Last week, Dr Tony Tan, deputy chairman of the Government of Singapore Investment Corporation (GIC), gave an exclusive interview to Commonwealth Magazine, a Taiwanese business periodical.
I have extracted some of the points being discussed below for us to ponder upon :
• Right now, the biggest concern is about an asset bubble. What do you think?
If you look at the consequence of what has happened in 2008 and 2009, apart from the economic difficulties which have been felt by a lot of countries, there's one major change. It's already been quite clear for some years now that economic growth throughout the world is going to shift from the West, essentially from the US and Europe, to Asia, particularly to China, India and other countries. And 10 years ago, 80 per cent of the world's economic growth took place in Europe and the US. This has steadily declined. The share of world economic growth accounted for by Asia has risen and will soon rise to over 50 per cent. And we believe that this will continue. So by and large, economic growth will be stronger in Asia than in the Western countries.
• Some people think that Citigroup's situation is a symbol of the decline of Europe and America. What's your view about the financial industry landscape in the future? Do you think that Asian banks will replace their Western counterparts?
This financial crisis has presented Asian financial institutions with what I will regard as a once-in-a-lifetime opportunity to increase their market share in the world's international banking business and become much more important players in the global banking system. The reason is a very simple one - the financial crisis which originated in the US has damaged many US and European banks.
But in Asia, because we went through the Asian financial crisis 10 years ago, in 1997 and 1998, which caused us a great deal of problems, I think the Asian banks have learnt their lessons, and so have Asian governments. So by and large, the central banks in Asia - for example, the Monetary Authority of Singapore - have made sure that the banks...operate in a very conservative way. They did not invest a lot of money in collateralised debt obligations and other types of derivatives. As a result, Asian banks have come out of this crisis in much better shape. They have higher capital ratios, they are not as leveraged as the American and European banks, they have much more capacity to extend their lending. They are in relatively good shape. So they are in a good position to expand their business.
The only qualification which I would have is that for this to happen, the Asian banks would have to build and develop their capabilities because if they want to play a more global role, they need to have more global capabilities. And these are technical capabilities, like the ability to do investment banking transactions, the ability to do foreign exchange business across the globe on a 24-hour basis, the ability to engage with companies not only in Asia but also in Europe and America. If they can do that, then they have the capital base and the financial balance sheets in order to increase their share of the world's banking business. As I said, I think that this is a once-in-a-lifetime opportunity. Whether it will be realised by the banks in Asia depends on what they actually do.
• You mentioned the rise of Asia. Will GIC invest more in emerging markets and less in developed markets?
You will find more of that in our chief investment officer report. But all I can say is that when GIC started in 1981, we started in a very simple way. We invested only in public markets, equities and bonds in the stock markets in the US and Europe. And even at the present time, we have substantial investments in the US and in Europe, but with the shift in world growth from the US and Europe to the emerging countries, particularly in Asia, our view is that over a period of time, we will be investing more in the emerging countries than in the US and Europe. But GIC does not operate on strict allocation targets. We look at where we can see value, but certainly value will come in regions where there is economic growth. So we would expect over a period of time that more of our investments will be in the emerging countries, particularly in Asia, rather than in the US or in Europe. But we have no specific targets.
• Right now, the rate-of-return target is the G-3 (the US, Europe and Japan). Does GIC intend to modify the target because of the shift in economic power (that is, to China)?
That's a very big question because the definition of global inflation, as in the sense the average of the inflation rates of Europe, America and Japan, is arbitrary. It need not be the case but you need some measure. I would imagine that as the Asian economies grow, countries like China will play a much greater role in the world economy and when that happens, I think it would make sense for GIC to re-look again as to whether our definition of global inflation rate as the average of the inflation rates of the US, Europe and Japan is the right one or not, or whether we should include countries like China. That will be more realistic.
• So do you think it's time to think about this issue?
We are thinking about this already because you have to. We can see, for example, during this crisis, that China has come out of this global financial crisis very well. I mean, it has maintained its growth rate at 8 per cent. It is in a strong position with its very large reserves, more than US$2 trillion (S$2.8 trillion) and it must continue to be responsible for a large part of the world's growth. You can see the way this has changed in how major decisions are made throughout the world today. Today, it's no longer the G-7 of industrialised countries which make decisions but the G-20 which includes countries like China, Brazil and Indonesia. And I think that this is a reflection of how economic wealth and influence is shifting from Europe and America to the emerging countries.
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