Dispatch (Asia edition)
| by Peta Tomlinson, Nazatul Izma Abdullah, Sonia Kolesnikov-Jessop 02 Jul 2008 Topic: News |
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Corporate governance improvesInvestors can draw confidence from improving corporate governance standards in Greater China, though they are encouraged to proceed with caution. The advice comes from a new report examining the contrasting corporate governance protections available to investors in Hong Kong and mainland China. Conducted by RiskMetrics Group, provider of risk management and corporate governance services to the global financial community, the report compared practices in each market, including regulatory and exchange requirements. It noted significant progress in both jurisdictions, although Hong Kong retains an edge over mainland China in protecting minority investor interests. 'While Greater China has made significant progress with respect to shareholder rights, in both jurisdictions key institutional and enforcement limitations may hide risks for the unwary,' said David Smith, RiskMetrics Group analyst and author of the report. With the prevalence of controlling shareholders in both markets, he said minority investors should pay closer attention to minority shareholder protections than in other markets with broader share ownership. 'Many Chinese companies are majority-owned by the state, while the Hong Kong market is characterised by family-controlled entities,' explained Smith. He cautions investors not to over-rely on boards to uphold minority rights, given most directors are effectively appointed by majority owners and related-party transactions are common. 'Until share ownership becomes more widely dispersed across the region, investors are unlikely to see progress toward a culture of genuine independent directorship. Investors should apply special scrutiny to related-party dealings in the absence of independent boards.' The report notes Hong Kong's history and commitment to minority shareholder rights, and China's progress in recent years. Measures have included the reform of mainland China's securities markets and mandating independent directors, bringing financial reporting substantially in line with international financial reporting standards. 'We urge investors not to have their "eyes wide shut" to governance and accounting risks in mainland China and Hong Kong,' said Smith. 'Earnings revisions and stock price volatility are de rigueur in these markets.' The report also found that financial reporting and auditing requirements in mainland China and Hong Kong are similar, mainland China's shortage of experienced auditors and accountants remains an issue. Striding ahead of piratesChina has made great strides towards protecting brands and intellectual property rights (IPR), according to anti-piracy expert Bill Thompson. Thompson has spent nearly three decades fighting counterfeiting in Asia, establishing a network of offices in the Chinese mainland through the company he founded, Thompson Market Services. Earlier this year, the company was acquired by Hong Kong-based International Risk, a wholly owned subsidiary of New York-listed FTI Consulting, in a strategic alliance to build force in China. Based in Shanghai, Thompson is now vice-president - brand protection services of International Risk Ltd. He says the Chinese government is taking piracy seriously, adding that it's now 'nowhere near' as risky to expose one's intellectual property in China. 'I've been doing this for 27 years and I believe it takes a long-term evolution to create and enforce protections for intellectual properties,' Thompson says. He draws similarities to earlier times in Japan, Hong Kong and Taiwan, countries which once 'wore the unwanted crown of being a major source of counterfeiting problems', and says no rapidly developing economy is immune. China poses the greatest challenge yet to global brand owners, he says, because of its sheer size and population. Yet China is also taking charge. 'Every day in China, several hundred thousand people get up in the morning to go fight counterfeiting,' Thompson says. 'There are so many different enforcement agencies and so many places where people can file complaints or seek redress. From state to city to provincial to village level, China has a huge manpower carrying out raids and enforcing laws.' The disincentives have also been slowly and steadily increasing in terms of fines and criminal prosecutions, he continued. 'Particularly in the trademark area, protections are reliable and swift - worlds better than they were 15 years ago.' China is sending a message to the world through its high success rate, says Thompson, adding that 95% of raids are successful. To give your brand the best protection, Thompson says the main essential is to register all patents, trademarks and copyrights. Step two is to be vigilant: 'monitor the marketplace, so you know what is going on'. Finally, have an action plan to deal decisively with breaches. 'Choose a plan that makes sense to you, as everyone's approach needs to be tailored,' he said. Businesses brace for fraudAustralian businesses can expect rising levels of economic fraud in the wake of the national economic slowdown. According to Andries Terblanché, head of financial services at KPMG in Sydney, increases have already begun to appear as a result of rising interest rates and increased costs of living. 'The economic cycle has a lot to do with it,' says Terblanché. 'When belts are tightening, we typically see a greater incidence of fraud and also more litigation, when people who feel they've lost money begin to question the level of advice they've received.' In regard to litigation, it's not only accountants and financial planners who may be targeted. As hardship increases, Terblanché says that 'anyone who has a finger in the financial space' could be held accountable for their earlier advice. This is nothing new, and it's a universal principle in a cyclical downturn, he says. 'The first signs have begun to appear as international identity fraud spills over to the national arena. Highly sophisticated perpetrators are finding ways of accessing credit cards, and we're seeing increasing evidence of that in Australia. We're also seeing early signs of wealth funds being targeted, where perpetrators gain access to superannuation funds that belong to someone else.' Companies should stay ahead of the cycle by ensuring they have the mechanisms in place to weed out identity fraud, Terblanché, says. Financial services providers can arm themselves by ensuring their business is appropriately managed in the boom times. 'It's much easier to sell financial products when the wind is in the sails, but you have to ensure that the principles of the organisation are meticulously followed.' This clearly proved an issue for sub-prime business in the US, he adds. 'In downturns we often have to deal with inappropriate behaviours of boom markets,' Terblanché points out. 'This is the opportune time to remind ourselves that boom times carries as much responsibility as managing downturns in economic cycles. This needs to be reflected in our risk management practices, particularly in a buoyant economic market. It is almost too late, in a sense, to try and prevent fallout when the market has turned.' Singapore going undergroundLand-scarce Singapore is looking into the feasibility of building an underground industrial city, with power stations, water reclamation plants, wafer fabs and R&D labs, data centres, warehouses plus port and airport logistics centres to free up surface land for other uses. The island-state already stores some of its military munitions in this way having blasted caverns beneath a disused granite quarry. The move underground helped free up 300 ha of land and is said to have reduced manpower needs by 20% because it is easier to secure. Work is underway for Phase 1 of the $2bn Jurong Rock Cavern (JRC) project beneath Jurong Island to provide storage for crude oil and oil products like naphtha, condensate and gas oil. The five caverns are expected to free up 60 ha of surface space. The first JRC cavern should be ready at end-2010 and one customer, Jurong Aromatics Corporation, which is building a $2bn aromatics complex, is already committed to use it. Industrial landlord Jurong Town Corporation has now called a tender for a feasibility study on a wide-ranging 'underground rock cavern usage' study to see how any new caverns beneath the island can be best used. At this stage the study is looking just at usage and not sites, however, potential sites could be areas with deposits of igneous rock, such as granite, in the central, northern and north-eastern areas of the island. A 1995 paper by Nanyang Technological University researchers published in the Quarterly Journal of Engineering Geology, concluded that the Bukit Timah granite, which forms one-third of the surface area of Singapore, had good potential for underground cavern construction. Among other things, the winning consultant will have to study the costs and the use of underground caverns in other countries. It will also advise JTC on the possible environmental and health issues of such projects. A plan in the late 1990s to construct a Science City, a mixed-use commercial project, under Science Park 2 was derailed because of cost factors. playing cyber catch-upIn a bid to increase broadband penetration and bridge the urban-rural digital divide, Malaysia has announced a high speed broadband project (HSBB). Under a controversial arrangement, the country's dominant telecommunications incumbent Telekom Malaysia Bhd will invest RM8.9bn (US$2.74bn) while the government will invest another RM2.4bn (US$0.74bn) over a period of three years to implement the first phase of the HSBB. The HSBB infrastructure will offer speeds of between 10 Mbps and 1 Gbps and will be developed at an estimated cost of RM15.2bn (US$4.68bn) in three phases over 10 years with the government putting in an initial investment of RM4.8bn (US$1.48bn). The government rationalised that Telekom Malaysia was the best choice to upgrade the existing network for the HSBB roll-out as it already owned 95% of the existing fixed line infrastructure, which will minimize duplication. Although the government has made assurances that the regulatory framework will be developed on an open network concept to ensure equal opportunity access and a level playing field, uneasy industry players have indicated that they would prefer an independent HSBB network. For transparency and their protection, telcos want the government to disclose pricing, access terms and even last mile connectivity details before signing the HSBB deal with Telekom Malaysia, to ensure fair competition since the incumbent would have a monopoly on the HSBB network, reported The Star. It is estimated that Malaysia's gross domestic product (GDP) would grow by another 1% or an estimated RM6.68 (USD2.06) billion and create 135,000 new jobs if the targeted 50% broadband penetration rate could be achieved by 2010. Currently, Malaysia's broadband penetration rate remains very low at 18% compared with Singapore (78%), Hong Kong (80%) and South Korea (93%), reported The Edge Daily. price war dogs airlinesAlready battered by record fuel prices, Malaysia's low-cost carrier, Air Asia, now has to contend with headwinds in the shape of national full-service carrier Malaysia Airlines which has launched its own low fares campaign. However, Malaysia Airlines has denied that its new low and zero fare products are competing directly with Air Asia's business model, instead explaining that it is meant to create new demand and to generate revenue from hitherto unsold seats. According to Malaysia Airlines, the campaign was intended to help offload between three and four million unsold seats for its domestic and Asean routes annually. Passengers who book free and low-cost seats on Malaysia Airlines still have to pay for fuel surcharges, administration fees and airport taxes, similar to the Air Asia model. In retaliation, Air Asia has launched its own sub-zero campaign, which it insists is cheaper than its competitor's fees. The LCC has also reiterated that the playing field should be leveled, and that it should be allowed to compete without restrictions against the national carrier. Notably, restrictions on the lucrative Kuala Lumpur to Singapore route are a sore point for Air Asia. On the bright side, the ongoing skirmish between Malaysian aviation's David and Goliath has benefited consumers looking for bargains to cushion the pain of rising prices. According to media reports, the zero and low fare products enabled Malaysia Airlines to sell an additional 150,000 seats, including those at normal fares, during the week of the campaign's launch while increasing its online penetration by 900%. On the downside, if price undercutting is sustained, foreign airlines may be discouraged from flying into the Kuala Lumpur International Airport if they are unable to compete, which would defeat the KLIA's objective of attracting and retaining more carriers and becoming a major regional airline hub. in brief Lloyd's expands China business Lloyd's plans to expand its mainland reinsurance business as domestic insurers face massive payouts arising from recent natural disasters in China, the South China Morning Post reported. The report quoted Lloyd's chairman Lord Peter Levene as saying that reinsurance will be the firm's focus for now in China, though it may at some point offer general insurance services. He noted that few domestic companies were providing reinsurance, as the concept is still new in China. Lloyd's set up a wholly owned company in Shanghai last year.
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Bullet train shot down China continues to perform strongly despite a global showdown in IPO activity, Ernst & Young reports. The firm says that strong Chinese companies such as Visa Inc., China Railway Construction Corp Ltd, and Reliance Power Ltd are still able to attract interest from investors. 'While the mature markets are experiencing a slowdown, the emerging markets are still thriving and will continue to drive global IPO activity, as long as they experience robust economic growth, says E&Y. It notes that three of the top 10 IPOs in the first quarter of 2008 were Chinese. Globally, China (including Hong Kong) produced the highest number of deals (34), followed by Australia (30), Japan (22), Canada (20), Poland (17), and India (16).
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