---- by Jill Wong, Hong Kong ----
China's economy, along with those of Hong Kong and Macau, face significant threats of a fall-out from the US credit crisis, but business leaders are holding out hopes for a bright future due to abundant opportunities in the region. That's according to speakers at Bloomberg's 2008 Leadership Forum, held recently in Hong Kong.
A year ago, people were talking about how Asia had decoupled from the US. If you look at the way stockmarkets have been reacting, you realise the decoupling ...was fantasy and fiction. Central banks have less latitude to act. We're seeing the extent to which political instability is happening around us ... It's going to be a very interesting six to 12 months, says Willie Pesek, a Bloomberg columnist and a panel speaker at the forum titled In Today's Global Uncertainty, What are the Key Challenges and Opportunities for China and Hong Kong?
The other four speakers of the first panel introduced as the captains of chaos by forum host and Bloomberg TV anchor Bernard Lo in reference to the industry challenges they face were Timothy Grady, managing director of Merrill Lynch, Asia Pacific; Lawrence Ho, chairman and chief executive officer of Melco International Development; Tony Tyler, chief executive officer of Cathay Pacific Airways and Vincent Cheng, chairman of The Hongkong and Shanghai Banking Corporation (HSBC).
Regarding the impact of the US sub-prime crisis on Merrill Lynch, Grady conceded that things are slowing a bit, but said the overall investment banking business is still positive in the long run.
Most large global investors are under-allocated to Asia. Ten years ago, if you were a large institutional investor, you didn't necessarily need an allocation to Asia, whether Asian equities, Asian debt or Asian real estate. Now, given the growth of business, you have to have some allocation to Asia, said Grady, who runs Merrill Lynch's real estate business in Asia. He added that regional headcount at Merrill Lynch has increased over the past year.
Likewise, HSBC is also placing its bets on Asia, one of the two regions the other being Latin America that jointly added nearly US$1.1 billion in profit growth for its global banking and markets unit in the first half, as compared with the same period last year. However, the unit posted $3.9 billion worth of fresh write-downs on credit trading, leveraged and acquisition finance positions.
A bigger challenge regionally for HSBC has to do with the rising costs of operating the group's large network of branches and ATM machines. We see a lot of opportunities in the region. Yes, there are challenges ahead, and I think for the next six months, the challenges will still be there. Asia is not entirely decoupled from the US. But commodity prices are coming down and inflation is easing off, Cheng said, noting the abundant opportunities offered by the fast-growing Chinese banking sector.
The Hong Kong-US dollar peg is another challenge for Hong Kong banks with a huge Hong Kong dollar deposits base. As long as the US doesn't increase rates, (we can't raise rates), Cheng said in response to a question from the floor about deposits.
Cathay Pacific, while insulated from the credit crunch due to its minimal debt levels, has had to grapple with the problem of high fuel prices, although Tyler noted that demand for flights remains very strong in our key markets.
It's very difficult to make money out of flying long haul. You're burning more fuel per mile flying long haul than short haul ...We're reshaping the network, cutting some Los Angeles, Vancouver [routes], but we're adding flights to Australia, Middle East, Tyler says.
The forum also touched on Macau's economy, which is heavily reliant on gaming revenues. Overall it has perhaps less to worry about in terms of the US financial crisis and high fuel prices. The main challenge there lies in the need for infrastructural development to catch up with rocketing growth in the number of Chinese tourists, says Ho, whose Melco group includes Melco Crown Entertainment, a leading player in Macau's gaming market.
You have a country with 1.3 billion people and domestic travel last year was 1.4 billion people. More often than not, the first two destinations that mainland tourists travel to beyond China are Hong Kong and Macau. In Macau's case, one can make the argument that growth in the last four years has been a bit too fast. Gaming revenues this year are up more than 50 per cent and last year's growth was over 50 per cent. When one industry is growing at such an overwhelming pace, the other industries and the infrastructure in Macau really need time to catch up, Ho adds.
On our Macau business, the first half of the year has been a banner time for us. We're continually building. The US credit crisis has definitely affected us. We went out and did our project financing, US$1.75 billion, last year. At that point in time, we thought that was the absolute worst market. A year later, we are very happy that we raised the money that we needed at that point in time, he notes.
The message, then, is that irrespective of market conditions, there will always be opportunities for companies that know how to take advantage of them.
The Bloomberg Leadership Forum in Hong Kong was held on September 4, 2008. INSEAD is the Forum's knowledge partner.