business asia- issue 1, spring 2009

Issue No. 1, Spring 2009

Is Asia the Next Place to Go?

Business AsiaSit down with

Jeremy Siegeland find out his outlook on the Asian financial markets.

PLUSWHY CHINA WILL

RECOVER FIRST

RESTAURANT REVIEW:

HANDCUFFS & GOURMETIN SINGAPORE

India: Better or worse?

Business Asia

FOR GENERAL INQUIRIES:[email protected]

ADVERTISE WITH US:[email protected]

WANT TO WRITE FOR US ORWORK FOR US? CONTACT:[email protected]: “Recruiting”

LET US KNOW WHAT YOU THINK at http://businessasia.weebly.com!SEE INSIDE BACK COVER FOR MORE INFORMATION.

PRESIDENTVICE PRESIDENTCO-EDITOR-IN-CHIEFCO-EDITOR-IN-CHIEF

CHIEF ADMINISTRATIVE OFFICEREXTERNAL COMMUNICATIONS OFFICEREXTERNAL COMMUNICATIONS OFFICERINTERNAL COMMUNICATIONS OFFICERCOPY EDITORLAYOUT EDITOR

EDITORIAL

ADVERTISING MANAGERMARKETING MANAGERBUSINESS STAFF

Jeremy VasquezRay WongAlexandria SunIvan Au

Hyohoon LimSeo Hyun KimEugene HuangCheryl SimWes YiuMichael Hong

Sara LiuZoie TengNik KumarBarbie HsuChristy Ai

Hyun Jae DhongPamela HidajatTony LeeWytse Schukken

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INVESTING

TECHNOLOGY16| Rise of the Digital Dragon by Eugene Huang Our technology correspondent talks about Baidu, the Google of China

REAL ESTATE18| Tale of Two Cities: Shanghai and Hangzhou Real Estate by Barbie Hsu & Christy Ai China’s real estate condition summarized by two major cities

20 | 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.

23| 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

12 | Asia Equity Focus: Where

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

15|Good News in Bad Econo- my: the Philippine Economy Remains Strong by Aaron Vasquez, New York University The sun shines on this island economy

Issue No.1, Spring 2009Business Asia

6 | China, the United States, and the Financial Crisis by Sara Liu How is the global economic crisis affecting China and Sino-US relations?

8 | 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

10 | India’s Future Amid the Present Financial Crises by Nik Kumar The emerging economy of India shows promising growth and a positive economic outlook

INVESTING

COVER FEATURE4 | EDITOR’S LETTER

5 | BUSINESS OVERVIEW

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

TECHNOLOGY16| Rise of the Digital Dragon by Eugene Huang Our technology correspondent talks about Baidu, the Google of China

REAL ESTATE18| Tale of Two Cities: Shanghai and Hangzhou Real Estate by Barbie Hsu & Christy Ai China’s real estate condition summarized by two major cities

20 | 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.

23| 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

LIFESTYLE25

| Mainland China: Home of 106 Billionaires and More Than 800 Million Poor by Christy Ai Discussing the widening gap be tween rich and poor

27 | Restaurant Review:

Doctor’s Orders by Wes Yiu Eccentricity is taken to a whole new level in Singapore

29| Destination: Shikoku by Joanne Ng, National University of Singapore Experience the wonders of Shi- koku, the smallest yet one of the most beautiful islands in Japan

INTERVIEWS32 | 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

34 | On Korea: Seo Young

Tae, Hyundai Oil Bank by Seo Hyun Kim What the globalizing world means to South Korea

CAREERS35

| Postcard from the Edge by Duncan Scott,Vice President, V.F. Corporation Things to keep in mind about working in Asia

36 | Internships Abroad:

Working in China

by David Hao, University of Toronto Take a look at a summer intern’s experience with an American publisher in China

37 | Hot Careers in China for Foreign

Graduates by Alexandria Sun & Ray Wong Two professors at Nanjing Uni- versity discuss their thoughts on the economy and future for students

Shanghai, see p.19

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WELCOME to the inaugural issue of Business Asia, the first undergraduate-run 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 Penn-sylvania, NYU, UCLA and Boston University. We hope to expanding interna-tionally 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 re-spectively. 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 op-portunities in Asia. As you read through these articles, we hope to shed light on the question that lingers on many minds.

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?

From top: Alexandria Sun, Ivan Au

Alexandria SunIvan Au

CO-EDITOR-IN-CHIEFSQUESTIONS? FEEDBACK? Email us at [email protected]

BUSINESS ASIA • Spring 2009 • 5

Business Overview

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 protes-tors clashed, ASEAN+3 Summit finance ministers’ meetings were cancelled.

Japan announces a record stimulus packageJapan 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.JANUARY

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 DifficultiesIndonesia’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.

Hilary Clinton Discusses Future US-China Eco-nomic RelationshipThe 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 AgainThe Korean Won exchange rate to U.S. Dollar has reached a record high of 1,500 won.

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

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

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

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 RecoveryAs 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.

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Cover Feature

THE ISSUE

Anumber of economists believe China bears some responsibili-

ty in causing the financial crisis. For-mer United States Treasury Secre-tary 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 in-flation and booming trade and capi-tal 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 mort-gage market and has now burst with devastating consequences world-wide.” 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

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 BACKGROUNDHowever, 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 be-gan with its 1979 economic reforms. Focused on advancing the Chinese economy, the reforms aimed to de-crease government planning and direct control while increasing the role of market mechanisms. By de-centralizing the economy or more specifically, economic policy-mak-ing, enterprises were able to operate and compete on free market prin-ciples. Since then, China’s trade and investment reforms initiated a surge in foreign direct investment (FDI). Many economists credit this impres-sive FDI for much of China’s aver-age 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

By Sara Liu, Cornell University

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

China, the United States, and the Global Financial Crisis


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 imbal-ance. U.S. imports from China are almost six times as large as US ex-ports 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 ex-ports become clear.

THE EFFECT ON CHINABecause of the global trad-

ing 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 reces-sion is inevitable at some point.” However, given China’s significant trade surplus with the United States, economists generally agree that Chi-na 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 at-tributed to its low-margin, low-tech-nology 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 fall-ing 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.

CHINA-U.S. RELATIONSThis 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 invest-ment in both countries. This talk ended in a $20 billion provision in trade financing with the goal of eas-ing 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 “in-terdependent,” 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 “manip-ulating” 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”’ pro-gram “poison to the solution” of the global economic crisis.

CONCLUSIONThe Treasury Department

urged China to “re-balance its econ-omy 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 Feb-ruary of 2009, China took its first steps in regionalizing the Yuan. This was met with approval by research-ers 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 for-eign exchange reserve levels.”

Furthermore, despite the fi-nancial 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 commit-ment to support the development of African countries and continue to encourage Chinese companies to further invest and establish busi-nesses 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 rela-tions with the United States as the global economy weathers the latest recession. BA

AS OF FEBRUARY 2009, CHINA

ACCOUNTED FOR ALMOST HALF OF THE U.S. TRADE

DEFICIT.


Cover Feature

W ith T-shirts labeled “Lehman Fraud”, many victims of Lehman Brother’s mini-bond 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 of-ficial 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-

By Felix Lau, Hong Kong University of Science and Technology

Protestors in Hong Kong lay signs in the streets con-demning Lehman Brothers

and other banks for the Minibond Crisis.

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terest yield. As a result, more than 40,000 investors have put 2.01 billion dollars into mini-bonds and other com-plex 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 re-covering some of their losses. However, the court de-cided that they should start a civil ligation, which is more costly and risky. On the flip side, other parties criticized

Hong Kong: Victims of Lehman Brothers’ Minibond Fraud


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 authori-ties, 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%.

THE AFTERMATHIt will be a while before consumers restore their confidence in the

market. When various Chinese banks announced that they own the mini-bond, 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 docu-ments. 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 regu-lation 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

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

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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 Lehm-

an Brothers.

WHAT HAPPENED?Lehman Brothers filed for bank-ruptcy protection on September

15th, 2008 and the minibonds were rendered useless.

HOW MANY ARE POTENTIALLY AFFECTED?

More than 40,000 investors have invested $2.01 billion of their

lifetime savings into minibonds and other complex derivative

instruments.

WHAT IS LEHMAN BROTH-ERS SELLING FOR NOW?

As of April 9, 2009, the stock price of Lehman Brothers Hold-

ings Inc. (ticker: LEHMQ.PK) closed at 4 cents a share.Two

years ago, the stock price was over $70 a share.

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PRESENT BUSINESS CLIMATE OF INDIAWITH THE UNITED STATES experienc-

ing the worst financial meltdown since the Great Depression of 1929, the U.S. position as the ul-timate 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 gov-ernment bailouts and nationalizations, sending shock waves throughout the global financial mar-kets. 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 na-tion 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 con-sumer debt and rising asset values. As the Rus-sian 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 mar-kets 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, tour-ism, textiles, information technology, and foreign investment continue to suffer.

However, the fundamental financial prin-

Cover Feature

By Nik Kumar, Cornell University

The current financial meltdown has rocked the world but some coun-tries 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.

INDIA’S FUTUREAMIDST THE PRESENTFINANCIAL CRISIS


ciples in India are still sound because the Indian bank-ing system is conservative: the govern-ment and its r e g u l a t o r s have a domi-nant role to play in the

banking system with over 70% of assets and liabilities held by government-owned banks, as high as 29% re-serve requirement, and over 90% of loans and depos-its 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 secu-rity, medical, and disability payouts. A natural desire for security, therefore, fuels personal savings. For ex-ample, 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.

FUTURE GROWTH DRIVERS OF INDIASince 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.

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 econo-my to a consuming one. If the country can be encour-aged 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 semi-skilled 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 ter-rorist attack on Mumbai, businesses must consider the persistence of political violence. “Fear of physical dan-ger to employees, executives, and property can muddy the sentiment towards India,” says Gunjan Bagla, a consultant to US companies in India. With the upcom-ing 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 resil-ience in the face of the global economic meltdown, thus revealing a promising future for the emerging economy. BA

“The three pillars of the banking finan-cial system—capital, liquidity, and confi-dence—remain rela-tively unshaken.”


INTRODUCTION

Last year was a disappointing year for every-one. The U.S. housing market collapsed. The bankruptcy of Lehman Brothers has prati-

cally destoryed investors’ confidence and financial market stability. Fears about further deterioration in the banking sector have also triggered intense dele-veraging and unwinding processes, which left major stock indexes in the global financial markets to plum-met. 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-

Investing

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 in-flicted 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 fi-nancial 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 eq-uity markets and what are the most valuable invest-ments in these current market conditions?

ROAD TO 2009: BIGGEST CHALLENGE FOR ASIAN FINANCIAL MARKETS SINCE WWII

Banking businesses in Hong Kong look grim too. The macroeconomic environ-ment has considerably worsened. The continuous net outflows from the domestic equity markets weigh on heavy investors’ attitude towards Asia’s financial markets. These mar-ket uncertainties and liquidity con-cerns have dragged the Hang Seng Index down to around 10,700 to 11,550.

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Asia outperforms U.S. and World since November 2007

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By Zoie Teng, Cornell University

PERCENT PERFORMANCE MSCI ASIA-PACIFIC EX-JAPAN MSCI WORLD S&P 500


EXTERNAL: WEAK MACROECONOMIC TRENDS AND CASH DRAINAGE FROM CHI-NESE MARKETS

The significant worsening of the macro environ-ment in the U.S. has made Asian equity markets much more volatile in the short run. The ISM Manufactur-ing Index, a key index that measures the U.S.’ manu-facturing activity, plunged to a record low in Decem-ber. 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 poten-tial 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 bigger-than-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 overes-timated 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 finan-cial 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, provid-ing credit support for manufacturers of ten sectors, which includes housing, rural infrastructure, auto car, and steel. It is hoped that these fiscal spending, tax-cuts 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-

ity. However, the market now becomes a very dynamic place and has so many uncertainties com-pared to the past. We are unsure about whether the

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

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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 big-gest banking operations have been cleaned up. Many investors now prefer to sit on cash amid market un-certainty 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 Fed-eral Reserve Bank, cautioned, “fiscal stimulus alone would likely not be enough to prompt a recovery in the economy”. Given the current difficult environ-ment, 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 coun-try’s economic growth potential and the oversold lev-els. 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 in-stitutions, 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

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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 Boni-facio City. The largest property developer in the Philip-pines, Ayala Land, is also keeping its capital expen-ditures 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 Hold-ing, 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 af-fected by the crisis, because in addition to growing through consumer demand rather than the export-driven 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 gov-ernment 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

The domino effect triggered by the U.S. subprime mortgage crisis has crippled many countries’ econo-mies 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 govern-ment 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 work-ers 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

By Aaron Vasquez , New York University

Good News in Bad Economy:

the Philippine Economy Remains Strong

Investing



Technology

Rise of the Digital DragonBy Eugene Huang, Cornell University

10.2%. 11.1%. 11.9%. These statistics represent the phenomenal real annual GDP growth rate of Chi-na 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, Chi-na currently houses the largest number of people in any country around the world. Add to this the popula-tion statistics of other countries with a predominant Chinese population, these figures represent a signifi-cant 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 cer-tainly 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 def-initely 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 Decem-ber 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 discus-sion forum.

INCREASING POPULARITY AS A SEARCH PORTAL

The increasing popularity of Baidu is evident in recent data collected by Comscore, which mea-sures 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 BUSI-NESS 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, ad-vertising 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 tremen-dous growth over the 18 months since its inception.

Furthermore, Baidu has plans to enter the e-commerce 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 pay-ment 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-com-merce 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 INFRINGEMENTHaving 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 concern-ing 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.

BOTTOM LINEWhile Baidu’s entire arsenal of new and excit-

ing products and services promises great potential in the future to come, its alleged unethical business practice may very well prove to be its greatest mis-giving. What’s important is that the management at Baidu come clean with their business practices and re-gain 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 over-take Google as the biggest name in the digital realm in the near future? BA

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AS OF AUGUST 2007

YAHOO: 8,549 MIL (14%)BAIDU: 3,253 MIL (5%)

MICROSOFT: 2,166 MIL (4%)

NHN: 2,044 MIL (3%)

ASIA IS THE LEADER ININTERNET SEARCHING TRAFFIC

IN PICTURES

34%- ASIA- 33%

UNIQUE SEARCHES (WORLDWIDE 100%)

28%- EUROPE- 29%

27%- N. AMERICA- 26%

7%- S. AMERICA 8%4%- MIDDLE EAST & AFRICA- 3%

TOTAL SEARCHES (WORLDWIDE 100%)


Tale of Two Cities:Shanghai and Hangzhou Real Estate

By Christy Ai and Barbie Hsu, Cornell University

The 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 glamor-ous commercial center in China, Beijing being the cul-tural and political center. As a result, Shanghai is com-pared to New York City for its cosmopolitan nature and bustling commercial areas. Many major interna-tional 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 Shang-hai have greater spending power than the rest of the country and are more receptive to international brand

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 hi-erarchy 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 bor-der between Shanghai’s Inner and Outer Ring, hous-ing price goes for about $500/square foot, and once you reach the outskirts of Shanghai, hous-ing price immedi-ately drops down to $100/square foot. Commercial space is also selling fast in Shang-hai. For example, the Shanghai World Financial Cen-

Of the Fortune 500 World, over 300 of the

company’s overseas Headquarters are

located in Shanghai.

Real Estate


Hangzhou was voted as Number One

Best Place to Live in Asia by the United Nations, and this

publicity added to its value.

ter was a popular hit among investors. Located in Pudong, the commercial center in Shanghai, the building is a showcase of grandeur and modernity. Designed by Kohn Pederson Fox, it consists of 101 stories and stands 1,614 feet tall. There are many buildings like this, yet what is most surprising in the light of economic downturn back then is that 40% of the seventy-floor office space was already reserved at its open-ing on August 28th, 2008. This kind of market behavior also applies to other commercial real estate mar-kets. According to Financial Times’ Daniel Thomas, Grosvenor, a prop-erty company owned by the Duke of Westminster, has committed $600 million for shopping centers in China. Just two hours from Shanghai, Hangzhou is a mid-size city famous for its natural and architectural scenery. It is often considered the private backyard re-sort for the Shanghai elites who want to occasionally get away from the bustles of the city life. Known for its tranquility and breathtaking view, the area near the West Lake (XiHu) has been attracting developers and consumers alike. Don’t be surprised! These resort homes can ask for a higher price than the first-tier apartments in Shanghai. The apartments within walking distance to the West Lake have an average selling price of about

$1000/square foot with some go-ing as high as $2000/square foot.

As Shanghai’s elites bid on the limited lakeside view, the housing price is ex-pected to keep on rising for years to come. Though investors seem op-timistic about Shanghai and Hang-zhou’s real estate markets and expect a hefty return on investments, prop-erty markets in Asia have generally slumped in recent months. Based on Real Capital Analytics numbers, there has been a dramatic decline in sales – 68% in the third quarter from last year. Since then, new regulations in China were also created to prevent

“speculation and land hoarding” and Asian banks are being more cautious in giving out loans. All these fac-tors are further reducing the volume of property sales. At the end of the day, the story of rising hous-ing price demands an explanation: investors are flock-ing to China because they believe in its high growth potential. With over 1.3 billion people, China is des-tined for economic growth due to the size of its popu-lation alone. As people make more money, they would have more dispensable income. They will want more consumer goods, more shopping malls, and of course, more office space for burgeoning businesses. BA

Hangzhou, the capital of Zhejiang province, is a 2 hour drive south-west from Shanghai.



Where is China’s Real Estate Market Heading?

Many Chinese millionaires and billionaires were born out of the real estate boom in the past decade. Though the imma-ture 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

In 1998, China’s real estate market entered a Golden Era. After China cancelled its welfare housing distri-

bution 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 encoun-tered 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 Bei-jing, 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.

II. WHILE THE CAUSE OF THIS ADJUSTMENT HAS NO DIRECT RELATIONSHIP WITH THE SUBPRIME MORTGAGE MARKET, SUBPRIME MORTGAGES HAVE INSTIGATED GLOBAL ECO-NOMIC VOLATILITY, INCREASING THE INTENSITY AND DE-GREE 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

by Professor Peng Liu, Ph.D., Cornell Univeristy

AUTHORS’ BIOGRAPHIES

Dr. Peng Liu, Assistant Professor of Real Estate and Finance, joined Cornell’s fac-ulty in 2007 after obtaining a Ph.D. in finance and real estate from the Haas Business School at University of Cali-fornia, 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 Cen-ter 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 academ-ics, Prof. Liu worked in various indus-tries, including engineering, advertis-ing, consulting and hedge funds.

Mr. Haibin Lin, Founder and Managing Director of Shanghai Foresight Invest-ment Management Co. Ltd. The compa-ny is a boutique real estate investment bank, focusing on real estate invest-ment strategy, M&A and corporate fi-nance. Before founding the company, Mr. Lin worked GIC Real estate, a Singa-pore based real estate investment firm, and real estate development compa-nies 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 Uni-versity.

and Haibin Lin, Managing Director of Shanghai Foresight Investment Management Co. Ltd.

Translated by Ivan Au, Cornell University


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

Real Estate Entrepreneurs Confidence Indexfrom the China National Statistic Bureau

real estate financial products are extremely simple. Mortgages securitized by long term floating interest rate are the dominant product. There are no com-plex 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 ad-justments. 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 liquid-ity.

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 intro-duced a new set of policies to stimulate the real es-tate market in October 2008. This policy may pos-sibly 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 RECOV-ER WITHIN THE NEXT TWO YEARS

The basic need for housing is far from satisfied. Due to urbanization and change in household struc-tures, by 2025, the population residing in Chinese cit-

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 devel-opment, 75-80% of families in first and second tier cities currently still reside in welfare residences con-structed 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, hous-ing affordability had only worsened between 2003 and 2005. But rest assured, since the gap is not con-siderable, the housing affordability would quickly re-bound to the historical average within the next two years of adjustments.

Generally speaking, the Chinese housing mar-ket 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 resi-dential inventory level compared to the same period last year. As a result, these inventories have strained the cash flows for many developers, forcing devel-opers to reduce prices. After prices reduce, the deal


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. AFTERTHOUGHTSThe 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

Property Sales Volumefrom Centaline

Housing Affordabilityfrom CEIC, J.P. Morgan estimates

NEW MORTGAGE LENDING POLICY

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

Mortgage ceiling reduced to 70% for the second property and mortgages no longer pro-vided

Monthly mortgage repayment limited to 50% of household income

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

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 second-home 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 addi-tional properties would be determined by individual commercial banks.

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

JUNE 2003

MAY 2004

SEPTEMBER 2004

JUNE 2006

OCTOBER 2007

OCTOBER 2008


Risks in China’s Housing MarkeT

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.

by Ivan Au & Jeremy Vasquez, Cornell University

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 associ-ated with pre-completion sales. Selling before comple-tion is a characteristic of developing real-estate mar-ket s in emerging countries. This market phenomenon takes place because it is beneficial for both sides. De-velopers 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 wel-fare 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 transparen-cy and investors don’t have sufficient information for

Real Estate


historical income and transactions. The only information available is from consulting firms. Instead of having ac-cess 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 recov-ery- residential or commercial?PL: Residential real estate will recover relatively sooner. The current adjustment is due to overpricing. The de-mand is not the problem; the affordability is the main concern. As price adjusts, there is a lot of waiting de-mand. 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 unfortunate-ly 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 similar-ity 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 improv-ing the regional real estate market?PL: The goal for the local government is to stabilize the local economy and to maximize employment opportuni-ties and GDP growth. Right now, the Chinese govern-ment likes to have centralized power. If it wants real

estate properties in a certain area, it would extend fa-vorable 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 Chi-nese banks become even more conservative in their lending to the real estate developers? Will there be any consolidation in the real estate indus-try 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 some-times cannot even get the principal back. The only rea-son for which the banking industry was eager to lend is because the housing prices were soaring and borrow-ers 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 infor-mation 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. There-fore, 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.

Mainland China: Home of 106 Billionaires

and More than 800 Million Poor

By Christy Ai, Cornell University

“To get rich is glori-ous,” 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 mil-lion-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, mak-ing a living off farming and other labor-intensive occupations. Farm-ing provides food but very little cash, and most farmers do not get social security. Therefore, they must save and budget carefully in case of emer-gencies. Even worse, the weather can wreak havoc without notice in ad-vance. For example, this year’s snow-fall destroyed almost 3,000 square miles of crops, leaving many families in desperate need of food and money.

GROWTH AND INEQUALITYHistory has shown us that

a wide income gap poses serious dangers to society. Excessive in-equality 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

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serves as the scapegoat. Rural pov-erty in China is a real problem, and will continue to be a problem whether the billionaires splurge on $2,000 t-shirts or not. Unemploy-ment, 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 fundamen-tal and based more on social class than wealth.

Among other things, the rich have now realized the income in-equality is a very realis-tic part of life and may end up threaten-ing the social stability and unity in Chi-na. While they continue to lavish them-selves with L’Occitane en Provence and Mont Blanc, some are be-ginning to take social responsibility seriously. In 2008, a total of USD $9.4 bil-lion 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

follow their path.

OPPORTUNITIESThough 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 Gar-dens, Yang Huiyan becomes the first Chinese to pass the USD $10 billion

benchmark with her massive wealth of USD $17.5 billion in assets, mak-ing 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 Gar-den, whereupon he then transferred his shares to his daughter, Yang Hui-yan.

Zhang Yin, the richest self-made 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 ex-porter of scrap paper. Through her hard work, she has tripled her ma-jority 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 de-velopment and manufacturing are the two greatest contributors to this recent surge in wealth, both of which are primarily based in Guang-dong. However, while these busi-

nessmen are mak-

ing their fortune in G u a n g -dong, we also need to see the flip side of the coin. The minimum-w a g e d , 70-hours a week, fac-tory work-ers are s e n d i n g

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 en-vironment in China presents plenty opportunities for today’s sharp and ruthless young entrepreneurs who hope to become the next billion-aire. But, will this generation help to close the gap between rich and poor? The future of China will be largely dependant upon their deci-sions. BA

The rich have now realized that in-come inequality

is a real part of life and may end up threatening the

social stability and unity of China.

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Doctor's Orders:Check Out Aurum

By Wes Yiu“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 hos-pital-themed eateries in Singapore. In an effort to keep pace with other hot-spots of delectable cuisine, Singa-pore enters the fray with the restaurant Aurum – pairing food and medical surgeries. As you step inside, you will embark on an unforgettable journey, witnessing revolu-tionary 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, giv-ing 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 notice-able gold-plated dining chairs that are actual wheel-chairs. Yes, they are fully-functional and even come equipped with a locking mecha-nism 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, un-charted waters with its extremely macabre theme. Sin-gapore is known for its large Chinese population. As a person of Chinese lineage, I can say that Aurum’s ap-

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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. Practitio-ners of the field work to utilize the chemical and physi-cal processes that occur during cooking, ultimately cre-ating 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 op-erating 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

was the intent of the restaurant itself given its hospi-tal 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 din-ing at Aurum. I do not doubt that the chefs behind these concoctions are quite talented. They are cer-tainly 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 origi-nality to succeed in the world of fine dining. BA

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Lifestyle

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 un-able 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 pictur-esque 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 PREFEC-TURE; 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 preci-pices 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 acci-dents 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 tempta-tion to order a second serving.

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…

Destinations: ShikokuBy Joanne Ng, National University of Singapore


DAY 6, 2ND JANUARY: MATSUYAMA CITY, EHIME PREFEC-TURE 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 pro-vided 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 On-sen 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. Unfortu-nately, 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 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 ex-ceptionally 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 southern-most 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 ac-companying 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 tree-trunk 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 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

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Interviews

416 Eddy Street, Ithaca, NY 14850 | (607) 277-6767JAPANESE CUISINE

With a romantic and elegant atmosphere, we offer the finest sushi selections and a variety of other classic Japanese entrees.

SpecialsTuesday- LUNCH & DINNER

40% OFF- Rolls, House Sake, WineThursday

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Having a par ty?

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BA: Business AsiaJS: Jeremy Siegel

BA: In your article “Consequences of Asia Rising,” you mentioned that the U.S. economy was losing its im-portance 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 eco-nomic storm better than Europe or the Americas. First of all, we do see that their stock markets are do-ing better. They have an advantage of being high savings countries. So they don’t have the leverage prob-lem, and they can divert some of their savings and use them to stimu-late demand.

BA: The financial crisis wiped out $50 trillion last year in Asia accord-ing to Asian Development Bank. How much is the U.S. liable for the recession in Asia?

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 In-stitute. 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.

Sitting down with Professor Jeremy Siegel, Ph.D. University of Pennsylvania

by Kellen Xu, University of PennsylvaniaThe prominent Wharton professor and author of the classic “Stocks for the Long Run” discusses his view on Asia’s economy and its future.

JS: I think that growth projection was too high everywhere, not just in the United States. There was exces-sive pricing in real estate and overly optimistic expectations in commer-cial development and tourism. Over optimism was not just in the United States. We passed through a re-markable period of world growth, and expectations just got too high. The U.S. was one of those countries that over-speculated in the real es-tate market. BA: Are Asian countries better equipped for recovery than their Western counterparts from this fi-nancial 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


Interviews


Sitting down with Professor Jeremy Siegel, Ph.D. University of Pennsylvania

by Kellen Xu, University of Pennsylvania

of emergency measures because the risk of a break-down in our finan-cial systems is well past, very differ-ent 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 re-cession? Does China or India seem more promising? JS: I think it depends on how the recovery evolves. Whichever coun-try recovers first will have the ad-vantage. 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 dimin-ish the view of the U.S. However, if we recover quickly, the rest of the world will see that we have a resil-ience that would maintain our po-sition the world’s economic leader. There is no question in my mind that China and India will eventu-ally 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 popu-lation, 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 develop-ing world, China, India, and other countries in the coming decades. The aging population in the devel-oped 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 lev-els 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 dol-lar, the current global reserve cur-rency. 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 economi-cally viable. What political and eco-nomic ramifications would occur if it did take place?

JS: We have already seen a slow ero-sion of the dollar as the internation-al reserve, which is being replaced by the euro and yen. I expect that trend to continue. However, I don’t be-lieve there will be a world currency that will replace currencies in use by the major economies in the world. We have actually tried special draw-ing rights many years ago, and they

weren’t very popular. People want money where they can buy some-thing.

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 stu-dents looking for jobs? JS: I also wanted to be a teacher, and I always loved economics. Al-though 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 initia-tives 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 finan-cial turmoil?

JS: Oh, yes, I’ve been through two cycles like this before. There will be a dip in the short run, but the econ-omy 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 Pennsyl-vania, double majoring in Business and Psychol-ogy with special concentrations in Finance and Legal Studies.



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 com-pany through extensive market research and continuous effort of restoring faith within the company. Though the cri-sis is more severe this time, Seo Young-Tae, remains opti-mistic.

INTERVIEW WITH HYUNDAI OIL BANK’S CEO Seo Young-Tae

By Seo Hyun Kim, Cornell University

Interviews

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 com-pany 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 ex-ecutive cost to deal with the current financial crisis. Also, to make the company more competitive for the future, our company is focusing on internal manage-ment 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 busi-ness 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.

BA:Graduating seniors this year are having a hard time finding a job. Any tips for them? SYT: No matter what happens, compa-nies 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 over-come one way or another. Therefore, students should plan for their future beyond the immediate crisis by differ-entiating themselves and preparing for their long-term career goals. BA

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


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 fascinat-ing 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-work-ing, 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 prob-lems 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 fac-tors 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 con-tributes 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 stay-ing focused on the Big Three. First, Quality of the service or prod-uct 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 EdgeBy Duncan Scott,Vice President of V.F. Corporation

Things to keep in mind while working working in Asia!

Careers


THE ARRIVALJoy flooded my heart when I learned that I was going to work in China this past summer. Though born and partially raised in the Middle Kingdom, I was, shamefully to admit, quite ignorant of the recent economic and cultural development as I have spent a good chunk of my life living in Canada. Therefore, I saw this summer internship as an excellent opportunity to fully reconnect with my mother land and explore China from a foreigner’s point of view. As soon as I landed and settled down, I plunged right into action. The little alleys, the towering skyscrapers, the bustling crowd...walking down the memory lane, I was nostalgic of childhood experiences. China is a mystery whose essence cannot be captured by words alone; a unique culture pervades the most mundane of everyday’s life-the blue license plates attached to the rear ends of cars, the red cornices of Chinese temples and a myriad of tiny things that would make your tingle with awe and excitement.

THE WORKI 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 documents. Priding myself on having a good grasp of Chinese, I quickly learned that translating was not as easy as it looked. Though a native Chinese speaker, I frequently encountered professional terms that were hard to translate. Soon enough, Google Language Tools became my best friend at work. While working there, I was lucky to have access to free Business Week magazines and the research materials conducted by Standard & Poor’s, two subsidiaries under

McGraw-Hill. Yet surprising enough, very few people in China have ever heard that

McGraw-Hill is actually a Fortune 500 Company. Popular reaction

was either a complete blank look on their face or “Ohhh that publishing company?” after a moment of awkward pause. Along the same line, many people did not know about Standard & Poors or even

Business Week. Of course, as a temporary employee there, I

was a bit ticked off by the lack of due recognition.

Ultimately, I loved the job. Perhaps the only

downside was the meager pay I received: 70 RMB per day (about 10 dollars) - an amount only enough for treating friends to a round of beer. But, I feel the experience of working in a Fortune 500 corporation in Asia would outweigh the “labor exploitation.” With Asia evolving 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

By David Hao, University of Toronto, Canada

Working in the Middle Kingdom

The little alleys, the towering

skyscrapers, the bustling crowd...Walking down

the memory lane, I was nostalgic of childhood

experiences.

David Hao is a sophomore at the University of Toronto in Canada.

Careers

Take a look at a summer intern’s experience with an American publisher in China


HOT CAREERS IN CHINA

for foreign graduates

Bottom line:If you are a new college grad but think-ing 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 net-working 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

With high GDP growth and an immense market size, China presents many exciting job opportunities

for college graduates. For graduates who are considering making a strategic career move to China, we

have compiled a list of promising career fields after meeting with Professor Yuetang Wang, CPA and

Professor Jinping Yu of Nanjing University.

According to Professor Wang, “ac-counting is evolving into a new playing field as the Chinese government allows for the adaptation of the International Accounting Standard (IAS).”As a re-sult, the Big Four accounting firms are taking advantage of the new policy to grow their businesses. Also, China pres-ents a wealth of investment opportuni-ties for foreign investors. Whether you are in for merger and acquisition or just opening a store branch in Shanghai, you probably need good bookkeep-ing 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.

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 risk-loving 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 middle-class 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: be-fore striking out on your own, first seek guidance from the locals and take time to understand the rules of the game.

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 manage-ment, it is in a rather short supply. As China becomes more globalized, the de-mand for experienced managers would increase. An experienced manager can gather a comfortable seven-figure salary (in RMB, Chinese currency) in a major international corporation.

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 experi-enced professionals in business, law and cutting-edge technology. VC firms usually only recruit professionals who come with extensive, highly special-ized work experience and a wealth of professional contacts.

Accounting

Management

EntrepreneurshipVenture Capitalby Alexandria Sun & Ray Wong,

Cornell University

Careers

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