Business Asia- Issue 1, Spring 2009

Business Asia

Issue No. 1, Spring 2009

Sit down with

Jeremy Siegel

and find out his outlook on the Asian financial markets.

PLUS

WHY CHINA WILL RECOVER FIRST

India:

Better or worse? RESTAURANT REVIEW:

HANDCUFFS & GOURMET IN SINGAPORE

Is Asia the Next Place to Go?

PRESIDENT VICE PRESIDENT CO-EDITOR-IN-CHIEF CO-EDITOR-IN-CHIEF

Jeremy Vasquez Ray Wong Alexandria Sun Ivan Au

CHIEF ADMINISTRATIVE OFFICER EXTERNAL COMMUNICATIONS OFFICER EXTERNAL COMMUNICATIONS OFFICER INTERNAL COMMUNICATIONS OFFICER COPY EDITOR LAYOUT EDITOR

Hyohoon Lim Seo Hyun Kim Eugene Huang Cheryl Sim Wes Yiu Michael Hong

EDITORIAL

Sara Liu Zoie Teng Nik Kumar Barbie Hsu Christy Ai

ADVERTISING MANAGER MARKETING MANAGER BUSINESS STAFF

Hyun Jae Dhong Pamela Hidajat Tony Lee Wytse Schukken

FOR GENERAL INQUIRIES: cornell.asia.business.forum @gmail.com ADVERTISE WITH US: [email protected] WANT TO WRITE FOR US OR WORK FOR US? CONTACT: cornell.asia.business.forum @gmail.com Subject: “Recruiting” LET US KNOW WHAT YOU THINK at http://businessasia.weebly.com! SEE INSIDE BACK COVER FOR MORE INFORMATION.

PHOTOGRAPH COURTESY OF JUSTIN LEOW

Business Asia

Business Asia Issue No.1, Spring 2009

4 5

| EDITOR’S LETTER | BUSINESS OVERVIEW

by Hyohoon Lim A brief overview of main events affecting business in Asia and economic indicators

INVESTING

12

15

| Asia Equity Focus: Where

are we heading in 2009? by Zoie Teng What you need to know about investing in Asia’s equity markets

COVER FEATURE

6 8 10

| China, the United States, and the Financial Crisis by Sara Liu

How is the global economic crisis affecting China and Sino-US relations?



| Perspectives from Abroad: Hong Kong



by Felix Lau, Hong Kong University of Science and Technology Views from abroad, where the crises have had different consequences | India’s Future Amid the Present Financial Crises by Nik Kumar

The emerging economy of India shows promising growth and a positive economic outlook

|Good News in Bad Econo-



INTERVIEWS

Shanghai, see p.19

32

my: the Philippine Economy Remains Strong by Aaron Vasquez, New York University The sun shines on this island economy





TECHNOLOGY

16

| Rise of the Digital Dragon

by Eugene Huang Our technology correspondent talks about Baidu, the Google of China

SOURCE: CITY-PHOTO.ORG



REAL ESTATE

18

| Tale of Two Cities:

20

23

Shanghai and Hangzhou Real Estate by Barbie Hsu & Christy Ai China’s real estate condition summarized by two major cities

| The Subprime Mortgage

Crisis and the Real Estate Market in China by Professor Peng Liu, Cornell University Why China will be the first to recover from the subprime mortgage crisis.

| Risks in China’s Real Estate

Market with Professor Peng Liu, Cornell University by Ivan Au & Jeremy Vasquez Characteristics of China’s real estate market that make it different from the rest

LIFESTYLE

25

27

29

34



| Sitting Down with Professor Jeremy Siegel, University of Pennsylvania by Kellen Xu, University of Pennsylvania

The prominent author of the classic “Stocks for the Long Run” discusses his view on Asia’s economy and its future

| On Korea: Seo Young

Tae, Hyundai Oil Bank by Seo Hyun Kim

What the globalizing world means to South Korea

CAREERS

35

| Postcard from the Edge

| Mainland China: Home of 106



| Internships Abroad:

| Restaurant Review:

36 37

| Hot Careers in China for Foreign

Billionaires and More Than 800 Million Poor by Christy Ai Discussing the widening gap be tween rich and poor Doctor’s Orders by Wes Yiu Eccentricity is taken to a whole new level in Singapore

| Destination: Shikoku

by Joanne Ng, National University of Singapore Experience the wonders of Shikoku, the smallest yet one of the most beautiful islands in Japan











by Duncan Scott,Vice President, V.F. Corporation

Things to keep in mind about working in Asia

Working in China by David Hao, University of Toronto

Take a look at a summer intern’s experience with an American publisher in China Graduates by Alexandria Sun & Ray Wong

Two professors at Nanjing University discuss their thoughts on the economy and future for students

editors’ letter

PHOTOGRAPHS COURTESY OF JUSTIN LEOW

WELCOME to the inaugural issue of Business Asia, the first undergraduaterun magazine in the nation focused on the changing business landscape in Asia. Our mission is to deliver an informative yet interesting magazine that will keep you updated with current events. Through Business Asia, we hope to establish a forum for a new generation of global leaders. From a small idea back in Fall 2008 to the actual magazine today, we owe our success to a team of 19 dedicated students at Cornell- without their many nights of hard work and valuable opinions, this magazine would not have been possible. For this issue, we are distributing the magazines to Cornell, the University of Pennsylvania, NYU, UCLA and Boston University. We hope to expanding internationally as we move on to our next issue, tentatively launching in November, 2009. We may be publishing our inaugural issue at the peak of the global financial crisis, but we believe that this is the best time for students to understand its ripple effect in Asia, an increasingly important player in the global market. The theme of this issue comes in the form of a riddle: “Is Asia the Next Place to Go?” We provide you with insights from enthusiastic students, prominent professors and experienced alumni around the globe to help you consider this question. This issue first briefly overviews the main political and economic events that have taken place in Asia in the past quarter. Then, our dear reader, you will witness how the crisis has affected China, Hong Kong, and India respectively. The subsequent discussion of the Philippine market and a detailed analysis of why China’s real estate market is positioned to recover first will bring a ray of hope and prove the contrary. The lifestyle section will then take you to Singapore and Japan while exposing a social problem in China. We also have gleaned valuable insights from two prominent professors on what they think about the Asian economy’s past, present and future. To wrap things up, we have compiled insider knowledge and little-known secrets about career opportunities in Asia. As you read through these articles, we hope to shed light on the question that lingers on many minds. From top: Alexandria Sun, Ivan Au

Finally, we value YOUR opinion. After you fill out the survey on our website, http://businessasia.weebly.com/, you will automatically get a chance to win 50% off any Kaplan course or a coupon from Miyake Japanese Restaurant as a sign of our appreciation. Are you ready to tackle the big question?

Alexandria Sun Ivan Au CO-EDITOR-IN-CHIEFS QUESTIONS? FEEDBACK? Email us at [email protected]

China to Combine Steel Companies In order to help steel companies facing liquidity shortages, the State Council of China approved a plan to combine steel companies. Indonesia Vow for Anti-Corruption despite Economic Difficulties Indonesia’s famous politician and current law maker Sarjan Taher was sentenced four and a half years in prison after he was charged with receiving bribes and swaying government policy in favor of lobbyists.

APRIL

Business Overview

JANUARY Hilary Clinton Discusses Future US-China Economic Relationship The U.S. Secretary of State met with China’s Minister of Foreign Affairs Yang Jiechi to discuss the future of the U.S.-China relations. Korean Exchange Rate Plummets Again The Korean Won exchange rate to U.S. Dollar has reached a record high of 1,500 won.

Asian Countries to Create Their Own Version of IMF China, Japan, and South Korea discussed bringing funds to a common foreign reserve pool that will help Asian countries with liquidity shortages.

FEBRUARY

Aluminum Corp. of China to Invest in Rio Tinto Aluminum Corporation of China, China’s largest aluminum producer also known as Chinalco, announced an investment of $20 billion in debt-ridden Rio Tinto Group.

Southeast Asian Countries Sign Free-Trade Agreement with Austrailia & New Zealand In an effort to lower trade barriers and find a breakthrough during the economic crisis, the Association of South East Asian Nations signed a free trade pact with Australia and New Zealand.

China’s Game Company Goes Public ChangYou.com Ltd., Chinese online game maker, gained $120 million after IPO on NASDAQ. ASEAN+3 Summit Cancelled After Bangkok Protest After Thai soldiers and Pro-Thaksin protestors clashed, ASEAN+3 Summit finance ministers’ meetings were cancelled. Japan announces a record stimulus package Japan unveiled its latest economic stimulus package containing a record Y15.4 trillion ($155 billion) in fresh spending and tax cuts to tackle its worst recession since World War II. Japan would issue more than 10 trillion yen in new bonds to finance the package.

MARCH China Rejects Coca-Cola’s Bid for Huiyuan Juice Chinese government decided to reject Coca-Cola Company’s largest bid to purchase China’s juice maker Huiyuan. Both companies announced that they “respected” the government’s decision. China’s Stimulus Plan May Change the World Economy Chinese Premier Wen Jiabao announced that the government will add a record amount of funds in addition to the $586 billion stimulus package. China’s Trade Figures May Show Signs of Recovery As China’s trade deficit declines, prime minister Wen Jinbao is expecting “gradual recovery.” Asian Stock Rally Continues Asian stock markets extended rally for the fifth week and boosted investors’ confidence, following the rally on Wall Street.

BUSINESS ASIA • Spring 2009 • 5

Cover Feature

China, the United States, and the Global Financial Crisis

How is China affected by the global economic crisis, and how is the current financial crisis affecting China’s relations with the United States?

By Sara Liu, Cornell University

THE ISSUE number of economists believe China bears some responsibility in causing the financial crisis. Former United States Treasury Secretary Henry Paulson, in an interview with the Financial Times, discussed how the “super-abundant savings from fast-growing emerging nations such as China… at a time of low inflation and booming trade and capital flows put downward pressure on yields and risk spreads everywhere.” He says that this “laid the seeds of a global credit bubble that extended far beyond the U.S. sub-prime mortgage market and has now burst with devastating consequences worldwide.” In addition, criticisms of China manipulating its currency cast a doubtful light on China’s role in the current financial crisis. The Economic Policy Institute (EPI), in September 2006, released an article calling for action against China’s violation of currency manipulation standards. “For the sake of stability in the U.S. economy, the Chinese economy, and the global economy,” it states, “action must be taken to unwind… the run-up in the American trade and current account deficits.” A run-up, the EPI claimed, is spurred by the Yuan’s currency peg against the dollar. On December 10, 2008, the

A

6 • BUSINESS ASIA • Spring 2009

Treasury Department concluded in its semi-annual report to Congress that although “the gap between the real exchange rate and its equilibrium level remains wide and the RMB remains substantially undervalued,” the Treasury has had not found any of United States’ major trading partners to have manipulated the rate of exchange “for purposes of preventing effective balance of payments or gaining unfair competitive advantage in international trade.” However, just over a month later, Timothy Geithner, the current Secretary of the Treasury, and former New York Federal Reserve President, released a statement that “President Mr. Obama – backed by the conclusions of a broad range of economists – believes that China is manipulating its currency.” However, Wen Jiabao, the Chinese premier, disagrees. He places the blame for the financial crisis squarely on the ensnared countries. “I think the main reason for this global financial crisis is the imbalances of some of the economies themselves. For a long time they have had double [fiscal and current account] deficits and kept up high consumption based on massive borrowing. It is completely confounding right and wrong when some countries who have been

overspending to blame those who lend them money for their spending.” Wen rejects accusations that China is manipulating its currency, citing that “the renminbi had appreciated 21 per cent since China adopted a managed float of its currency in 2005.” THE BACKGROUND However, before a blame game develops, China’s recent economic developments should be analyzed and a brief history of its reforms reviewed. Many believe that China’s entry with regards to capitalism began with its 1979 economic reforms. Focused on advancing the Chinese economy, the reforms aimed to decrease government planning and direct control while increasing the role of market mechanisms. By decentralizing the economy or more specifically, economic policy-making, enterprises were able to operate and compete on free market principles. Since then, China’s trade and investment reforms initiated a surge in foreign direct investment (FDI). Many economists credit this impressive FDI for much of China’s average 9+% annual GDP growth from 1978 to 2005. Now, the focus is on China’s trade relationship with the United States. Since the late 1980’s, China has run a bilateral trade surplus with

the United States. In 2005, these surpluses grew large enough that the United States’ bilateral trade deficit with China exceeded $200 billion, or over one-fourth of its total imbalance. U.S. imports from China are almost six times as large as US exports to China, implying that future exports must grow six times faster relative to import growth just to keep the bilateral imbalance steady. As of February 2009, China accounted for almost half of the U.S. trade deficit. Now, as the United States economy braces for a recession, consequences of China’s heavy reliance on its exports become clear. THE EFFECT ON CHINA Because of the global trading ties, many countries beyond the United States have felt the pinch of the American recession. In fact, in late January of 2008, former Federal Reserve Chairman Alan Greenspan said, “some form of global recession is inevitable at some point.” However, given China’s significant trade surplus with the United States, economists generally agree that China will be one of the hardest hit. Peking University professor Michael Pettis worries that as the U.S. import demand falls, “there’s a real risk that the Chinese economy will be overwhelmed” as “the U.S. is so much larger than China, and it is adjusting so rapidly.” Much of China’s success in exports can be attributed to its low-margin, low-technology business model. As such, Chinese companies have gained a reputation for producing products lacking in quality, a reputation only strengthened by the latest scandals of poisoned milk and tainted toys. With American business and consumers pulling back on spending

on China’s exports, many Chinese businesses are going bankrupt. For instance, as a consequence of falling demand for its closing exports, Xinji, which is located four hours from Beijing, had closed most of its factories by November 2007. Tens of thousands of workers returned to their villages, and most are now jobless.

AS OF FEBRUARY 2009, CHINA ACCOUNTED FOR ALMOST HALF OF THE U.S. TRADE DEFICIT. CHINA-U.S. RELATIONS This financial crisis has also affected the relationship between China and the United States. As recently as December of 2008, the Wall Street Journal Asia reported talks between the two countries, leading to a mutual support for the financial markets, trade, and investment in both countries. This talk ended in a $20 billion provision in trade financing with the goal of easing the credit-market squeeze that is tightening trade across borders. Vice Premier Wang Qishan, who led the Chinese delegation, said Friday that the two countries have become “interdependent,” so that “improving China-U.S. cooperation is critically important for both countries and for the whole world.” However, trade ties appear to have weakened substantially. As reported in the Washington Post, U.S. Treasury Secretary Timothy F.

Geithner accused China of “manipulating” its currency and, accusing China of using cash grants, cheap loans and other subsidies to illegally aid its exporters. China, in return, has called the ‘“Buy America”’ program “poison to the solution” of the global economic crisis. CONCLUSION The Treasury Department urged China to “re-balance its economy by relying more on domestic private consumption rather than exports and by further developing its financial markets.” It seems that China is heeding the advice. In February of 2009, China took its first steps in regionalizing the Yuan. This was met with approval by researchers such as Zhang Bin, an analyst at the Chinese Academy of Social Sciences, who says, “Making yuan a regional currency will serve China well… it will eventually give China more power in the financial market to match its economic size and foreign exchange reserve levels.” Furthermore, despite the financial crisis, China has pledged to maintain its aid and investment in Africa. From Assistant Foreign Minister Zhai Jun in early February, 2009, “China will honor its commitment to support the development of African countries and continue to encourage Chinese companies to further invest and establish businesses in Africa.” In taking steps like these, China begins the reform called upon by the United States’ policies. As such, a close eye will be kept on China and its changing relations with the United States as the global economy weathers the latest recession. BA

BUSINESS ASIA • Spring 2009 • 7

Cover Feature

Hong Kong: Victims of

Lehman Brothers’ Minibond Fraud

By Felix Lau, Hong Kong University of Science and Technology

Protestors in Hong Kong lay signs in the streets condemning Lehman Brothers and other banks for the Minibond Crisis.

8 • BUSINESS ASIA • Spring 2009

terest yield. As a result, more than 40,000 investors have put 2.01 billion dollars into mini-bonds and other complex derivative instruments. Yet when Lehman Brothers filed for bankruptcy protection on Sept.15 last year, the collective worth of the minibond was of little existing value. UNFORTUNATE VICTIMS TAKE MATTER INTO THEIR OWN HANDS Sympathetic to victims’ difficulties, many local parties offered assistance, in particular, the Democratic Party in Hong Kong. The Democratic Party wanted to gather all the victims to file a class action lawsuit. In March, the investors filed a class-action suit against HSBC and Bank of New York Mellon in hopes of recovering some of their losses. However, the court decided that they should start a civil ligation, which is more costly and risky. On the flip side, other parties criticized

PHOTOGRAPH BY: JENNIFER O’BRYAN SOURCE: HTTP://WWW.FLICKR.COM/PHOTOS/JENNOBRYAN/3327343639

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ith T-shirts labeled “Lehman Fraud”, many victims of Lehman Brother’s minibond incident have been chanting “Give me back my money” in Charter Park and squatting outside government agencies. Though the event has received widespread media coverage, the official response to the victims’ outcry for justice has not been so sympathetic. Victims, mainly composed of the elderly, shed tears and protested in vain. To give a brief introduction: Lehman Brothers minibond is a high-risk, credit-linked note—a form of credit derivative usually sold to corporate investors. However, in Hong Kong, it was sold to the general public and has been put under the category of bond by various investment banks. Without much financial knowledge, the general public was told that minibond is similar to a low-risk bond and therefore, convinced that Lehman minibond is as safe as time deposit but with a greater in-

the Democratic Party for its seemingly selfish intent, which is to promote its own public image. The Hong Kong Consumer Council has not extended its help to the victims yet, even though what the bank did was considered a violation of seller’s integrity. Furthermore, the Hong Kong Monetary Authority, a regulator of the market, is only making minimal progress in investigation. With such unenthusiastic response from the official authorities, the victims decided to take the matter into their own hands; some have set up a website called “Lehman Brothers Victim Group” to update the public about the latest progress on the buyback of the minibond and to raise awareness of the incident. Even though the website has 4,000 visitors a day and 280,000 visitors within the first 6 months, the number of cases handled by the government has amount to less than 10%.

LEHMAN BROTHERS (LEHMQ.PK), 4/1/2008-4/1/2009

QUICK FACTS WHAT IS A MINIBOND?

A high-risk, credit-linked note; a form of credit derivative usually sold to corporate investors.

WHAT STARTED ALL OF THIS?

In Hong Kong, minibonds were sold to the general public and categorized as a bond by various investment banks such as Lehman Brothers.

WHAT HAPPENED?

Lehman Brothers filed for bankruptcy protection on September 15th, 2008 and the minibonds were rendered useless.

37.5

25

HOW MANY ARE POTENTIALLY AFFECTED?

12.5

0

DATA SOURCE: YAHOO! FINANCE

4/1/2008

4/1/2009

THE AFTERMATH It will be a while before consumers restore their confidence in the market. When various Chinese banks announced that they own the minibond, their stock prices immediately plunged more than 10%. Two months after the incident, a special subcommittee was granted power to study the origin of this minibond catastrophe after the initial worries that it would set a precedent for unbridled government interference. The subcommittee can cite executives from banks and have access to relevant internal documents. This could be seen as a ray of hope for the victims that one day their money will be returned. In conclusion, after this unfortunate event, citizens in Hong Kong may have learnt a lesson or two when it comes to buying financial products and more people will start questioning the regulation of financial instruments. To learn more about this incident, please visit the website for the Lehman Brothers Victim Group at http://www.lbv.org.hk/. BA

More than 40,000 investors have invested $2.01 billion of their lifetime savings into minibonds and other complex derivative instruments.

WHAT IS LEHMAN BROTHERS SELLING FOR NOW? As of April 9, 2009, the stock price of Lehman Brothers Holdings Inc. (ticker: LEHMQ.PK) closed at 4 cents a share.Two years ago, the stock price was over $70 a share.

BUSINESS ASIA • Spring 2009 • 9

Cover Feature

INDIA’S FUTURE AMIDST THE PRESENT

FINANCIAL CRISIS By Nik Kumar,

Cornell University

The current financial meltdown has rocked the world but some countries are better geared to weather the storm than others. The emerging economy of India has unique business characteristics and growth drivers for a promising recovery.

10 • BUSINESS ASIA • Spring 2009

PRESENT BUSINESS CLIMATE OF INDIA WITH THE UNITED STATES experiencing the worst financial meltdown since the Great Depression of 1929, the U.S. position as the ultimate economic powerhouse has become rather shaky. The aggressive risk-taking by U.S. financial institutions, high leverage ratios, and ultimately the collapse of Wall Street have led to colossal government bailouts and nationalizations, sending shock waves throughout the global financial markets. While the crisis has rocked the world and left few countries untouched, some nations have been hit much harder than others. Ironically, it has been the sophisticated western markets that have been dealt the hardest blow, evidenced by the fact that approximately 56% of the global write-offs and write-downs by financial institutions have come from the United States and only 8% have come from Asia. Notably, the economy of India, a nation with one of the world’s key emerging markets, is still enjoying a growth rate of 7.1%. While India has fallen victim to the tentacles of financial crisis, the growth is still substantial compared to other ailing economies. It is not difficult to see why India has fared better in a time of crisis. The disintegration of the financial markets in the West was a collapse of the same complex financial systems that made them fiscal titans, built as they were on unearned wealth and high leverage ratios such as uncontrolled consumer debt and rising asset values. As the Russian Prime Minister Vladimir Putin noted at the World Economic Forum at Davos, “the explosion of debt set the pace for rapidly growing personal consumption standards, primarily in the industrial world. We must openly admit that such growth was not backed by a real potential. This amounted to unearned wealth, a loan that will have to be paid by future generations.” In contrast, the emerging markets in Asia, particularly India, have been hit, not because of “unearned wealth,” but rather of its role as a key exporter to the U.S. of service support and label capital (Does outsourcing ring a bell?) As demand from the Western nations shrinks, tourism, textiles, information technology, and foreign investment continue to suffer. However, the fundamental financial prin-

ciples in India are still sound the “The three pillars of because Indian bankthe banking finaning system is cial system—capital, conservative: the governliquidity, and confi- ment and its egulators dence—remain rela- rhave a domitively unshaken.” nant role to play in the banking system with over 70% of assets and liabilities held by government-owned banks, as high as 29% reserve requirement, and over 90% of loans and deposits belonging to domestic category. The three pillars of the banking financial system—capital, liquidity and confidence—remain relatively unshaken. Also, India has one of the highest savings rate in the world of about 33%, primarily due to the fact that the country has no social safety net in the forms of social security, medical, and disability payouts. A natural desire for security, therefore, fuels personal savings. For example, the vast majority of Indians spend their entire lives saving money to buy a house. It is very rare that they will take out loans from a bank and incur debt to finance their lifestyle. The notion of living on credit is a novelty. Another unique feature particular to India is the large remittances it receives from its non-residents living overseas. Approximately 50% of the remittances are used for families’ maintenance, 20% is deposited in bank accounts, 10% is invested in property, and less than 3% is invested in the equity markets. In fact, India is the largest remittance receiving country in the world. These remittances play an integral role in the Balance of Payments and are seen as a stable source of external income. So, in essence, India is by default much more prepared to deal with the crisis.

As the trickle-down effect starts to impact rural India, the growth potential is enormous since more than half of India’s population still lives in the countryside. As India enters this century with more disposable income at hand, it is slowly moving from a producing economy to a consuming one. If the country can be encouraged to consume more, there is unlimited potential for growth. Also, India is a young country; the median age is just 25 years with a large pool of skilled and semiskilled labor entering the spending phase of their lives. However, all these future growth drivers come with a caveat. In the wake of the November 2008 terrorist attack on Mumbai, businesses must consider the persistence of political violence. “Fear of physical danger to employees, executives, and property can muddy the sentiment towards India,” says Gunjan Bagla, a consultant to US companies in India. With the upcoming general elections to be held in May 2009, the world is anxious to see if the new government will take time to focus on policy concerning economic development. All in all, I believe India will continue to show resilience in the face of the global economic meltdown, thus revealing a promising future for the emerging economy. BA

FUTURE GROWTH DRIVERS OF INDIA Since 2003, both corporate and infrastructure investments in India have been stimulating growth in the country. Though the spectacular growth rate may have slowed down in the past decade, it is bound to shoot up. In recent years, a growing middle class with fattened wallets has spurred the overall consumption, which continues to grow at a stable rate of 8% per year. BUSINESS ASIA • Spring 2009 • 11

Investing

Asia Equity Focus: By Zoie Teng, Cornell University

L

INTRODUCTION ast year was a disappointing year for everyone. The U.S. housing market collapsed. The bankruptcy of Lehman Brothers has pratically destoryed investors’ confidence and financial market stability. Fears about further deterioration in the banking sector have also triggered intense deleveraging and unwinding processes, which left major stock indexes in the global financial markets to plummet. For example, MSCI’s Asian Index fell 43 percent in 2008. As the U.S economy had its worst quarterly performance since 1982, contracting at a 3.8 percent rate in the fourth quarter of 2008, it is hard for me to be bullish about the outlook of the financial sector in 2009. In Asia, the talk of the “worst recession” since the Great Depression has become a popular conver-

30

20 15 10 5 0

ROAD TO 2009: BIGGEST CHALLENGE FOR ASIAN FINANCIAL MARKETS SINCE WWII Banking businesses in Hong Kong look grim too. The macroeconomic environAsia outperforms U.S. and World since November 2007 ment has considerably worsened. The continuous net outflows from the domestic equity markets weigh on heavy investors’ attitude towards Asia’s financial markets. These market uncertainties and liquidity concerns have dragged the Hang Seng Index down to around 10,700 to 11,550.

PERCENT PERFORMANCE

MSCI ASIA-PACIFIC EX-JAPAN

12 • BUSINESS ASIA • Spring 2009

MSCI WORLD

S&P 500

SOURCE: THOMSON REUTEURS, NYTIMES

25

sation topic. The Chinese Premier, Wen Jiabao, said in a keynote speech at the World Economic Forum on January 25th, 2009 that “the current crisis has inflicted a rather big impact on China’s economy.” He expects the ongoing financial market turmoil will continue in 2009, particularly in the first and second quarters. If the trading environment in Asia remains negative, will there be a second wave of the global financial crisis, as warned by the Hong Kong Monetary Chief Joseph Yam Chi-kwong? More importantly, when will be the best time to invest in the Asian equity markets and what are the most valuable investments in these current market conditions?

Total Deficit or Surplus as a Percentage of US GDP: 1970-2019

SOURCE: CONGRESSIONAL BUDGET OFFICE

EXTERNAL: WEAK MACROECONOMIC TRENDS AND CASH DRAINAGE FROM CHINESE MARKETS The significant worsening of the macro environment in the U.S. has made Asian equity markets much more volatile in the short run. The ISM Manufacturing Index, a key index that measures the U.S.’ manufacturing activity, plunged to a record low in December. With the bigger-than-estimated drop in U.S retail sales and the concern that the unemployment rate is on rise, U.S. consumer spending is likely to deteriorate over the next three to six months. In mid-February, the financial epidemic spread to Eastern Europe. The dwindling confidence concerning the extent of bad loan risks faced by the biggest banking institutions has prompted currency devaluation and sell-off of bank stocks in eastern European countries. Furthermore, China equity funds have experienced a net outflow of USD $0.73 billion since 2007, according to Nomura research data. These figures indicate that liquidity in the Shanghai A-share market continued to contract in February, fueling concerns that more money will flow out of the domestic equity markets. The upside potential in Asian stock markets will be limited in the first half year given the difficult economic environment with high underlying uncertainty. INTERNAL: FALLING CORPORATE EARNINGS AND THE STRUGGLE OF MANUFACTURING BUSINESS While major companies in Asia reported biggerthan-estimated loss in earnings in the past few months, we still see scope for further earning losses in coming days, according to Po Wing-ho, the director of Credit Suisse APAC Asset Management. He stressed that net profits of some Chinese corporates have been overestimated by the market, as he expect to see a downward return on equity (ROE) adjustment from 17 to 12 per-

cent. I believe that such corporate earning risk will remain a big obstacle for a turnaround in the domestic equity markets. The survival of manufacturing business in China will be another delay for a turnaround in the China equity markets. According to rough official estimates, small business in China accounts for about 60 percent of China’s GDP, and employs about 70 percent of the country’s labor force. However, 62,400 companies in Guangdong, a manufacturing and trade hub in China, have shut down in 2008. If the situation continues to get worse, we would expect to see more downside risk in China. CAN THE GOVERNMENT’S ECONOMIC STIMULUS PLAN SAVE US? On January 28, the House passed an US$816 billion stimulus package to help shore up the financial system. The US stocks rallied after President Obama announced a “Bad Bank Plan” which would help clean up toxic assets that are currently held by American banks. Moreover, the Chinese government unveiled a US$586 billion fiscal recovery plan, providing credit support for manufacturers of ten sectors, which includes housing, rural infrastructure, auto car, and steel. It is hoped that these fiscal spending, taxcuts and measures that create jobs for people would help alleviate the negative effects of jobless problems and other macro weaknesses, making the outlook for Asian equity markets more promising. So, the question now becomes: can we depend on the government plan to stop the global recession from deepening? The answer is not necessary. The key driver in this current market conditions is liquid-

Investors may want to pay special attention to the Chinese markets, as they are believed to be the key for recovery growth during this period of economic uncertainty. ity. However, the market now becomes a very dynamic place and has so many uncertainties compared to the past. We are unsure about whether the BUSINESS ASIA • Spring 2009 • 13

TO STATES, INCLUDING MEDICAID REIMBURSEMENT

$39B

TO LOCAL SCHOOL DISTRICTS & PUBLIC COLLEGES

$30B

TO EXTEND HEALTH INSURANCE COVERAGE TO UNEMPLOYED

$30B

FOR HIGHWAY CONSTRUCTION

$27B

FOR UNEMPLOYMENT BENEFITS

$12B

14 • BUSINESS ASIA • Spring 2009

25.0%

POST-DISASTER RECONSTRUCTION

9.3%

RURAL DEVELOPMENT AND INFRASTRUCTURE PROJECTS

8.8%

ECOLOGY & ENVIRONMENT

7.0%

AFFORDABLE HOUSING

4.0%

INDEPENDENT INNOVATION

1.0%

HEALTH, CULTURE, AND EDUCATION

SOURCES: NEW YORK POST AND U.S. GLOBAL INVESTOR, INC.

TRANSIT AND RIAL PROJECTS

45.0%

RAILWAYS, HIGHWAYS, AIRPORTS, AND POWER GRIDS

BREAKDOWN OF CHINA’S $580 BILLION STIMULUS PACKAGE

HIGHLIGHTS OF U.S. $825 BILLION STIMULUS PACKAGE INTRODUCED BY HOUSE DEMOCRATS

$87B

Obama administration’s economic stimulus plan will be passed by the Congress. It is even more difficult to gauge whether the balance sheets of the world’s biggest banking operations have been cleaned up. Many investors now prefer to sit on cash amid market uncertainty or are still nursing their wounds from last year’s market onslaught. These fears can make Asian businesses contract further in the coming year, which in turn lead to even greater fear. The vicious cycle might last for a long time. As Ben Bernake, the former Chairman of Federal Reserve Bank, cautioned, “fiscal stimulus alone would likely not be enough to prompt a recovery in the economy”. Given the current difficult environment, the equity markets in Asia are likely to be quite volatile in the next few months. However, I expect to see more upside potential in the China and Hong Kong equity markets, taking into account the country’s economic growth potential and the oversold levels. I would suggest investors to stay cautious and pay close attention to signals of market stabilization such as positive economic outlook, improved profitability for 2009, balance sheet cleanup for most financial institutions, and further government stimulus policies. Investors may want to pay special attention to the Chinese markets, as they are believed to be the key for recovery growth during this period of economic uncertainty. Hopefully, investors’ confidence improves as the year unfolds and we will have some good news to share by then! BA

Investing

Good News in Bad Economy:

the Philippine Economy Remains Strong By Aaron Vasquez , New York University

T

he domino effect triggered by the U.S. subprime mortgage crisis has crippled many countries’ economies on its path of destruction. Indeed, very few have been spared. Nonetheless, there are some lucky ones. The Philippines has been growing rapidly in recent years, and though it has been affected by the current financial crisis, it is better positioned than many of its Asian neighbors to weather the current financial crisis. In 2007, the Philippine economy grew by 7.5%, the fastest rate in almost 31 years, but as the economic downturn spread around the world, GDP growth in 2008 slowed to 4.5%. In 2009, the Philippine government is forecasting a similar growth rate of 4.4%. Unlike most countries in Asia, the Philippine economy is driven more by consumer demand than exports, with consumer spending contributing about 70% to GDP, compared to about 30% of GDP for China. So, Philippine consumers are greatly benefiting from slowing inflation. This spending is also bolstered by overseas remittances, which make up about 10% of the economy. These remittances come from workers employed in relatively stable industries, such as healthcare. In fact, in February, remittances grew by about 5% compared to last year. Domestic tourism is also seeing growth as more Filipinos take fewer vacations overseas. The local hospitality industry is expected to see growth, and according to the Philippine Department of Labor and Employment, over 3,000 job openings are expected. Many international hotel companies are continuing 15 • BUSINESS ASIA • Spring 2009

with their plans for expansions in the Philippines, with Fairmont Raffles Hotels International planning a high-end Raffles Hotel and Residences in Makati and Shangri-la planning a new hotel in nearby Bonifacio City. The largest property developer in the Philippines, Ayala Land, is also keeping its capital expenditures for 2009 relatively unchanged from last year, falling just 5%, from 18.9 billion PHP to 17.9 billion PHP, and the largest mall operator, SM Prime Holding, is planning to build 3 new shopping malls, 16 new supermarkets, and 5 new hypermarkets in 2009, growing at a faster rate than last year. The Philippines has not been as badly affected by the crisis, because in addition to growing through consumer demand rather than the exportdriven growth of many of its neighbors, its has had conservative lending policies and has shunned away from complex derivatives, which has made up less than 1% of banking assets in the Philippines. Even though the Philippines is not gasping for air in the current global economy, it still faces its share of problems. Its infrastructure needs major upgrades, and the poverty rate still hovers at around 30%. To combat these problems, the Philippine government plans to create 800,000 new jobs through its 300 billion PHP stimulus package that will focus on building infrastructure, improving its social services, and cutting taxes. BA BUSINESS ASIA • Spring 2009 • 15

Technology

Rise of the Digital Dragon By Eugene Huang, Cornell University

10.2%. 11.1%. 11.9%. These statistics represent the phenomenal real annual GDP growth rate of China over the past 3 years. In comparison, these figures over the same period for the United States were 3.2% , 2.9% and 2.0%. This can perhaps give you an idea of the rapid pace that the Chinese economy had been expanding at throughout the past few years. With a population of more than 1.3 billion, China currently houses the largest number of people in any country around the world. Add to this the population statistics of other countries with a predominant Chinese population, these figures represent a significant proportion of the world’s population. Given that the information technology space within the Chinese community is relatively undeveloped compared to its American and European counterparts, there is certainly much opportunity for gain and profit for those who venture into the industry. One of the pioneer companies which has rose above the competition and positioned itself as an established name within the Chinese IT space is Baidu. Baidu (Chinese: 百度) is the leading Chinese search engine for websites, audio files, and images. While Google is a prime choice for any eager user of the internet in the Western world, Baidu can most definitely be considered its Eastern counterpart. Many parallels have been drawn between both companies – the most obvious being the uncanny resemblance of the start page of both search engines. On December 2007, Baidu became the first Chinese company to be listed on the NASDAQ. It offers 57 products and services including an online collaboratively-built encyclopaedia (Baidu Baike) similar to the offerings of Wikipedia, and a searchable keyword-based discussion forum. 16 • BUSINESS ASIA • Spring 2009

INCREASING POPULARITY AS A SEARCH PORTAL The increasing popularity of Baidu is evident in recent data collected by Comscore, which measures the search query volumes in China and the United States. These detailed statistical reports reveal that Baidu had replaced Google as the most popular country specific search engine in the world in the past year. While Google amassed 7.398 billion searches in August 2008, Baidu had 7.406 billion searches in July 2008 within the Asia Pacific region. BEYOND SEARCH CAPABILITIES: THE BUSINESS OF ADVERTISING AND E-COMMERCE To make things even sweeter for Baidu, its growth is not solely limited to search functions. In addition to its core competency as a search portal, advertising represents an important source of revenue for Baidu. As revealed on its website, since starting on Au-

Pure coincidence?

gust 1st 2007, the Baidu Union ad network now claims more than 1 billion daily ad impressions or around 30 billion a month. The ad network has exhibited tremendous growth over the 18 months since its inception. Furthermore, Baidu has plans to enter the ecommerce and online payment business in China soon to leverage and benefit from its extensive user base and search traffic. In preparation of its e-commerce plans, Baidu has already established a new online payment service called Baifubao, offering similar services as Paypal to the Chinese market. As of September last year, an impressive number of 40,000 businesses have already signed up for the beta test of their new e-commerce platform. Given China’s immense economic potential and its largely untapped e-commerce market, it appears this venture taken out by Baidu would very likely be a winning one as well. ISSUES WITH COPYRIGHT INFRINGEMENT Having said all of the above, we must however, note that Baidu has, at the same time, been battling a whole slew of legal charges over issues concerning illegal music downloads. In more recent times, the state-owned China Central Television exposed that Baidu had adopted fraudulent high cost-per-click advertisements as its search results and boycotted smaller websites which did not opt in to its advertising programs. All these ethical issues have certainly made a significant dent in Baidu’s name and raised concerns over its sustainability.

IN PICTURES ASIA IS THE LEADER IN INTERNET SEARCHING TRAFFIC UNIQUE SEARCHES (WORLDWIDE 100%)

TOTAL SEARCHES (WORLDWIDE 100%)

34%- ASIA- 33% 28%- EUROPE- 29% 27%- N. AMERICA- 26% 7%- S. AMERICA 8% 4%- MIDDLE EAST & AFRICA- 3%

TOP 5 SEARCH ENGINES (WORLDWIDE: 61,036 MIL SEARCHES) AS OF AUGUST 2007

GOOGLE: 37,094 MIL (61%) YAHOO: 8,549 MIL (14%) BAIDU: 3,253 MIL (5%) MICROSOFT: 2,166 MIL (4%) NHN: 2,044 MIL (3%)

SOURCE, COMSCORE

BOTTOM LINE While Baidu’s entire arsenal of new and exciting products and services promises great potential in the future to come, its alleged unethical business practice may very well prove to be its greatest misgiving. What’s important is that the management at Baidu come clean with their business practices and regain the trust of both its investors and the public. So long as this is fulfilled, who is to say that this Chinese Dragon is not going to take the Virtual World overtake Google as the biggest name in the digital realm in the near future? BA

BUSINESS ASIA • Spring 2009 • 17

Real Estate

Tale of Two Cities: Shanghai and Hangzhou Real Estate

By Christy Ai and Barbie Hsu, Cornell University

T

he discrepancies between the major cities and rural areas in China are shocking to many first-time visitors. On one hand, you have modern skyscrapers overlooking spacious boulevards in Shanghai. On the other hand, you have rural areas suffering from extreme poverty and inadequate infrastructure far away from the coastline and commercial hubs. Therefore, it shouldn’t come as a surprise that everyone wants to live in the city. Because the demand is more than the supply can satisfy, the housing prices in major cities has become exorbitantly high in recent years. Take Shanghai for instance. It is the glamorous commercial center in China, Beijing being the cultural and political center. As a result, Shanghai is compared to New York City for its cosmopolitan nature and bustling commercial areas. Many major international corporations which want to take advantage of China’s growing economy see Shanghai as a gateway to China and have acted accordingly. Of the Fortune 500 companies over 300 has established their Chinese headquarters in Shanghai. Also, consumers in Shanghai have greater spending power than the rest of the country and are more receptive to international brand 18 • BUSINESS ASIA • Spring 2009

names. Many comparisons can be drawn between Shanghai and N.Y.C. Shanghai is organized into rings while N.Y.C is divided by districts. Socio-economic hierarchy goes hand in hand with the mapping of the rings or districts. Just like Upper East Side, the Inner Ring is for the rich while the Outer Ring away from the city center is for the working class. Workers who live in the Outer Ring often have to spend two hours on road to get to work. The price difference in these two areas is drastic. The average value of real estate is about $800/square foot in the Inner Ring. At the border between Shanghai’s Inner and Outer Ring, housing price goes for about $500/ Of the Fortune 500 square foot, and World, over 300 of the once you reach company’s overseas the outskirts of Shanghai, housHeadquarters are ing price immedilocated in Shanghai. ately drops down to $100/square foot. Commercial space is also selling fast in Shanghai. For example, the Shanghai World Financial Cen-

ter was a popular hit among investors. $1000/square foot with some goLocated in Pudong, the commercial ing as high as $2000/square foot. Hangzhou was voted center in Shanghai, the building is a As Shanghai’s elites bid on the limited showcase of grandeur and modernity. lakeside view, the housing price is exas Number One Designed by Kohn Pederson Fox, it Best Place to Live in pected to keep on rising for years to consists of 101 stories and stands 1,614 come. Asia by the United feet tall. There are many buildings like Though investors seem opthis, yet what is most surprising in the timistic about Shanghai and HangNations, and this light of economic downturn back then publicity added to its zhou’s real estate markets and expect is that 40% of the seventy-floor office a hefty return on investments, propvalue. space was already reserved at its openerty markets in Asia have generally ing on August 28th, 2008. This kind slumped in recent months. Based of market behavior also applies to on Real Capital Analytics numbers, other commercial real estate marthere has been a dramatic decline in kets. According to Financial Times’ sales – 68% in the third quarter from Daniel Thomas, Grosvenor, a proplast year. Since then, new regulations erty company owned by the Duke of in China were also created to prevent Westminster, has committed $600 million for shopping “speculation and land hoarding” and Asian banks are centers in China. being more cautious in giving out loans. All these fac Just two hours from Shanghai, Hangzhou is tors are further reducing the volume of property sales. a mid-size city famous for its natural and architectural At the end of the day, the story of rising housscenery. It is often considered the private backyard re- ing price demands an explanation: investors are flocksort for the Shanghai elites who want to occasionally ing to China because they believe in its high growth get away from the bustles of the city life. Known for potential. With over 1.3 billion people, China is desits tranquility and breathtaking view, the area near the tined for economic growth due to the size of its popuWest Lake (XiHu) has been attracting developers and lation alone. As people make more money, they would consumers alike. Don’t be surprised! These resort homes have more dispensable income. They will want more can ask for a higher price than the first-tier apartments consumer goods, more shopping malls, and of course, in Shanghai. The apartments within walking distance more office space for burgeoning businesses. BA to the West Lake have an average selling price of about

Hangzhou, the capital of Zhejiang province, is a 2 hour drive southwest from Shanghai.

BUSINESS Spring2009 2009••19 19 BUSINESSASIA ASIA••Spring

AUTHORS’ BIOGRAPHIES

Where is China’s Real Estate Market Heading? by Professor Peng Liu, Ph.D., Cornell Univeristy and Haibin Lin, Managing Director of Shanghai Foresight Investment Management Co. Ltd. Translated by Ivan Au, Cornell University

Dr. Peng Liu, Assistant Professor of Real Estate and Finance, joined Cornell’s faculty in 2007 after obtaining a Ph.D. in finance and real estate from the Haas Business School at University of California, Berkeley. Prof. Liu teaches real estate and Securitization and other Structured Financial Products for newly created Minor of real estate at Cornell. Professor Liu is affiliated with the Center for Real Estate Finance, Program in Real Estate, and the East Asia Program. His primary research focuses on asset pricing and hedging in the real estate market. Prior to his career in academics, Prof. Liu worked in various industries, including engineering, advertising, consulting and hedge funds.

Mr. Haibin Lin, Founder and Managing Director of Shanghai Foresight Investment Management Co. Ltd. The company is a boutique real estate investment bank, focusing on real estate investment strategy, M&A and corporate finance. Before founding the company, Mr. Lin worked GIC Real estate, a Singapore based real estate investment firm, and real estate development companies such as China Resources Land and Hutchison Whampoo. Mr. Lin received MBA from the Haas Business School at University of California and M.S. & B.S. of civil engineering from Tsinghua University.

20 • BUSINESS ASIA • Spring 2009

Many Chinese millionaires and billionaires were born out of the real estate boom in the past decade. Though the immature housing market has been dealt a blow by the current economic crisis, we can still expect a recovery in the near future. I. CHINA’S REAL ESTATE MARKET IS CURRENTLY UNDERGOING THE LARGEST ADJUSTMENT IN THE DECADE China’s real estate market entered a Golden Era. After China cancelled its welfare housing distribution system, housing sales has been soaring at an average annual growth rate of 23%. It was not a rare sight to see people lining up outside of a new apartment building with straight cash for down payment. As a result, the real estate industry has become an essential backbone of the Chinese economy. Since the end of 2007 though, the housing market has encountered some problems along its path of glory. National housing sales have declined by 29% in 2008; in the ten largest cities such as Shanghai and Beijing, housing sales further have shrunk by 50%. Statistics indicate that the housing price has already begun to fall from its peak in November 2007. For example, Vanke, the largest real estate developer in China with 2.34% of market share, has seen its prices decline from RMB 1,040 per square foot to RMB 720 per square foot. The severity of this adjustment has been reflected by the Real Estate Industry Confidence Index. The index dipped during the third quarter in 2008 as the land market experienced major volatility. Until the end of 2007, land price increased exponentially and available land was a rather rare commodity in many cities. Today, there is only minimal participation in land auctions. The second-half of 2008 witnessed large amounts of failed auctions from the lack of bidding, resulting in plunging land price.

In 1998,

II. WHILE THE CAUSE OF THIS ADJUSTMENT HAS NO DIRECT RELATIONSHIP WITH THE SUBPRIME MORTGAGE MARKET, SUBPRIME MORTGAGES HAVE INSTIGATED GLOBAL ECONOMIC VOLATILITY, INCREASING THE INTENSITY AND DEGREE OF THE ADJUSTMENT IN CHINA’S REAL ESTATE MARKET The financial real estate market in China is not equipped with the infrastructure necessary to create subprime mortgages. First, the China’s

Private Residential Housing-Supply, Demand, and Price from CEIC, J.P. Morgan estimates

real estate financial products are extremely simple. Mortgages securitized by long term floating interest rate are the dominant product. There are no complex mortgage products, and certainly not mortgage backed derivatives. Furthermore, as property prices continue to increase, the China Banking Regulatory Commission would continue to increase the amount of down payment required by the bank and restrict the mortgage lending policy. Lastly, unlike the United States, China has maintained its benchmark interest rate at 5% for the past few years. In October 2007, China began to implement a set of policies to restrain the rapid growth of the housing prices, initiating the current round of adjustments. Based on the timeline, the adjustments are not related with the subprime mortgage crisis itself. Moreover, the main reasons behind the increase in prices are the soaring demand for housing and the skyrocketing stock prices due to a surplus of liquidity. Although subprime mortgages do not have any direct influences on the Chinese real estate market, the subprime mortgages have severely affected the Chinese economy, thus starting a domino effect. The weakened economy has caused demand for housing to shrink. On the flip side, the government introduced a new set of policies to stimulate the real estate market in October 2008. This policy may possibly speed up the volatility in the real estate industry. III. THE CHINA REAL ESTATE MARKET IS GENERALLY HEALTHIER THAN THE REST OF THE WORLD, AND IS EXPECTED TO RECOVER WITHIN THE NEXT TWO YEARS The basic need for housing is far from satisfied. Due to urbanization and change in household structures, by 2025, the population residing in Chinese cit-

Real Estate Entrepreneurs Confidence Index from the China National Statistic Bureau

ies will increase by 350 million, of which 240 million are new immigrants. Additionally, the number of people per household continues to decline, further increasing the demand for housing. Another basic need is the unprecedented demand for improvement in living standards. Despite the 10 years of development, 75-80% of families in first and second tier cities currently still reside in welfare residences constructed by the government prior to 1998. Both of these basic needs account for almost 80-90% of the current residential demands, and are most likely to persist into the future. Fortunately, the high overall savings rate in China guarantees household spending. At the end of 2008, savings rate among the Chinese people reached RMB 22 trillion dollars, growing at 25.7% compared to the same period last year, making up 74% of China’s GDP in 2008. Lastly, while residential prices have increased rapidly in the past few years, disposable income per capita has also simultaneously increased. Yet, housing affordability had only worsened between 2003 and 2005. But rest assured, since the gap is not considerable, the housing affordability would quickly rebound to the historical average within the next two years of adjustments. Generally speaking, the Chinese housing market is relatively healthy. Right now, the main disease is the surplus of residential inventory that only time itself would cure. Once the inventory returns to a reasonable level, the rising momentum of housing prices will be revived. Among the six largest cities, five of them experienced an increase of 50% in residential inventory level compared to the same period last year. As a result, these inventories have strained the cash flows for many developers, forcing developers to reduce prices. After prices reduce, the deal BUSINESS ASIA • Spring 2009 • 21

Property Sales Volume from Centaline

Housing Affordability

from CEIC, J.P. Morgan estimates

flow will hopefully recover. The length of this adjustment process depends on the inventory of each city and is predicted to take around half a year to a year and a half. IV. AFTERTHOUGHTS The current subprime mortgage crises will probably change the structure of China’s real estate investment funds. Around 2005, a large amount of investment flowed into the real estate industry in China, one of the big four emerging markets. In contrast, due to government regulations, there were almost no Chinese real estate investment funds from mainland China as of 2005. Nonetheless, the number of Chinese real estate investment funds has been steadily growing. Though international real estate investment funds entered the Chinese market in the early 90s, most of them have remained relatively small in size and only a handful have become big market players, i.e. GIC RE, Deutsche Bank, and Morgan Stanley. As of 2008, around 40 international investment funds were active in the Chinese real estate markets. The foreign investors have been hit hard by the U.S. financial crisis, which has led many companies to lower their prices or even abandon properties earlier purchased. Mass layoff has become a common trend among these companies all the while China introduced new policies regarding investment funds, giving a head start to investment funds with a strong background in China such as CITIC Capital and Everbright Alam. As foreign-owned investment funds shrink and mainland China funds grow, we might be in the process of witnessing the reshaping of China’s real estate investment funds industry. BA

NEW MORTGAGE LENDING POLICY JUNE 2003

No-less-than 20% down payment ratio for the purchase of the first self-use housing unit

MAY 2004

Mortgage ceiling reduced to 70% for the second property and mortgages no longer provided

SEPTEMBER 2004

Monthly mortgage repayment limited to 50% of household income

JUNE 2006

Residential buyers are required to pay at least 30% of purchase price as down payment

OCTOBER 2007

PBoC and the China Banking Regulatory Commission have annouced to impose new policy new real estate lending and credit policies aimed at quelling speculation through mortgage controls. The policy will increase down payment requirements for secondhome purchasees to 40% from the current 30%, and raise mortgage rates to 1.1 times the benchmark one-year lending rate on Sept, 27, 2007. Down payment rules for additional properties would be determined by individual commercial banks.

OCTOBER 2008

1. Deed tax cut to 1% from 1.5% 2. Suspension of stamp duty (0.5%) 3. Down payment requirement for first time home buyers lowered to 20% from 30% 4. Mortgage rates for first-time home buyers lowered to 0.7 of PBoC benchmark rates

22 • BUSINESS ASIA • Spring 2009

Real Estate

Risks in China’s

Housing MarkeT

by Ivan Au & Jeremy Vasquez, Cornell University

In the long run, what are the underlying risks in China’s housing market? We sat down with Professor Liu as he further explained the unique characteristics of this market. BA: Business Asia PL: Peng Liu BA: What risks do you think are unique to the real estate market in China? PL: The most important risk is the forward risk associated with pre-completion sales. Selling before completion is a characteristic of developing real-estate market s in emerging countries. This market phenomenon takes place because it is beneficial for both sides. Developers want to minimize the risk of being unable to sell out all their units and consumers want to lock-in the pricess to hedge against potential increases later on. Usually, homes are delivered in about a year, during which the prices can double. For the developer, there has yet to be a mature mortgage market in China. For the consumer who have been historically assigned welfare housing by the government, taking out a mortgage

loan is a completely novel concept. As a result, such loans were not readily available in China. Right now, the most pressing issue is that the real estate market in China has leveled out as housing prices expect to fall further. Many buyers have chosen to walk away after placing their down payments and the banks do not want to be liable for mortgage defaults when all they can get are half-completed construction sites. BA: What is the nature of the commercial real estate market in China? PL: The commercial real estate market in China which includes hotels and retail malls is still in its early stage. There is a lot of demand from foreign investors who are looking for investment opportunities, but unlike the United States which has publicly traded real estate investment trust (REITs), the system lacks transparency and investors don’t have sufficient information for BUSINESS ASIA • Spring 2009 • 23

historical income and transactions. The only information available is from consulting firms. Instead of having access to public information at your fingertips, you would need to ask a local consulting company for information on comparable transactions in the past. BA: What type of real estate is apt for quicker recovery- residential or commercial? PL: Residential real estate will recover relatively sooner. The current adjustment is due to overpricing. The demand is not the problem; the affordability is the main concern. As price adjusts, there is a lot of waiting demand. Commercial properties normally have long-term leases so they lock in expenses for the tenants. Therefore, I do believe that it is going to recover at a slower pace. Tenants who want to secure another long term lease would want to wait and spot a sign of recovery before locking themselves into any kind of contract. In a sense, there will be a response lag. BA: Do Chinese consumers take as much pride in home ownership as Americans do? PL: The U.S. government encourages homeownership because it sees residential homes as the cornerstone for a stable social structure. Therefore, it extends favorable mortgage terms to most people, sometimes unfortunately to individuals with subprime credit. But in China, I would say that the majority of Chinese population are not homeowners. Nonetheless, they do greatly value home ownership and the turnover rate is low in many Asian countries. The average relocation rate in the United States is about every 4 years while that in China is much less frequent. People just don’t like to move and they stay fixed in one place for a long period of time. One similarity between the U.S. and China is that the middle class views second homes in suburbs as a way to iconize its success. Especially with most major cities being heavily populated and expensive, people definitely would like to buy a spacious second home somewhere in the suburb. The only thing holding them back asides from monetary restraint is the lack of proper infrastructure. As a result, the growth in that area is limited for now. BA: What role do local governments play in improving the regional real estate market? PL: The goal for the local government is to stabilize the local economy and to maximize employment opportunities and GDP growth. Right now, the Chinese government likes to have centralized power. If it wants real 24 • BUSINESS ASIA • Spring 2009

estate properties in a certain area, it would extend favorable tax rate in the area to encourage investors. In contrast to the U.S., a local government in China has rather limited power. BA: In the wake of this financial crisis, will Chinese banks become even more conservative in their lending to the real estate developers? Will there be any consolidation in the real estate industry as poorly-funded developers get driven out? PL: Chinese banks, especially state-owned enterprises, don’t like to deal with non-performing commercial loans. For these non-performing loans, banks sometimes cannot even get the principal back. The only reason for which the banking industry was eager to lend is because the housing prices were soaring and borrowers were paying on time. However, the credit system is still immature. For example, credit cards were rare in China until 2005 and banks didn’t like to share information with one another. There is nothing like a FICO score. Furthermore, though the ratio of loans allocated to real estates is growing, it is still under 10%, which is far less than the U.S. ratio. The global financial crisis is affecting lender behavior as banks realize the potential amount of risk underlying each transaction. There is also a heated debate as to whether China should have a securitization market, where cash flows are securitized. Indeed, it has even attempted to do so with the first mortgage-backed security (MBS) deal in China issued in Shanghai. However, the demand for such financial product is minimal. In general, banks want real estate loans on their balance sheets because they generate more income than other business loans. Up until two years ago, there were no shorts and options. Therefore, there are fewer ways to hedge risks. Maybe, it is a good thing that there aren’t that many complicated derivatives to confuse people, but China should have the fundamental financial instruments, such as credit swaps and options. That being said, China should also learn the lesson from the United States: don’t rely on the complicated, exotic derivatives too much. Though these derivatives can increase liquidity and help hedge risks, they can also be lethal at times. BA Professor Liu has also co-authored a more detailed explanation to the real estate market in China. The article “Mortgage Prepayment and Default Behavior with Embedded Contract Risks in China’s Housing Market” can be found in the Journal of Real Estate Finance and Economics, Vol. 38, No. 3 2009.

Note: The Chinese Character in the background image means fortune

Mainland China:

Home of 106 Billionaires and More than 800 Million Poor

ARTWORK BY: MICHAEL KUO SOURCE: HTTP://CHRONICLES1289.DEVIANTART.COM/ART/CALLIGRAPHY-41569166

By Christy Ai, Cornell University

“To

get rich is glorious,” said Deng Xiaoping, former leader of the People’s Republic of China. And glorious it is, China is home to more billionaires than anywhere else, except the United States: 106 billionaires to date (in U.S. Dollar). Members of this elite circle in China buy body lotions that are more costly than gold of equivalent weight , dine at Japan’s Liao Li where 15 courses are served with one-of-a-kind antique utensils and finish the day with a hefty million-dollar bet at the Hong Kong Horseracing Club. One thing is for

sure—China’s elite definitely knows how to enjoy life. But what about the rest of the population? There are more than 800 million poor in the countryside, making a living off farming and other labor-intensive occupations. Farming provides food but very little cash, and most farmers do not get social security. Therefore, they must save and budget carefully in case of emergencies. Even worse, the weather can wreak havoc without notice in advance. For example, this year’s snowfall destroyed almost 3,000 square miles of crops, leaving many families in desperate need of food and money.

GROWTH AND INEQUALITY History has shown us that a wide income gap poses serious dangers to society. Excessive inequality raises crime rate and stifles potential economic growth. Latin America and the Philippines are classic examples where growth has been stymied by a high Gini ratio, a measure of inequality of the wealth distribution. China’s Gini ratio is currently almost on par with that of Latin America’s – is it in danger of falling into the same trap? China has many inherent problems and inequality often

26 • BUSINESS ASIA • Spring 2009

follow their path. OPPORTUNITIES Though income inequality is prevalent, social inequality in China has diminished considerably. Today, women have fought their way to the foreground, as evidenced by their increasing power in business. Two women lead the rich on the 2008 Hurun’s List: Yang Huiyan, 26, and Zhang Yin, 50. The majority shareholder of property developer Country Gardens, Yang Huiyan becomes the first Chinese to pass the USD $10 billion

The rich have now realized that income inequality is a real part of life and may end up threatening the social stability and unity of China. benchmark with her massive wealth of USD $17.5 billion in assets, making her the richest woman in Asia. It’s a classic rags to riches story but with a twist of inheritance. Her father Yang Guoqiang started to acquire land at the bottom of the market in the mid 1990’s and worked his way up to almost 60% of Country Garden, whereupon he then transferred his shares to his daughter, Yang Huiyan. Zhang Yin, the richest selfmade woman in the world, is the first woman to top the Hurun List in

2006. Born in a modest household in Northeastern China, she set up a waste-paper trading business in Hong Kong and became the top exporter of scrap paper. Through her hard work, she has tripled her majority share in Nine Dragon Paper to USD $10 billion this year. Currently, the rich in China are growing at a faster rate than their Western counterparts. Property development and manufacturing are the two greatest contributors to this recent surge in wealth, both of which are primarily based in Guangdong. However, while these businessmen are making their fortune in Guangdong, we also need to see the flip side of the coin. The minimumwaged, 70-hours a week, factory workers are sending their hard-earned money back to their impoverished homes in the country side and fighting an ageless battle against poverty. For sure, the underdeveloped and loosely regulated economic environment in China presents plenty opportunities for today’s sharp and ruthless young entrepreneurs who hope to become the next billionaire. But, will this generation help to close the gap between rich and poor? The future of China will be largely dependant upon their decisions. BA

FROM LEFT: THE DAILY MAIL, CHINA DIGITAL TIMES

serves as the scapegoat. Rural poverty in China is a real problem, and will continue to be a problem whether the billionaires splurge on $2,000 t-shirts or not. Unemployment, central budget control, and lack of social security are other fundamental problems that many blame inequality for. While no one can deny the link between wealth inequality and social unrest, many of China’s problems are fundamental and based more on social class than wealth. Among other things, the rich have now realized the income inequality is a very realistic part of life and may end up threatening the social stability and unity in China. While they continue to lavish themselves with L’Occitane en Provence and Mont Blanc, some are beginning to take social responsibility seriously. In 2008, a total of USD $9.4 billion was contributed by the elite in China to alleviate the problem of unemployment within struggling families. The contributors include Yu Pengnian who contributed USD $420 million to health and higher education and Zhu Mengyi who contributed USD $158 million to poverty alleviation, health, and education. They remember their humble beginnings and are now giving back to society. Hopefully, their actions will inspire others to

Lifestyle

Doctor's Orders: Check Out Aurum By Wes Yiu

PHOTOGRAPHS BY ROBERT STEINER

“There are many things that make Singapore a popular food destination. These include the culture, the tastes, and the variety. In an effort to keep pace with other hot-spots of delectable cuisine, Singapore enters the fray with its restaurant Aurum. In Latin, the term Aurum means gold, giving the restaurant a hip and stylish feeling, geared towards attracting the young adults crowd. Once you step inside, you will embark on an unforgettable journey, witnessing innovative ways that dinner can be prepared and served.”

Famous for the eccentricity of its food, Asia is a paradise for gourmet diners who are seeking exotic tastes. In recent years, the presentation has also taken on an unconventional touch: the famous toilet restaurant in Taipei, the jail-themed brasserie in China and the hospital-themed eateries in Singapore. In an effort to keep pace with other hot-spots of delectable cuisine, Singapore enters the fray with the restaurant Aurum – pairing food and medical surgeries. As you step inside, you will embark on an unforgettable journey, witnessing revolutionary ways in which dinner can be prepared and served. Once you step inside, you will immediately find the lavish restaurant stays true to its name. In Latin, the term Aurum means gold, giving the restaurant a hip and stylish feeling, which is geared towards attracting the young adults. There is no shortage of gold in the restaurant, from its wallpaper to its noticeable gold-plated dining chairs that are actual wheel-chairs. Yes, they are fully-functional and even come equipped with a locking mechanism to keep you in place (I tested them out personally). To some, the whole restaurant setup seems a little unnerving. The dining tables are cold, slick, silver operating tables

that one would be placed on if undergoing surgery. The tables might give diners an ominous feeling that they are about to “go under the knife.” Moreover, silver utensils are located in drawers in the operating table— drawers that are usually reserved for scalpels and other surgical tools. Given the restaurant’s décor, I cannot help but wonder if elderly patrons should walk in expecting to be given sponge baths by the staff. The restaurant is treading in dangerous, uncharted waters with its extremely macabre theme. Singapore is known for its large Chinese population. As a person of Chinese lineage, I can say that Aurum’s ap-

BUSINESS ASIA • Spring 2009 • 27

was the intent of the restaurant itself given its hospital theme. The Welcome Chrysanthemum Tea is s not tea in a traditional sense. Instead, the tea is encased in gelatin and served on a tablespoon, evoking the familiar memory of being fed cough syrup as a child. As the waiter brings the steaming broth to your table, he takes a syringe of olive oil and squeezes the silky noodles into the broth to form a quite pleasant concoction. From the Sicilian Green Olives that are mixed with calcium chloride to the vanilla ice cream served with raspberries that are frozen with liquid nitrogen, you would be sure to find prime examples of unique cuisine that only can be concocted through molecular gastronomy at Aurum. Overall, it was quite an experience dining at Aurum. I do not doubt that the chefs behind these concoctions are quite talented. They are certainly creative and daring, willing to try new things in the realm of molecular gastronomy. However, one cannot help but wonder if the dark gothic theme would hurt the restaurant in the long run. For now, Aurum certainly has the talent, passion, and originality to succeed in the world of fine dining. BA

28 • BUSINESS ASIA • Spring 2009

PHOTOGRAPHS BY ROBERT STEINER

proach seems rather bold as traditional Chinese would probably feel quite auspicious sitting in a wheel chair and eating off an operating table. However, perhaps the younger generation, those who are able to shrug off the seriousness of death, would not mind the dark surroundings as they look to be connoisseurs of what is called molecular gastronomy. Molecular Gastronomy deals with experimentation of taste and form. Practitioners of the field work to utilize the chemical and physical processes that occur during cooking, ultimately creating a work of art so to speak – a dish that pleases the palate. Not exactly the same as food science, molecular gastronomy deals with transforming merely ingredients into a culinary masterpiece that satisfies all the senses. At Aurum, you will immediately witness the science used in food preparation. Patrons can peer into the kitchen and see what the chefs, or rather “doctors,” are preparing. The kitchen is illuminated by bright operating lights, adding to the hospital-themed aura of the restaurant. You can tell that the chefs even put a twist on the food. The Singapore Sling tasted eerily close to cough syrup, with its sweet cherry taste. Perhaps this

Lifestyle

Destinations: Shikoku By Joanne Ng, National University of Singapore

Often considered remote and lacking in attractions, Shikoku is seldom on the list of places to visit among travellers to Japan. The least populated and smallest of the country’s four main islands, Shikoku is most famous for the pilgrimage trail of its 88 sacred temples, but there’s much more to the island than that…

DAY 1, 28TTH DECEMBER: NARUTO, TOKUSHIMA PREFECTURE

Tokushima Prefecture – where our road trip began! Starting here from the northeast of Shikoku and moving clockwise in a circle through its four prefectures, we followed the same route that pilgrims have taken throughout the past 1000 years over the next 6 days. Our first stop was the famous Naruto Whirlpools. Caused by the difference in water level in the Naruto Strait during the tides, these titanic whirlpools can extend more than 20m in diameter. We ventured along a 450m walkway beneath the Naruto-Ohashi Bridge for a birds’-eye-view just 45m above the raging currents. Equally roaring cold winds accompanied the view, but we were still unable to get a good picture of the whirlpools. Perhaps we should have taken one of the tourist boats, which would have placed us directly above the maelstrom!

DAY 2, 29TH DECEMBER: IYA VALLEY, TOKUSHIMA PREFECTURE

Today’s highlights were the well-known vine bridges in Iya Valley. The most popular bridge is the Iya-no-Kazura-bashi which is reconstructed every three years, though it did not seem as picturesque as the Oku Iya Kazura-bashi, a charming set of vine bridges 30km east. Iya Valley is one of Japan’s three “Hidden Regions”, and it certainly looked the part. The narrow, winding mountain roads that snaked through it were the furthest any of us had ever been from civilization, and the few shops and eateries that hugged the valley’s remote paths were shut due to the upcoming new year too. Even the ticket counter at the Oku Iya Kazura-bashi was closed! At night, we homestayed with the Ueda family who make various sweets and snacks from their home. Their house was in a quiet, out-of-the-way location, and none of us had homestayed while travelling before. Call us paranoid, but we couldn’t help but wonder if we would survive the night… DAY 3, 30TH DECEMBER: OBOKE AND KOBOKE, TOKUSHIMA PREFECTURE; KOCHI CITY, KOCHI PREFECTURE. Our fears were unfounded after all, and we departed feeling slightly ashamed for our suspicions, especially after Mrs Ueda treated us to her delicious cooking.We begun the day by taking in the magnificent sight of the valleys Oboke and Koboke, literally meaning “Great Danger Walking” and “Small Danger Walking”. Their steep precipices and surging rapids certainly did not seem to be for the faint-hearted, although the most unnerving sight there was a surprise find near Akagawa Bridge. It came with a warning sign indicating that the city government cannot be held responsible for accidents involving tourists crossing the bridge, which casted serious doubts on its safety! The afternoon brought us to southward into Kochi City, a quiet, attractive city home to one of the twelve remaining original castles in Japan. Dinner comprised of one of Shikoku’s famous products: sliced katsuo-no-tataki, or charcoal-braised bonito fish with a raw middle. It had a surprisingly meaty flavour, and we had to fight the temptation to order a second serving.

BUSINESS ASIA • Spring 2009 • 29

DAY 4, 31ST DECEMBER: SHIMANTO RIVER AND CAPE ASHIZURI, KOCHI PREFECTURE. The Shimanto River is Japan’s last freely-flowing river, providing a relaxing and scenic drive along its banks. According to one of our Japanese teachers, the river is extremely clean and has its own ecosystem, resulting in fascinating creatures like prawns with exceptionally long arms. Some of those prawns became our lunch, and we were happy to discover that they had a fresh, sweet taste. From the river, we headed to Cape Ashizuri, distinct for its white lighthouse perched atop its rugged cliffs. Along the 2km walking trail of its impressive coast is the southernmost point of Shikoku too. There, we gazed across the Pacific Ocean while taking in the stunning sight of sunlight streaming through the clouds.

DAY 5, 1ST JANUARY: UWAJIMA CITY, EHIME PREFECTURE.

The first day of the new year was unfortunately marred by the closure of all eateries but fast-food outlets. That Uwajima City is more like a quite town than a city, making the search for decent meals even harder. A visit to the Taga Shrine and its bizarre accompanying attraction made the day worthwhile however. Numerous Shinto Shrines were closely linked to fertility rituals in the past, and Taga Shrine is one of the few such shrines remaining. Its grounds are hence home to amusing carvings and statues, and huge treetrunk phalluses which provided backdrops to some interesting photos. The highlight on its grounds though, is the Dekoboko Shindo. This three-storey sex museum is filled – literally from floor to ceiling – with various prints, drawings, pottery and carvings from all over the world, including the Karmasutra and Japanese erotic manga. Interested visitors could even purchase protective charms with dangling male genitalia, but we felt that viewing the exhibits was enough…

DAY 6, 2ND JANUARY: MATSUYAMA CITY, EHIME PREFECTURE

Despite being Shikoku’s largest city, Matsuyama possesses a tranquil, picturesque charm in line with the general atmosphere of the island. Rising above the city stands Matsuyama Castle, a fine specimen of one of Japan’s original castles. The new year celebrations provided us the opportunity to try our hands at some traditional Japanese new year games too. One of them was Hanetsuki, which resembles badminton but proved deceptively difficult to get a hang of! After the morning’s exertions, a visit to the nearby Dogo Onsen seemed the perfect way to wind down. The oldest hot spring in Japan, Dogo Onsen looked arresting, with its castle-like architecture and traditional design facets. Unfortunately, it was so packed inside due to the holidays that it was impossible to relax. We ended up snacking on the area’s famous Botchan-Dango – delectably sweet rice dumplings on skewers – to calm our spirits instead.

DAY 7, 3RD JANUARY: SHODOSHIMA ISLAND, KAGAWA PREFECTURE

Our final day in Shikoku was spent leisurely driving around Shodoshima Island, northeast of Kawaga Prefecture. Its moderate climate resembles that of the Mediterranean, resulting in an ideal place for cultivating olives for which the island is famous for. Naturally, we had to visit Olive Garden, where we strolled through groves of olive trees and sampled a variety of olive products in the souvenir shop. Their olive oil moisturising lotion seemed a great purchase for the dry winter, although the olive-flavoured chocolate was a souvenir we all thought we could do without. On Shodoshima Island also lies an interesting monkey park, and we stopped our car nearby to take pictures of a group of monkeys on the road. Nature proved somewhat threatening though, when two monkeys tried to enter the vehicle through the open windows. Our quick reflexes at winding up the windows were all that kept them out! We returned to the main island and concluded our memorable trip of Shikoku soon after, having had enough interesting experiences….till the time for our next vacation comes around! BA

30 • BUSINESS ASIA • Spring 2009

Interviews

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Interviews

Sitting down with Professor Jeremy Siegel, Ph.D. University of Pennsylvania by Kellen Xu, University of Pennsylvania The prominent Wharton professor and author of the classic “Stocks for the Long Run” discusses his view on Asia’s economy and its future.

BA: Business Asia JS: Jeremy Siegel BA: In your article “Consequences of Asia Rising,” you mentioned that the U.S. economy was losing its importance and you could see a lot of potential in Asian economy.Do you think that is still the case given the recent financial slowdown? JS: Yes, definitely. We don’t have all the data yet. But I believe that Asia may, in fact, weather this economic storm better than Europe or the Americas. First of all, we do see that their stock markets are doing better. They have an advantage of being high savings countries. So they don’t have the leverage problem, and they can divert some of their savings and use them to stimulate demand. BA: The financial crisis wiped out $50 trillion last year in Asia according to Asian Development Bank. How much is the U.S. liable for the recession in Asia?

32••BUSINESS Spring2009 2009 BUSINESSASIA ASIA••Spring 32

JS: I think that growth projection was too high everywhere, not just in the United States. There was excessive pricing in real estate and overly optimistic expectations in commercial development and tourism. Over optimism was not just in the United States. We passed through a remarkable period of world growth, and expectations just got too high. The U.S. was one of those countries that over-speculated in the real estate market. BA: Are Asian countries better equipped for recovery than their Western counterparts from this financial crisis? Will the centralized governments actually help since they can react more quickly? JS: Clearly, many Asian countries don’t have to go through a lengthy democratic process to get the spending started the way we do. That is good, but then they don’t get the deliberation on what the right measures are to be taken. There are gains to both systems. I don’t think that we have to think now in terms

INTERVIEWEE’S BIOGRAPHY Professor Jeremy Siegel is the Russell E.Palmer Professor of Finance at the Wharton School of the University of Pennsylvania, the best undergraduate business program in the U.S. Siegel has written and lectured extensively about the economy and financial markets. He is a frequent guest on CNN, CNBC, NPR and a regular columnist for Yahoo! Finance and the Wall Street Journal, among many other major publications and networks. Siegel has also served for 15 years as head of economics training at JP Morgan and is currently the academic director of the U.S. Securities Industry Institute. Siegel is the author of numerous publications. His book “Stocks for the Long Run” was named by the Washington Post as one of the ten-best investment books of all time. Siegel has received many awards for his research and excellence in teaching. In the past, he has been ranked as the best business school professor worldwide by Business Week and Forbes.

of emergency measures because the risk of a break-down in our financial systems is well past, very different from September and October of last year. BA: Do citizens in Asia need to spend their savings to get out of the recession? JS: The consumers’ problem in the western countries is that they are cutting back. As a result, Chinese exports are falling. The only way to make up the difference is for the Chinese government to help the Chinese consumers to offset that drop. BA: Do you think the global power structure will change after the recession? Does China or India seem more promising? JS: I think it depends on how the recovery evolves. Whichever country recovers first will have the advantage. I actually think Asia will be the first to recover. The long-term trends are better for Asia. The U.S. has taken a blow because of the poor performance of its aggressive style of capitalism. That will diminish the view of the U.S. However, if we recover quickly, the rest of the world will see that we have a resilience that would maintain our position the world’s economic leader. There is no question in my mind that China and India will eventually have bigger economies than the United States. But the question is how many years? Maybe 15, 20, or 30 years. But just in terms of population, they will be big and together will be a very powerful economic force. BA: Can you elaborate more on this global financial crisis?

JS: It’s my belief that the United States, Europe, and Japan will have to rely on capital from the developing world, China, India, and other countries in the coming decades. The aging population in the developed countries will be looking to sell its bonds. The fast growing countries will be saving and will be looking to buy the stocks and bonds. There will be a massive shift in capital from developed countries to developing countries. If developing countries do not buy our capital, it will be a much bleaker future for the retirees in the developed countries. BA: Do you think investors in Asia will be less likely to invest abroad now? Where do you think people should put their money? JS: Stocks are down to favorable levels in most countries in the world. All countries have been affected by the world bear market. Some of them will be profitable in the future. I see opportunities everywhere. BA: During March, China urged new monetary reserve to replace the dollar, the current global reserve currency. Mr Zhou, governor of the People’s Bank of China, said a new currency reserve system controlled by the International Monetary Fund could be more stable and economically viable. What political and economic ramifications would occur if it did take place? JS: We have already seen a slow erosion of the dollar as the international reserve, which is being replaced by the euro and yen. I expect that trend to continue. However, I don’t believe there will be a world currency that will replace currencies in use by the major economies in the world. We have actually tried special drawing rights many years ago, and they

weren’t very popular. People want money where they can buy something. BA: On a more personal level, what has your career path been like? What words of wisdom do you want to give to the distressed students looking for jobs? JS: I also wanted to be a teacher, and I always loved economics. Although when I was very young, I thought I would be a math teacher. I started studying economics much later. Don’t be discouraged by the current downturn. It’s tough to get a job, but when you get one, you’ll get in at the bottom. Then, things will be moving up, and you will be able to move up with those firms. BA: You mentioned that Milton Friedman was your role model, in what ways did he inspire you? JS: He was a great teacher, and he showed me the importance of the free market and how private initiatives and governments, though well meaning, can mess things up badly. BA: Do you think Finance will still be Wharton’s No.1 concentration in terms of popularity after this financial turmoil? JS: Oh, yes, I’ve been through two cycles like this before. There will be a dip in the short run, but the economy and finance will come back. There is still a tremendous need for financial services. BA

Kellen Xu is a sophomore at the Wharton School of Business at the University of Pennsylvania, double majoring in Business and Psychology with special concentrations in Finance

and Legal Studies.

BUSINESS Spring2009 2009••33 33 BUSINESSASIA ASIA••Spring

Interviews

INTERVIEW WITH HYUNDAI OIL BANK’S CEO Seo Young-Tae With the exchange rate reaching its peak in decades and US-dependent domestic markets dwindling, South Korea’s economy is in crisis. According to Standard and Poor’s, a global credit rating agency, South Korea’s GDP for this year has shifted from 0% to -3.5%. Korea’s GDP recovered in five quarters after the International Monetary Fund (IMF) crisis in 1998. Experts are predicting that this time Korea’s economy will recover after the first quarter of the year 2011.

This is not the first time for South Korea to weather an economic disaster of such scale. In the wake of 1998’s economic crisis, many heroes emerged to build a new landscape. In the midst of revitalizations was the CEO of ‘Hyundai Oil Bank’, Seo Young Tae, who revived the company through extensive market research and continuous effort of restoring faith within the company. Though the crisis is more severe this time, Seo Young-Tae, remains optimistic.

BA: Business Asia || SYT: Mr. Seo Young-Tae

By Seo Hyun Kim, Cornell University

BA: Hyundai Oil Bank has moved from deficit crisis to surplus. What do you think are the most important driving forces behind your company’s success? SYT: Here are some of the primary factors for success. We have changed our marketing policy from ‘market share-driven’ to ‘profitability-driven.’ That way, we can thoroughly focus on improving the bank’s profitability. We have also updated the management system. For example, eight years ago, the system gave the team managers absolute authority. Since then, we have reformed the system, and now employees can report directly to the Chief Executive Officer. Equally important, we have changed the employee reward system. In the past, we calculated employee compensation based on their years of work experience and status. That way, employees had little incentive to optimize their efficiency. Under the new system, employees are rewarded based on their performance. We have also adopted ‘Action Learning’ (AL) techniques to motivate the employees to voluntarily participate in innovations both in and outside of the company. For the last seven years, we have researched and obtained 3,000 AL assignments, solved them and pocked more than 200 billion Korean Won. Lastly, we have reformed our hierarchical culture. We are constantly moving towards a merit-based promotion system. This has resulted in dramatic changes to Hyundai Oil Bank’s organizational culture. BA: What is your company’s goal for the year 2009? How will your company overcome the global financial crisis? SYT: This year, our goal is to maximize cash flow and minimize risks. We hope to have secure and sustained operation. Our company is now investing 3 trillion Won in facilities, and would like to maximize our spending power in order to continue this project. In the short run, we are trying to minimize the total executive cost to deal with the current financial crisis. Also, to make the company more competitive for the future, our company is focusing on internal management reforms and investment. BA: What kind of actions do you think the Korean companies should take to deal with this financial crisis? SYT: In an export-driven economy, a company’s best strategy should focus on its survival. In order to do this, it should minimize unnecessary expenditures, foster strong leadership skills, and focus on the company’s production capacity. In a time like this, we need to step back and look at the big picture. We need to focus on the company’s long-term competitiveness. Also, it’s important not to be petrified. The companies still need to formulate and execute new business plans. Companies that are largely U.S. dependent are likely to be the most vulnerable. Therefore, in the future, we need to expand our consumer base to other markets, such as Asia, South America, and the Middle East.

34 • BUSINESS ASIA • Spring 2009

BA:Graduating seniors this year are having a hard time finding a job. Any tips for them? SYT: No matter what happens, companies can always recognize talents.That is the universal truth.Especially in times of crisis, students should hone their fundamental skills to make them more marketable. Stripping it to the bare bones, effective communication skill and quantitative skills would always be desirable. Everything else is built upon these two. All crises have been overcome one way or another. Therefore, students should plan for their future beyond the immediate crisis by differentiating themselves and preparing for their long-term career goals. BA

Careers

Greetings from Hong Kong! I’m originally from Boston and have been living in various Asian countries for 20+ years. My current role takes me to 16 Asian countries. I have a great job that allows me to experience fascinating cultures & a glimpse of how various countries are positioning themselves politically and economically for future success. So what can I tell you about Asia Business? I’m assuming that a lot of you are thinking about ways to get ahead in Asia, especially given the current economic uncertainties. Rest assured, there are great prospects in Asia for hard-working, intelligent people. Asia is still the fastest growing region in the world and with growth comes opportunity. College will sharpen your thinking skills and give you a methodology for solving problems that not everyone out there will have. The multidimensional environment at college will also give you insights into what your future partners and customers are like in today’s global economy. These are the things that you can and will benefit from. My experience in Asia has taught me that the overriding factors for success in business are not cultural in the regional or ethnic sense, but cultural in the sense of being your best. A dedication to ethics— including but not limited to objectivity and openness, a hunger for knowledge, and a drive to find ways to add value on a very personal level—leads to unlimited capacity to achieve your goals. Some stereotypes about Asia still hold true to a certain degree. At the risk of over-generalizing: linear thinking and discipline are more prevalent here than in the West. While that often results in high service levels and efficient by-the-book execution, it also contributes to bureaucracy and at times can greatly inhibit progress. Corruption, the gap between laws and effective enforcement, is also a drag on success and a source of frustration. Emerging nationalism in some Asian countries can lead to pride which in turn leads to blind spots, just as it does elsewhere in the world. Finally, there is generally more entrepreneurial thinking in Asia than in the West and that is a definite strength that can be tapped into. Ultimately, success in the business world in Asia requires staying focused on the Big Three. First, Quality of the service or product you are providing: achieving standards and ensuring that these are aligned with what your customers really want. Second, Delivery with Speed and Accuracy. Third, Controlling Cost in terms of time and money that it takes to achieve items 1 & 2. Achieving optimum balance of these Big Three will open many doors for you in Asia. BA

Postcard from the Edge By Duncan Scott, Vice President of V.F. Corporation Things to keep in mind while working working in Asia!

BUSINESS ASIA • Spring 2009 • 35

Careers THE WORK I was fortunate enough to have been hired by The McGraw-Hill Companies for their Summer Intern program in Beijing, the capital of China. I primarily worked in their corporate unit. Contrary to popular belief, I was not assigned to the grunt work: fetching coffee, filing and photocopying; instead, I was given a month-long research project that aimed to evaluate the viability of entry into the market of vocational education and training in China. I was also working on a variety of other jobs on the side, mostly translations of official By David Hao, documents. Priding myself on having a good grasp of University of Toronto, Canada Chinese, I quickly learned that translating was not as easy as it looked. Though a native Chinese speaker, I Take a look at a summer intern’s experience with frequently encountered professional terms that were an American publisher in China hard to translate. Soon enough, Google Language Tools became my best friend at work. THE ARRIVAL While working there, I was lucky to have access to free Joy flooded my heart when I learned that I was going Business Week magazines and the research materials to work in China this past summer. Though born and conducted by Standard & Poor’s, two subsidiaries under partially raised in the Middle Kingdom, I was, shamefully McGraw-Hill. Yet surprising enough, very few to admit, quite ignorant of the recent people in China have ever heard that economic and cultural development as I McGraw-Hill is actually a Fortune have spent a good chunk of my life 500 Company. Popular reaction The little living in Canada. Therefore, I saw was either a complete blank look this summer internship as an alleys, the towering on their face or “Ohhh that excellent opportunity to fully skyscrapers, the bustling publishing company?” after a reconnect with my mother moment of awkward pause. crowd...Walking down land and explore China from Along the same line, many a foreigner’s point of view. the memory lane, I was people did not know about Standard & Poors or even nostalgic of childhood As soon as I landed and Business Week. Of course, as settled down, I plunged right experiences. a temporary employee there, I into action. The little alleys, was a bit ticked off by the lack of the towering skyscrapers, the due recognition. bustling crowd...walking down the memory lane, I was nostalgic of childhood Ultimately, I loved the job. Perhaps the only experiences. China is a mystery whose essence downside was the meager pay I received: 70 RMB per day cannot be captured by words alone; a unique culture (about 10 dollars) - an amount only enough for treating pervades the most mundane of everyday’s life-the blue friends to a round of beer. But, I feel the experience license plates attached to the rear ends of cars, the red of working in a Fortune 500 corporation in Asia would cornices of Chinese temples and a myriad of tiny things outweigh the “labor exploitation.” With Asia evolving that would make your tingle with awe and excitement. fast into an economic powerhouse, I would highly recommend anyone who is interested in working there to hunt for an summer internship in Asia. BA David Hao is a sophomore at the University of Toronto in Canada.

Working in the Middle Kingdom

36 • BUSINESS ASIA • Spring 2009

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Accounting

According to Professor Wang, “accounting is evolving into a new playing field as the Chinese government allows for the adaptation of the International Accounting Standard (IAS).”As a result, the Big Four accounting firms are taking advantage of the new policy to grow their businesses. Also, China presents a wealth of investment opportunities for foreign investors. Whether you are in for merger and acquisition or just opening a store branch in Shanghai, you probably need good bookkeeping to make it happen. The game goes both ways as many Chinese companies are establishing their presence overseas. The once regionally confined career is in desperate need of global-minded, foreign-educated CPAs.

Management

Many of the top management are foreign-educated and have at least a few years of overseas experience under their belt. China might have cheap labor, but when it comes to cutting-edge management, it is in a rather short supply. As China becomes more globalized, the demand for experienced managers would increase. An experienced manager can gather a comfortable seven-figure salary (in RMB, Chinese currency) in a major international corporation.

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Entrepreneurship

With an ever-growing middle class demanding more material comfort and technologically advanced products, China appears to be a treasure trove for entrepreneurs. “Developed countries like the U.S. have a consumer market that is relatively saturated. China, on the other hand, has a huge pent-up demand for consumer products which is still waiting to be tapped by riskloving entrepreneurs.” says Professor Yu. One popular trend is the increasing demand for outsourcing in China, a country of relatively cheap yet educated labor force. Since almost every college grad speaks English, why not start an outsourcing company that specializes in hotel reservation service for American hotel chains? The list of opportunities goes on. Of course, any innovative, neat gadget that caters to the middleclass consumer taste would also be a hot shot. A caveat though, according to Professor Yu, is that any “entrepreneur wanting to be successful in China needs to have a comprehensive understanding of its unique culture.” His advice: before striking out on your own, first seek guidance from the locals and take time to understand the rules of the game.

Venture Capital VC is as much as a new trade in China as it is a niche industry. Few would break into the field, but don’t lose hope yet. VC funds are increasing in number in an economic climate of excess liquidity and hot investment money. Some of the world’s biggest VC firms such as Sequoia have already established a branch in Shanghai, the hub for major VC activities. As more local VC firms sprout to life, we will see an increasing demand for experienced professionals in business, law and cutting-edge technology. VC firms usually only recruit professionals who come with extensive, highly specialized work experience and a wealth of professional contacts. Bottom line: If you are a new college grad but thinking about establishing a particular career in China, gain a few years of experience here first in a renowned, international company and learn Chinese. If you are an experienced professional, then try to network with as many professionals as possible, preferably those who have had work experience in China. Social networking plays an even more important role in the Asian business world. After that, seek out job opportunities that might interest you and for which you can apply your current skill set. BA

BUSINESS ASIA • Spring 2009 • 37

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YOU WILL BE AUTOMATICALLY ENTERED INTO A LOTTERY- TWO KAPLAN COURSES & 3 COUPONS TO MIYAKE JAPANESE CUISINE AVAILABLE!

STEP 3: ALL WINNERS WILL BE NOTIFIED BY SUNDAY, MAY 10TH, 2009! * ONLY APPLICABLE TO COURSES REGISTERED AT THE ITHACA KAPLAN CENTER.

Business Asia