Hong Kong,” says Johnson Lau, CFO of digi-tal display equipment maker Sgoco Group and an Institute member.

However, Chu at Harbour Plaza Re-sort City suggests Institute members are well placed to advise companies across the boundary on their HR budgets. “Given that declining revenue and escalating staff costs have challenged the Mainland service oper-ators, CPAs with expertise in the Hong Kong model of efficiency can help Mainland busi-nesses to increase labour productivity and mitigate the burden of fixed staff costs.”

A continued slowdown could also present opportunities to CPAs if it prompts consolida-tion. “I see more mergers and acquisitions,” says Lo at ShineWing, adding that he expects more state-owned enterprises listing its main operating arm in Hong Kong. “I believe that CFOs will be more in demand, as companies need their knowledge and expertise.” 

Readjusted economyOn the other hand, economists hope the Chi-nese government can improve the targeting of investment. “The very high growth rates of recent years may have been distorted by an investment boom, so growth of around

7-8 percent is probably much more natural for a country at Chi-na’s stage of development,” says Peter Westaway, Chief Econo-mist at Vanguard Asset Management in London.

To be sure, much investment has been misdirected on specu-lative property acquisitions. “About US$6.8 trillion of the in-vestments made since 2009 may have been wasted on creating ghost towns, unused office blocks and mothballed factories,” says Richard Boxshall, Senior Economist with Pricewater-houseCoopers in London.

This could mean a property slump is expected to last well into 2015, further undermining confidence in financial mar-kets. “If the current property market slump in China takes a turn for the worse, it is possible GDP growth will fall below 7 percent,” says Yeo at BDO.

A major correction in the property market could make for a harder landing in 2015, warns Sitao Xu, Chief Economist at De-loitte China in Beijing. “Investment in real estate accounts for 20 percent of GDP and has profound impact on other sectors, includ-ing construction materials and the home improvement sector.”

However, Wan at Shui On Land is more optimistic. “China’s residential property market is on course for a recovery in 2015, led by tier-one cities [Beijing, Guangzhou, Hangzhou, Shang-hai and Shenzhen], which experience robust population in-flows,” he says.

Banny Lam, Managing Director and Co-head of Research at Agricultural Bank of China International, one of Mainland’s so-called Big Four financial institutions, says Beijing wants to fo-cus more on infrastructure. “The leadership is trying to correct the so-called over-investment path, and that means targeting healthy investments that can contribute more economic value to the economy,” he says.

One of the keystone infrastructure projects is the Silk Road Economic Belt linking China and Europe via Central Asia. “Those projects will be a major contributor to fixed asset invest-ment in the next several years, providing a lot of GDP growth for China,” Lam forecasts.

Lo at ShineWing expects continued investment in promot-ing new urbanization, including special economic areas. “Hong Kong financial professionals should try to explore more oppor-tunities and unleash potential in new zones,” he says, citing

Economy

For Hong Kong, a mixture of caution and calculation

No matter how upbeat predictions are for Hong Kong’s gross domestic product growth this year, they usually carry a caveat: It all depends on China.

Standard Chartered forecasts 3 percent GDP expansion for Hong Kong in 2015, in line with most economists’ predictions. “The growth momentum could be affected by the slowdown of the Mainland economy,” says Kelvin Lau, the bank’s Senior Regional Economist for Asia and a Hong Kong Institute of CPAs member.

The Hong Kong Monetary Authority opened 2015 on a note of caution, noting that the Federal Reserve in the United States is likely to raise interest rates, and that Hong Kong would fol-low suit, given the currency peg in place since 1983.

The HKMA urged financial institutions, companies and in-dividuals to manage their liquidity and interest rate risks pru-dently and avoid excessive borrowing. While CPAs can take the lead in implementing such policies, experts also point out areas of opportunity.

For example, a weaker domestic economy in the Mainland is likely to prompt more Chinese companies to seek markets abroad. “A lot of Chinese companies are expected to use Hong Kong as a stepping stone for foreign investment, helping Hong Kong to remain one of the world's major service centres,” says Banny Lam, Managing Director and Co-head of Research at Ag-ricultural Bank of China International in Hong Kong.

Lam forecasts Hong Kong GDP growth at about 2.5 percent in the next two or three years with China continuing to play a key role. “In 2015, we will still see a big number of Mainland tourists coming to Hong Kong, even though they will spend less than before,” he says. “Another major contributor to Hong Kong's economy in 2015 is domestic fixed asset investment, es-pecially major infrastructure projects.”

Hong Kong CPAs are also likely to be kept busy with stock market listings. “With China’s continued efforts to support the economy through stimulus measures and a recovery in the U.S., Hong Kong’s initial public offering market activities in 2015 will remain strong,” forecasts Rebecca Chan, Head of Hong Kong Capital Markets Group at KPMG China and an In-stitute member.

Sitao Xu, Chief Economist at Deloitte China in Beijing, says IPOs are only one step as the Mainland develops its capital market infrastructure. “A well functioning capital market needs watchdogs,” Xu adds. “Broadly speaking, as China gradually embraces transparency, CPAs in Hong Kong, along with other providers of professional services, will see greater demand for their expertise.”

16 January 2015

“Given that declining revenue and escalating staff costs have challenged the Mainland service operators, CPAs with expertise in the Hong Kong model of efficiency can help Mainland businesses to increase labour productivity and mitigate the burden of fixed staff costs.”

January 2015 17

Zhuhai’s Hengqin New Area, Qianhai Shen-zhen-Hong Kong Modern Service Industry Cooperation Zone and the Guangzhou Nan-sha Economic and Technological Develop-ment Zone as examples.

Long-term optimismThe Chinese economy’s glide path to 7 per-cent annual growth is far from a doomsday scenario. “The 7 percent figure does appear to be a psychological threshold mainly be-cause the economy was growing by double digits only a few years ago,” acknowledges Xu, the Deloitte economist. “Such a decel-eration naturally causes concern.”

However, economists say that a more important issue is the central government recognizing the need to maintain better, if smaller, GDP growth. “The government re-mains committed to furthering economic reforms and sustaining a certain level of growth,” says Lo at ShineWing.

Indeed, experts point to 2014 as a wa-

tershed year for economic reform, citing the abolition of registered capital require-ments for new companies; a plan to deregu-late pharmaceutical prices from this year; a significant opening of the capital account through the Shanghai-Hong Kong Stock Connect programme and the publication of draft rules on deposit insurance to be imple-mented in 2016.

These steps have been taken in addition to major structural reforms such as reining in credit growth (and using credit better through reallocation of resources from less productive sectors), enacting environmen-tal legislation and reducing excess capacity in industrial sectors.

Such reforms, economists say, might re-duce growth in the short term but can enable a prolonged period of sustainable growth. Yukon Huang, Senior Associate at the Carn-egie Endowment for International Peace and a former China country director for the World Bank, expects China’s GDP to settle at

about 6 percent in the next decade. Chaney at AXA forecasts 5 percent growth by 2025.

Some CPAs believe that a more liberal busi-ness environment, coupled with lower growth expectations, will create a need for smarter management. “With a flattening market, com-petition becomes keener,” says Chu at Harbour Plaza Resort City. “And with a decrease in rev-enue growth, business has to strive for cost leadership and product differentiation.”

Those circumstances are likely to present long-term opportunities for Institute mem-bers working in the Mainland. Lo at Shine-Wing believes that having the right informa-tion is key to making any decision and that Institute members should keep their fingers on the pulse.

“We should always be prepared for any new changes and trends,” says Lo. “I would suggest that CPAs participate more in cross-border business events and become involved with di-rect communications with Chinese officials to get the latest information at first hand.”

PHOTO: AFP