Para-dollar Shift

This morning's South China Morning Post displayed this pretty graph in the lead story of the Business section. It mixes two statistical trends that are not necessarily related - % increase in $100-millionaires per country may not have direct bearing on the % of global GDP contributed by various regions, or vice versa. However, the message is quite plainly stated: Asia's pockets are getting heavier faster than anywhere else.

Other interesting factoids pointed out in the Citi Private Bank / Knight Frank joint study:

- East Asia already surpasses North America and Western Europe in the number of $100-millionaires: 18,000 vs. 17,000 vs.14,000, respectively.

- Asia will extend that lead in the next five years, growing at 44.4%, vs 23% and 7% for N. America and W. Europe, respectively.

- On an individual country-by-country basis, the US will still hold a lead over China for a few more years. However, if super-wealth is like Olympic gold medals, that too will probably change.

- As far as global GDP is concerned, Developing Asia already chips in more than N. America and W. Europe. That lead will increase such that almost half the world's output could be produced by Asia in 2050. According to the study, the future is indeed red.

Of course, no growth trajectories are without their bumps and dips. If the words "China", "India", "Russia" were given as clues in a guess-the-topic TV game show, contestants would be forgiven for answering "corrupt and volatile nation-states" rather than "economic superpowers". Continued success for these countries depends in no small part on exogenous factors such as climate change, commodity prices and geopolitical stability. Still, the rise is expected to be both inexorable and disruptive.

And what will these rich folks do with their money? Make "investments of passion." No, that doesn't mean stuffing trust funds for a harem of under-aged mistresses  (although it could). The article refers to wine, art and sports teams. It could just as easily refer to vintage cars, landmark properties, rare watches - the list is endless.

Europe's rise over the centuries gave the world a legacy of beautiful buildings, art and legal (political and economic) systems. America's rise over the past century has given us super-efficient, globe-trotting corporate power. What will Asia's stamp on history be? Given how different the various cultures within the region are from each other, the picture is far from clear. I am neither dumb nor smart enough to make a detailed guess. However, I will be a fascinated observer.

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Crisis? What Crisis?

This flyer came to me in the mail this past weekend from one of HK’s well-established real estate brokers. The area of Mid-Levels that is featured is predominantly populated by foreign professionals in Hong Kong on expatriate packages or housing allowances, and wealthy locals (although not the tycoons, who occupy the Peak and other even-more exclusive enclaves). The table below summarizes the dwellings on offer, translating the prices into US-dollars and calculating the amounts on a per-square foot basis.

The result? Hong Kong’s premium residential real estate is back at an all-time high, with prices rivaling the giddy times of early-1997, just prior to the Asian financial crisis. Back then, when the bubble burst, prices tumbled steadily over five years, during which time the market struggled through currency crashes throughout Asia, followed by the dotcom blow-up, Enron/WorldCom and other corporate shenanigans, and lastly SARS. When the market finally hit its nadir in 2003, it bottomed at close to 40% of 1997 levels. The buzzword that year in the real estate market was “negative-equity.” Ouch.

Since then, with only a brief dip (a decidedly false summit) following the global financial crisis of 2008, the Hong Kong property market has seen a steady, relentless climb to its current perch at the top of the world. The key drivers to the price rise have been a HK-dollar pegged to the chronically weak US-dollar and its low interest rates, and feverish buying by mainland Chinese.

It’s a well-known story, but the actual prices still are mind-boggling. Basically, nothing – not even a 400-square-foot unit that is barely big enough for a Hong Kong mistress and her shoe collection to stand upright in – sells for less than $2,000 / sq. ft. The average for the group is $3,175 / sq. ft. The most expensive listed, Dynasty Court, at $10.7 million, is priced at close to $5,000 a square foot. Yes, Dynasty Court has a stirring view of Hong Kong harbor, and the health club sure is well appointed. But that kind of money could buy an awful lot of pretty postcards and gym memberships, with money to spare for a lamborghini or two.

At the end of 2011, pundits were predicting a market correction of 20% or so for this year. Now, doomsayers are not quite so strident. Prices are up 5% month-on-month from February to March. The US-economy is on the mend, the euro-crisis is taking a few months off to catch its breath, and the Chinese government is starting to act in a more accommodative way to address slowing domestic economic growth. Of course, risk factors for the real estate market remain. The newly elected leader of Hong Kong, CY Leung, has set reining in runaway property prices as a key policy agenda. Furthermore, the euro-crisis is by no means resolved – thinking so could be like wiping yourself while seated on the potty before you are sure that you are done with business. And if China experiences a hard landing, Hong Kong property will likely collapse with it.

But don’t bet on any meaningful corrections in the near term. Hong Kong’s place in the world is unique. It is arguably the coolest place in the world to live now if making money is one's aim. So HKers had better get used to the idea of living in dramatically expensive, shoebox-sized dwellings. An address in Blahnik Estates, anyone?

A Love Song for Hong Kong, Sort Of

Forgive me in advance for being sentimental this time. I happened to be sitting in front of my computer with a glass of wine, doing what i often do to help myself digest dinner - watch YouTube videos of classic rock/pop stars. My favorites are the old ones of Elton John, back when he still had a voice and when music videos were just shots of him wearing funny clothes, sitting at a piano and singing like a god.

When I watched this one of Mona Lisas and Mad Hatters, I was struck by why I've lived in Hong Kong for the past twenty years - simply speaking, I love the place. I came as an outsider, but immediately felt accepted, much the way Bernie Taupin (EJ's lyricist) felt about New York City when he visited. The song is about New York, but it could easily be about Hong Kong. With apologies to Mr. Taupin, I have reprinted the lyrics, changing a few of the references to ones that are more familiar to me now.

Now I know

"Happy Valley" are not just pretty words to say.
I thought I knew

But now I know that rose trees never grow, near Hong Kong harbor.

Until you've seen this trash-can dream come true,
You stand at the edge, while people run you through.
And I thank the Lord, there's people out there like you,
I thank the Lord there's people out there like you.

While Mona Lisas and mad hatters,
Sons of bankers, sons of lawyers,
Turn around and say, "good morning" to the night.
For unless they see the sky, but they can't and that is why,
They know not if it's dark outside or light.

This Coliseum's got, it's got a lot of songs to sing,
If I knew the tunes I might join in.
I go my way alone, grow my own,
My own seeds shall be sown, near Hong Kong harbor.
MTR's no way, for a good man to go down,
Rich man can ride, and the hobo he can drown.

And I thank the Lord for the people I have found,
I thank the Lord for the people I have found.

The message is clear to 1%ers and all others who spend their days hunched over at their desks as they strive to reach the next tier of small percentages used to measure relative wealth. The beautiful setting of this city is for free, and for everyone to enjoy. No one owns the sea; it is either placid or angry according to its own mood, but always stirring. The rain-forest hills that surround us teem with life, and will always do so, with or without us around. And the people? A heartier, more striving populace is impossible to find anywhere.

It is all here, to enjoy and care for, so long as we choose to notice and step outside.

China's New Long March

Shop-Till-You-Drop Month

The National People's Congress and the National People's Political Consultative Conference have just adjourned their annual March gatherings in Beijing. No doubt, much rubber-stamping was done by the elite cadre to try to address key policy issues such as the slowing GDP growth (expected to be below 8% this year) and increasing wealth disparity amongst the broader population.

But some attendees, such as Ou Yangkun - China's chief representative of the World Luxury Association - had grumblings. March is a critically important month for luxury shopping in Beijing because of the opportunity to proffer gifts to the assembled dignitaries; sadly for Mr. Ou, the local Hermes stores were sold out of US$45,000 diamond-studded Starry belt buckles. He had to suffer the indignity of joining a waiting list. "The buckle is an ideal gift for people who hope to keep a low-profile because it's not easy to see under one's suit," he explained, pouting. Hopefully, he had more luck sourcing solid-gold eyeglasses from Germany's Lotos, which sell for a more modest US$32,000. These are apparently also a must-have item for any self-respecting Chinese leader. Presumably, it's more difficult to discreetly hide blingy, uber-luxurious eyewear than belts, but that point seems to be lost on Beijingers intent on impressing Communist party bosses. Perhaps glittering clothing accessories and spectacles are not easily noticed in backrooms that are dimly lit with shady dealings.

Though March is drawing to a close, China's retailers and the international luxury brand owners need not fret. April will bring "Consumer Promotion Month", starting from the Ching Ming festival on April 4 and running through Labor Day on May 1. This promotion is a new thing being pushed by the Ministry of Commerce as a way of rebalancing economic activity away from reliance on export-driven industries (which have been slowed by uncertain markets overseas). In effect, what the Party leaders are saying is "stop saving - open up your wallets and spend, spend, spend." Shopping malls, restaurants and hotels will be offering discounts. Banks are being encouraged to extend more personal, consumption-oriented loans, rather than just mortgages.

The economic theory that growing countries should try to balance domestic consumption with export-oriented industries is well established. A vibrant local demand-driven economy protects a country from external shocks and makes it more self-reliant and in control of its own destiny. And, god knows, well-heeled Chinese should be discouraged from planning overseas trips that are little more than shopping bonanzas in locations such as Hong Kong, Paris, Milan and London. China has recently developed a trade deficit, and while much of it is due to the import costs of fuel, having hordes of Chinese tourists spending on average US$1,000 per trip on luxury items is not helping the situation.

However, concerns abound at Beijing's "shop-til-you-drop" cheerleading.

First of all, there is the issue of China's yawning wealth disparity. With a lot of wealth concentrated at the top (the country's Gini Coefficient is 42, and its top 10% earnings are 21.6x the bottom 10% - both figures the highest in Asia and higher than developed countries), it's not clear that asking rich Chinese to open up their wallets will achieve much good for the larger populace. Rather, they may be prone to continue buying more foreign luxury goods overseas or at one of the spanking new outlet stores in China owned by foreigners. Such conspicuous consumption does not help re-distribute wealth or keep much money flowing domestically.

Secondly, there is a concern about the deflating property bubble. With so much speculative wealth wrapped up in the huge local real estate market, encouraging consumerism at a time when people's net worth may be due for a tumble doesn't sound like prudent fiscal advise. If one’s house is on fire, one probably isn’t much in the mood to go jewelry shopping.

Thirdly, it strikes me that Chinese citizens don't need further encouragement to be even more status-conscious than they already are. Status has long been deeply embedded in Chinese (e.g. confucian) social structure, and showing off to your neighbors has become a national pastime. Stoking competitive consumerism as national policy is a recipe for breeding social discontent, something that the PRC government no doubt wants to avoid. It is sometimes easy to forget that the ruling party has the word "Communist" in its name. Interestingly, the difference between "communism" and "consumerism" is only four letters (m,s,e,r); these days, one would be forgiven for confusing the two in China.

In conclusion, I believe that consumer spending should be a consequence of good wealth distribution policy, not one that drives it. Unduly pushing spending in other countries (as examples, Korea leading up to the credit-card crisis in 2003 and the US leading up to the fiasco of 2008), invariably ends in debt-choked tears. In China, social safety nets, high quality education, decent health care, and good infrastructure are all investments that badly need further attention. If those concerns can be addressed to a wider base of citizens, more wallets will naturally open. With security comes confidence. It's simple human nature - much more so than lusting after diamond-studded accessories that do little else besides keep one's pants up or correct myopia.

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How to Burn Bridges to Goldman Sachs

When I saw this New York Times Op-Ed this morning by Greg Smith on why he is resigning from Goldman Sachs after twelve years, I wasn’t sure I wanted to re-print it on this blog. After all, it’s already gone viral on the internet, and everyone from Bloomberg to the Huffington Post have now commented on it. Even Rolling Stone magazine has spoken, in effect declaring that the "giant vampire squid" has spit back one of its own. The initial news reporting cycle is complete. So I asked myself two gating questions: What does a disillusioned banker’s leaving GS have to do with Asia’s One Percent? Why do I need to jump on the Goldman-pinata bashing bandwagon?

After chewing on my organic breakfast cereal and staring at this picture of Goldman’s Lloyd Blankfein (I’m not sure which one gave me more gas), I decided that this NYT editorial is in fact an event that is significant enough that I should toss my own humble opinion onto the cacophonous heap of commentaries being made.

First of all, I was never a fan of Goldman Sachs. I couldn’t afford to be. While I was a banker at Morgan Stanley and Lehman Brothers before then, Goldman was a towering competitor; they were out to eat every other bank’s lunch. Feeling any admiration for GS was a dangerous, almost self-defeating, emotion, like facing Roger Federer across a tennis net. Holding begrudging respect for Goldman was as close as many of my colleagues got. When clients talked about how strong GS was, our response was invariably, “yes, but you never know which side that you are on with them. Goldman only looks after Goldman.”

That was twelve years ago. Since then, all the evidence in the media, including Blankfein’s own tin-eared performances in front of congressional investigative panels since the GFC, points to an alarming erosion in a client-oriented culture, an affliction that hit all banks. Lehman Brothers and Bear Stearns died because they became their own casino. Other banks such as Morgan Stanley and Merrill Lynch also diluted their customer agency business and efforts to do the good work of raising money for corporations by beefing up their own proprietary books. It damn near killed them, as well. From all appearances, Goldman was somewhere in the middle – trying to delicately juggle a long-term client-driven franchise with a trade-for-our-own-account strategy that generated eye-popping profits. And for a while, they were amazingly good at doing it. They danced better than anyone else at the ball and wore the best gowns. Until the music stopped in 2008. But dancers hate not dancing, even when the tunes have been silent for some time. Instead, they plead with the band, “play! play!”

On the other hand, I am a fan of banking as an industry. Saying anything to the contrary is like saying that I don’t like my body’s circulatory system. Banking is the lifeblood of the world – the flow of money is as important as spirituality and intellectualism in defining our humanity. Without money, we'd still be trading stone tools for bison parts. However, like many of my finance industry friends and colleagues, I think that it is a terrible shame that the system has gotten so clogged with cholesterol and blood doping agents that periodic heart attacks are now seen as inevitable. Unless you are one of the people profiting from stuffing pizza and EPO (otherwise known to laypersons as “derivatives”, of which CDOs are only one form) into the bloodstream, it’s impossible not to see the risks posed to everyone.

Greg Smith’s letter is a barometer of where public opinion has gotten to. It’s one thing for him to post a blog entry or Facebook-status update or tweet about his departure from Goldman Sachs. If he chooses to risk burning a bridge to a former employer and branding himself as a “whistle-blower” that could jeopardize his chance for future employment, so be it. Hats off to someone who acts in his conscience in that way. But it’s another thing for the New York Times to print his letter as an Op Ed and have it catch fire across the global business media. No doubt that Greg will be held up as something of a hero by a still-irate public in a debate that is sure to rage for many more months.

A friend informed me that Goldman hired a new PR head earlier this week. His job just got a helluva lot more interesting! Not to mention Lloyd Blankfein’s.

As a closing note, I want to restate my opinion how vital the banking sector is. Most bankers that I know are incredibly industrious, honest, smart and deserve to be paid extremely well. Without them, Asia would not have achieved the kind of growth that has lifted so many millions (and soon billions) out of poverty and fulfilled countless dreams. But clearly, some areas of banking, particularly derivatives, have gotten far too bloated and self-indulgent. Clearly, Greg Smith’s unit was one of them. It’s noteworthy that he was in charge of equity derivatives units, not corporate client coverage. Too many bright young Chinese students these days want to enter banking because of the tempting pay levels and the lure of “inventing new financial products.” That’s a shame. The world needs new financial products like it needs new variety of chocolates. What it really deserves is a right-sized banking system that can pump clean blood at a healthy flow rate, so that wealth creation and growth can be steady, without being subject to lurches and collapses.

Blue Sky-scrapers

For any expatriate living in Hong Kong, it would be no surprise that the city has earned the dubious distinction of being the most expensive place in the world to rent a nice, if cramped, three bedroom apartment. What is key-catching is the gap by which Hong Kong takes the lead. As shown below, Hong Kong is 25% more expensive than Tokyo, 43% higher than New York, and 52% costlier than London. A US-expatriate taxed at 35% would need to earn almost US$220,000 per year just to have a decent roof overhead, never mind pay utilities or have a morsel to eat. Having a beachhead presence into China in a place where English is widely spoken and the rule of law still means something does not come cheap!

Many other countries create wealth at the top through a blessing of natural resources – oil, timber, coal, minerals, agriculture. Hong Kong’s prime wealth-creating commodity is its scarce land, which is sought after by a densely-packed, ambitious population, and sparingly dribbled out for development by a tycoon-influenced government. As I noted in an earlier posting, property development is responsible for creating sixteen Hong Kong billionaires and an untold number of 10+-millionaires.

Monthly Rental for a Luxury
Three-Bedroom Apartment
City		US Dollars
Hong Kong		$ 11,813
Tokyo		9,445
Moscow		8,441
New York		8,281
London		7,748
Caracas		6,819
Geneva		5,778
Bogota		5,628
Singapore		5,565
Lagos		5,421
Zurich		5,341
Rio		5,241
Mumbai		5,034
Seoul		4,933
Sydney		4,859

Other than these stunning residential rental prices, it is also common to see street-level family restaurants and mass-market shops being replaced by MacLaren and Rolls Royce car dealerships, luxury brands and high end jewelers. These are increasingly the only retailers that can afford the lofty commercial rents.

Of course, Hong Kong’s property market is notoriously volatile, with prices and rents swinging by up to 50% between the high and low points in a cycle. These days, however, despite the world’s economic worries, it remains a case of “making hay while the sun shines” for Hong Kong’s landlords. And for the foreseeable future, the weather forecast seems to call for blue skies with occasional patches of clouds. So, as renters suffer from the bright and warm climate, there seems to be loads of hay piling up. At least the Jockey Club horses will be very well fed!

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NOTE: This posting is tangentially related to the posting on the 2012 Forbes List of Asian billionaires.

A Room of Her Own, With No Ceiling

To belatedly mark the occasion of International Women’s Day last Thursday, I would like to call attention to a particularly admirable member of Asia’s elite - Kim Sung Joo. The more that I have learned about her, the more I have come to admire her lifelong spirit and dedication. So if you are looking to read something cynical and sarcastic, this posting will disappoint.

Kim Sung Joo is one of the women profiled in Forbes’ inaugural Asia 50 Power Businesswomen , a list which the magazine released on IWD. She was one of four Korean women who made the list. The others are spread geographically according to the table below. As you can see, Forbes did a commendable job in gathering a diverse group of accomplished individuals.

Ms Kim’s personal history started off as a typical one among Asia’s wealthy families – she was the youngest daughter among six children raised in a conservative family with the hope that she would do little more than marry into another wealthy, conservative family. However, she developed ideas that were decidedly different from her strict Confucian father and Christian mother. She excelled at studies, which made her parents nervous that she would not find a suitably un-intimidated mate. Undeterred, she went abroad for university, attending Amherst, then London School of Economics, then Harvard. But that wasn’t enough “rebellion” for her. (If my own daughter ever “rebels” to that extent, I’ll go to my grave a proud father.) When she informed her family that she wanted to marry a Westerner who she had fallen in love with, she was disowned. And left penniless. The next few years also proved to be difficult ones. She ended up splitting from her husband. She had health problems that required surgery. But the fight in her remained undiminished.

During those early years, she learned the luxury retail trade while working at Bloomingdale’s. Also, ironically, because of her overseas experience, she found herself helping her father negotiate a joint venture with a US auto-parts company. When he asked how he could reciprocate, she asked for, and received, a $300,000 loan from him. In 1990, she started a business-Sungjoo Group-importing global brands, including Gucci and Sonia Rykiel, into Korea. It was successful enough that she was able to repay her father with interest within four years. When Gucci subsequently bought back the Korea franchise rights from Sungjoo, she used the $27 million to acquire an ailing German luxury leather brand – MCM – that she thought had great potential.

She has transformed MCM into a thriving brand. In 2011, the company had revenues of US$450 million, 110 company-owned stores worldwide, and a proliferating presence in China. It is a rare example of a Korean-controlled luxury brand that has done well globally. She hopes that, in 3-4 years, she will be Korea’s first self-made woman billionaire. Not bad for a single mother.

Success stories abound across Asia; the entrepreneurial spirit is alive and well all over this hard-working region. However, this story struck a special cord with me, since there are so many reasons it should not have happened. Woman rarely succeed in Korea in business. Rich kids don't often stake out on their own and persevere to make independent fortunes. Korean-controlled foreign retail companies usually flounder due to lack of vision and profound cultural differences. Kim Sung Joo broke through all those obstacles; she is worthy of all the success that has come her way.

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Asia’s Billionaires – Forbes 2012

Forbes magazine’s popular list of the world’s billionaires has been released. The summary numbers for Asia (ex-Japan and ex-Australia / NZ) are as follows:

- The region has 267 entries, or 22% of the world’s 1,226 names;

- Geographically, the names are distributed as follows:

- Hong Kong’s Li Ka Shing again takes the top prize, posting a net worth of $US25.5 billion, ranking ninth globally. No wonder the locals call him “Superman”.

- Two Indian industrialists – Mukesh Ambani and Lakshmi Mittal – are nipping at his well-heeled heels with $22.3 billion and $20.7 billion, respectively.

Not surprisingly, China and India lead the Asian pack, given the size of each market. What is noteworthy is that Hong Kong, with a population of only 7.2 million, ranks third, with a surprising 38 billionaires. Further research reveals that 16 of the 38 names (a whopping 42%), including the top 4, made their money predominantly from Real Estate. This proportion is higher than any other country in Asia, and may rank as the highest in the world. On the one hand, it is clear to anyone who knows Hong Kong why so much wealth has come from property – the territory is a cramped, mountainous place on the doorstep of China with a tight land development policy and a low tax structure. The combination has led to the most expensive property market in the world. However, it is a sad commentary on Hong Kong that, rather than building world-beating businesses, brands and technologies like so much of the rest of Asia, its business (and political) leaders have focused so much on enriching themselves by providing housing for its own people, too often in cramped and seriously expensive dwellings.

La Vie de Luxe

Hong Kong is taking on a decidedly francophonic flavor these days. According to the Hong Kong census, the number of residents with French nationality in 2011 crested 10,000, up 60% over the past five years. This number compares to 33,700 Brits, 16,700 Americans, and 15,900 Aussies, making the French the most-populous non-English speaking Westerners in Hong Kong. Anyone who follows the global luxury trade these days knows why.

Consider the following facts:

- Mainland China is responsible for 25% of luxury goods sold worldwide. Within four years, it is projected to pass Japan as the world's largest market;

- Surrounding Asian countries with a taste for all things resplendent (Korea, PRC, Thailand) have very high luxury tax rates and import duties, making Hong Kong an attractive destination for tax-free splurging;

- Porsche just announced its per-employee bonus of 7,600 euros for 2012. This is up from 1,100 euros in 2009, 2,100 euros in 2010, and 1,700 euros in 2011. The 2012 bonus is even higher than in 2008, when the vroomster company paid 6,000 euros to each of its staff. Presumably, their cars didn't flying off the lot in Europe or the US in 2012, so the contribution from the emerging markets has been particularly noteworthy.

Okay, so Porsche is German. And Prada, Gucci, Armani and Ferrari are Italian. But nothing says luxurious living - in what you drape on your body, put in your mouth, or show off to your vigneron neighbors - like living llike the Gauls. And if Asia's 1% keep spending the way that they do, it will behoove them to learn to conjugate the verb acheter. And for the French to learn to say avec plaisir in a variety of Asian languages.




























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