DPM Tharman Shanmugaratnam at GIC's 20th Anniversary in China Dinner

Speech by DPM and Coordinating Minister for Economic and Social Policies, Tharman Shanmugaratnam, at GIC’s 20th Anniversary in China Dinner, Beijing, on 18 October 2018.


Dr Tony Tan, Special Advisor, GIC and former President of Singapore,
Minister Heng Swee Keat, Minister for Finance, Singapore
Mr Lim Chow Kiat, Group CEO, GIC
My fellow Board Members of the GIC
Distinguished guests, ladies and gentlemen

It is a pleasure to join GIC at this major, 20th year milestone of its journey as a major investor in China.

It is also an important period in China’s evolution, 40 years after it began its economic reforms and opening up to the world, and as it moves now towards achieving high quality growth and meeting the longer term needs of an ageing society.

And it is an important point in time for the world economy - with the US in a healthier economic state than has been seen in a long time, but much of the rest of the world slowing, and with growing downside risks for the global system as a whole. 

The downside risks are increasingly occupying the minds of both policymakers and investors. They were at the forefront of the many discussions that took place at the IMF/World Bank annual meetings in Bali last week.

I will talk briefly about three major risks - although it is the combination of the three risks that is most worrying.

The first risk is cyclical, and to be expected - we are at the late stages of the current economic and financial cycle in the US and some other economies. When the cycle runs out of steam, it could lead to a tumble in the world economy. 

No one knows for sure when the downturn will come, or where it will start. But the fact of the US economy having seen an unusually prolonged stretch of growth, and the fact of highly elevated asset prices, make seasoned players wary. 

What is especially worrying is that the downturn will occur in a world with much higher levels of indebtedness than we had before the global financial crisis. This was not unexpected. A period of prolonged low interest rates encouraged more borrowing. It has also encouraged lower quality lending – e.g. covenant-lite loans – with much of these loans being made by a less-regulated non-bank financial sector. They add to the risks in the system as interest rates are now gradually normalised.

This is not a new story in financial history. It is an old adage over and over again. Good times never last forever. And periods of stability have a way of laying the foundations for future instability. 

But there is another complication this time. When the downturn does occur, there will be much less room to counter it through monetary and fiscal policies. Even with interest rate normalisation in the next few years, because we are starting from today’s extremely low rates, there is no scenario that will give advanced country central banks room to cut interest rates by the extent needed to counter any serious significant downturn. 

Government debts in much of the advanced world have also increased significantly since the crisis. Even if there is still a good case for counter-cyclical fiscal policy in a downturn, getting political support will be harder.

The second risk is of weaker growth in the emerging world as global interest rates are normalised.

Advanced country central banks have good reason to normalise interest rates, and are doing so in a predictable fashion. But it is in the nature of today’s highly interconnected financial markets, and the herd behaviour that often features in the markets, that even small changes in these interest rates lead to volatility in capital flows experienced by other economies. The volatility has been accentuated by changes in the structure of the financial markets, including the rise of passively managed, trend-following funds. 

Some emerging economies are already under pressure. But capital flow volatility impairs growth in more than a few economies, as they build up buffers against capital flight - either by tightening macroeconomic policies beyond what is required domestically, or by building up reserves as a form of self-insurance, or by discouraging investments and imports so as to reduce current account deficits.

Weaker growth in the emerging world also makes the global economy more vulnerable. When the cycle eventually turns in the US, we will not have a strong engine of growth in the emerging world to compensate. 

China itself, which is entering a longer-term phase of slower, higher quality growth, may not be able to play the same outsized role of boosting world growth that it did when the global financial crisis hit.

The third risk is in the current trade tensions between the US and China. This may unfortunately be more than a temporary problem.

The current tensions did not start with today’s US administration, and are unlikely to end with it.

How the current tensions are resolved will determine if we end up in a lower-growth world. 

The interdependency between our economies has been at the core of both national and global growth over the last 40 years. 

If constructive solutions are found between the US and China, and WTO rules are updated, the interdependency between the US and China will continue to serve each of their economies well. It will also remain a positive force for growth in the Asia-Pacific region. 

If instead, we drift into an economic cold war between the US and China, there will be no winners. It will disrupt global supply chains, at significant cost to all. And reduced interdependence in trade and investment will not merely mean higher costs for consumers. It will, more fundamentally, stall the dynamic of learning, innovation and productivity growth that is spurred by trade and cross-border investment. It will mean lower growth all round. And it will make national efforts to raise median income growth, and achieve greater mobility, more difficult. 

It bears reminding ourselves that much of today’s challenge of finding a new balance between the US and China, has been the outcome of success in an open, competitive world order. China grew by plugging itself into the world economy, continually learning, and progressively moving up the value chain. It thus transformed itself, and in the process, contributed significantly to global growth.

We should also remember that China remains an economy with an overall level of productivity that is less than one third the level of productivity of the US. That’s dramatically different from 40 years ago when it was at less than 5% of the US level. But the story of convergence between China and the advanced world, and of global growth through both supply chain efficiencies and the expansion of China’s own markets, is far from over. 

We have to bear that larger picture in mind when we consider how the current trade tensions can be solved. It is why a constructive solution to tensions between the US and China, and a resetting of some of the WTO rules, is critical: not just to sustain multilateralism, but for stability in a more multipolar world, and for the growth that it brings all round

Strengthening connectivity and long-term investment

Asia remains a powerful growth story. As GIC’s CEO, Mr Lim Chow Kiat, has highlighted, GIC has been and will be a key player in promoting Asia’s growth.

GIC was an early investor when many Asian countries opened their markets. It was one of the earliest and largest foreign institutional investors in China, and has been a committed investor and partner of China through the cycles, including both the Asian and Global Financial Crises. 

A key priority in Asia must be to strengthen long term investment in its economies, and reduce their dependence on short term capital flows. 

Domestic reforms are central to this. Each nation has to do its part to attract long-term investment, especially by enhancing governance and the legal and regulatory infrastructure governing investments. 

But we can also achieve much through collaboration bilaterally and across the region.

Singapore and China are working together to promote connectivity and networks between countries and cities across Asia. This includes developing the financial ecosystem to support the Belt and Road Initiative (BRI).

What we do today builds on a long relationship. It goes back to Deng Xiaoping’s first visit to Singapore 40 years ago, shortly before he made the move to reform and open up China, and to our founding Prime Minister Mr Lee Kuan Yew’s first official visit to China even before that.

We have collaborated closely on projects within China, with the Suzhou Industrial Park being our first flagship project. We are working together now on Tianjin Eco-City, Guangzhou Knowledge City and the Chongqing Connectivity Initiative (CCI).

The Southern Transport Corridor within CCI is especially significant as it will boost connectivity across the region. It is a multi-modal transport corridor linking Chongqing to Guangxi by rail, and from Guangxi to Singapore, Southeast Asia and beyond by sea. It will help spur growth in Western China by enhancing transport and trade links, as well as create an additional leg for regional growth.

These Government-to-Government initiatives, with active participation from the private sector, will open up opportunities for growth – not only for China and Singapore but for the region as a whole. 

Long term investors like the GIC, CIC and others will play a key role in realising the full potential of these opportunities as Asia becomes more connected and open. 

Like some other leading global institutional investors, GIC’s advantage is its long term orientation, and its ability to diversify risks globally. It has also built up deep knowledge of the region and close partnerships with other investors in the region, local and international. 

These features allow GIC to go beyond short term investment plays. It enables it to aim for long term returns in China and the broader Asian region, and in so doing contribute to the growth of the countries it is invested in. That must remain GIC’s strategy. 

Finally, on behalf of the GIC Board, I want to thank all of you, our guests tonight, for joining us this evening, and for your continued trust and partnership with GIC, in China, around the region, and globally.

Once again, my warmest congratulations to GIC on this important anniversary!