SM Goh Chok Tong at the interview with “New Century Weekly” (April 2010)

New Century Weekly: What is your assessment of the global economic recovery? Is it better or worse than you expect?

Senior Minister Goh Chok Tong: The global economic crisis is behind us and a recovery has started. I would say the recovery is better than what most people had expected. The stimulus packages put in place by all the countries affected by the crisis were effective. In the United States, for example, the recovery was much earlier than people expected. The stimulus package which China put in had also sustained China’s economic growth. We have, through all these measures, avoided a very much feared global recession similar to that in the 1930s.

New Century Weekly: Some people worry that there is a risk of a double dip.

SM Goh: I would not worry about a double dip now. The debt crisis in Greece does cause some worry because we do not know at this stage whether one or two other countries in Europe could also be in a similar problem. But it is unlikely that the situation would degenerate to the extent that you have a double dip recession. Look at the Greece situation. The European countries and IMF had to move in very quickly to help Greece. Likewise, if another country runs into similar problems, I think the European Union and the IMF will have to move in very quickly to help the country having the debt problem.

New Century Weekly: You have experienced the Asian financial crisis in 1997. Some people think that this may be quite similar to that crisis and some people are worried that maybe China would be next to be affected. What is your view?

SM Goh: Well, the 1997 crisis and this crisis are quite different. In the 1997 crisis, Asian countries saw an inflow of relatively cheap US dollars. So, countries were borrowing US dollars and just embarking on speculative activities, moving into property development, offices, houses, golf courses, and iconic projects. A bubble then built up in Asia. But at that time, money was cheap, so people thought this was the way to make profits. Of course, at some stage, when the bubble burst, the international investors lost confidence in the value of the currency. The borrowing of foreign currency to invest in assets was not sustainable when confidence was lost. The current crisis, in contrast, was caused by over extension of bank loans and mortgages in the United States. So, the bubble, in a sense, took place in the US. But because the banks are selling financial products, like financial derivatives, all over the world, we were also affected. When the derivatives went wrong as a result of the weaknesses of the underlying mortgages, the US banks were very much affected. Lehman Brothers collapsed and several big banks in the US went nearly insolvent. That had a knock-on effect on us.

New Century Weekly: There are some commentators who are of the view that in 1997, the development model in many Asian countries depended on US investment. This is quite similar with the situation now in China. Do you think that Asia and China have to find a new development model?

SM Goh: For China, I think the concern is whether a bubble is building up. In China’s situation, it is not about borrowing foreign currencies to invest in China. It is because of the excess liquidity in China and the low interest rate. So, of course, people would borrow and invest in property. Yes, there is a potential danger there of the bubble bursting and then investments could go sour. But it is not similar to the financial crisis in 1997 because that was due to the in-flow of foreign borrowing in US dollars for domestic investments. However, there could be a problem in China if the exchange rate is not flexible. Then, they may see huge surpluses building up in China’s current account. Unless China knows how to sterilize the surpluses, the surpluses will be translated into inflation and investments of a speculative nature in China.

New Century Weekly: Do you see the risk of inflation now?

SM Goh: Yes, I see the risk of inflation in China. And I think the Chinese leaders also understand that there is a risk of inflation. So, they have to keep a grip on monetary policies.

New Century Weekly: What is your assessment on China’s monetary policy at the moment? Do you think that they have done the right thing?

SM Goh: It is a question which the Chinese planners and economists would have to study quite carefully. The lower interest rates were necessary because of the global economic recession, in order to have funds available for corporations to fund their activities. It was necessary to help corporations sustain their growth. But at some stage, the people in charge have to judge whether the monetary policy is too loose. Australia, for example, started raising interest rates very early, because Australia felt that the loose monetary policy could lead to inflation. In the case of China, I cannot comment because I have not studied the Chinese economy. There is of course a danger if the loose monetary policy is kept on for too long. People would begin to borrow because of lower interest rates and then you will have a speculative bubble; you will have inflation. But as for when China will have to raise the interest rate, this is for the people in charge to judge. In my view, it is also in the interests of China to move into a flexible exchange rate policy. When to do so is a matter for Chinese leaders to judge. At the right time and under the right economic conditions, you have got to move into a more flexible exchange rate system. The present fixed exchange rate to the US dollar is not tenable because it would give rise to macroeconomic imbalances and inflationary pressures.

You can also argue the other way around. Supposing the renminbi has been pegged to the US dollar and the value of the US dollar has gone up. This means the renminbi has also gone up. And then if China is unable to export, what would China do? China has to devalue and if they devalue, it is very painful because you have to devalue by a significant amount. It is therefore better to move into a flexible exchange rate. And I have to add – China’s exchange rate regime is evolving. China has just recently moved from a centrally planned economy to a market economy. So, the exchange rate is evolving. In 2005 to 2008, China actually had a flexible exchange rate. And then came the financial crisis. And of course China was worried about the stability of the currency. China therefore pegged itself to the US dollar. But I do not think that will remain forever. At some stage, China would have to again move into a flexible exchange rate. But when they move into a flexible exchange rate, how do you manage the flexibility? Again there are several models. In the case of Singapore, we use what we call a “BBC Model”, B for basket, the second B for band, and C for Crawl. That means we peg the Singapore dollar to a basket of currencies and those are the currencies of the major trading partners of Singapore. So, it is a basket of currencies. We also have a band within which we allow the Singapore dollar to fluctuate against this basket of currencies. It fluctuates, depending on the demand for the Singapore dollar. And then we have the crawl feature, meaning we allow for the possibility of appreciating the Singapore dollar in line with economic fundamentals.

New Century Weekly: Do you think now is the time for the yuan to appreciate because many US leaders have been pressing the yuan to appreciate at the moment?

SM Goh: The timing is a matter for the Chinese leaders to judge. But you have to move into a flexible exchange rate. At the moment, I would say political pressure has been put on China. Then as a result of political pressure, China has to take a firm stand because it is a sovereignty issue. So, political rhetoric does not help solve the problem. But I’m happy that the US Secretary of the Treasury is here to talk to Chinese leaders and maybe they would resolve the problem quietly because this is an economic problem. You have to resolve it quietly, and not through pressure. China will not yield to pressure. That point is very clear for all of us. And no country would yield to pressure. Look at Iran. Look at North Korea. Whatever pressure you put on them, they will not yield. And on this issue, China would not yield.

New Century Weekly: I have another question. Singapore has built some tourist attractions. Some people in Hong Kong and the Hong Kong media are worried about what this means. Will this change the regional role of Hong Kong as a tourist attraction? What is your comment on this?

SM Goh: First, I am very surprised that the Hong Kong people are worried. This is because Hong Kong is a free market, a competitive economy. Hong Kong never fears competition. So we have the theme park and casinos. Why should Hong Kong worry, because Hong Kong basically is a very competitive economy? And secondly, it is not a zero sum game. The world economy grows; the Asian economies grow. China grows and some tourists will come to Singapore, others will go to Hong Kong. The cake itself is growing bigger. And frankly speaking, we believe that there should be more attractions in Asia. The more there are, the more it is worthwhile for people coming all the way from the United States and Europe, because there are so many attractions to go to. They can come to Singapore. After three days, you go to Hong Kong. We are trying to encourage Hainan Island to develop. So, it may be in competition with Singapore. But we look at it as growing the tourism pie in Asia. So, if the Europeans want to come to Hainan Island, maybe they will stop by in Singapore. You know, even if they come to Singapore for maybe one day, and to Hainan for one week; well, Singapore still gets one extra day. These are all possibilities.

New Century Weekly: But will Singapore use your experience in tourist attractions to help China to build Hainan?

SM Goh: We are not assuming we can help China because China is now very sophisticated. The people have learned a lot. But we are happy to share our experience. So, if Hainan wants to send officials to see what experience we have, we will be happy to share because we believe helping other people to grow is good for ourselves. When you grow, we grow. That is our basic philosophy. We do not say “You grow and we therefore shrink”. When you grow, you make us look for areas to grow with you. In some areas, we will lose to you and we will say, “Never mind. We are not competitive.” But there are the areas where we can do better.

New Century Weekly: So, in those things, the relationship is one of competition?

SM Goh: No, we go on the basis that competition is all over the world. It is not between Hong Kong and Singapore. Or between China and Singapore. Competition is with Vietnam, with India, with central European countries; you know, competition is from all over. If you are fearful of competition from other countries, then you know surely you cannot do very well. If you are writing for the Hong Kong people, tell them not to worry. I have more confidence in them than maybe the reporters have in themselves.

New Century Weekly: What is the trend in international cooperation today, compared to ten years ago, during the Asian crisis?

SM Goh: I think there is more cooperation now. In this global financial crisis, for example, all the countries cooperated very well. The central bank governors were speaking to each other very often. Can we share information? Take the case of Singapore. There are many foreign banks in Singapore and Singapore may not know what is happening to the headquarters of the foreign banks. Of course, you know what is happening to the branches of these foreign banks in Singapore, but you do not know what is happening at the head office. The head offices can be in trouble and they can affect Singapore. So, the bank regulators of those countries share information with us. And likewise, we share with them because the regulators of a foreign bank want to know how the branches are doing in Singapore. So, there was tremendous cooperation. And even in terms of the stimulus packages, we shared information. For example, bank deposit guarantees. Hong Kong, Singapore, Malaysia - we told each other we are doing a government guarantee for bank deposits and we have now formed a committee to synchronise our exit from the government guarantee.

New Century Weekly: I have another important question. The Chinese people and other foreign friends are also worried about the corruption in China. They say corruption will be the biggest risk to China’s economic development in the future and I know that Singapore has very good experience in fighting against corruption. What is your view on corruption in China?

SM Goh: Well, I think the Chinese leaders know that if corruption is not checked, if it gets worse, then it is going to weaken the Communist Party. So, they are aware and they are doing all they can to minimise corruption. China is so big. It is not like Singapore, where we can know what is happening easily. So, China will need some time to get the machinery and the people in place to stamp out corruption. But what they can do is to minimise whatever corruption they can, and enforce strict measures against corruption. And it is a very important area for the Chinese leadership to concentrate on because to govern a country, you must not only just have the legal authority, you must have the moral authority. And if the corruption is rampant in a country, then the leadership may not have such strong authority. So, the Chinese leaders are aware of this.

New Century Weekly: Do you think the Asian Tigers, I mean Singapore and other countries, are still as active as they used to be, compared to others like the BRICs?

SM Goh: Well, you must remember that countries, like human beings, also grow old. So, we were young tigers in the early 1990s. Then the young tigers grew very fast. Tiger cubs became young adult tigers. Then came the 1997 financial crisis. Many tigers were hurt. Your limbs, your bodies were hurt by the crisis. We therefore had to recover from the injuries. And when we had recovered, we found that we were older by so many more years. So, the energy is not quite the same. In other words, what I am saying is you must judge a country at each phase of its development. In the early phase, the economic growth rate was high because it was measured against a low base. Singapore used to grow by 15 per cent per year, because there was a lot of slack, plenty of labour, plenty of land and so on. Then as the economy matures, even though we are still growing vigorously, the growth rate now is not 10 per cent. We are very happy if we can get 6 per cent. In fact in Singapore’s case, if we grow by 4 per cent, we regard that as good growth, because it is 4 per cent over a much bigger base. So, if you compare growth rates with the emerging economies like China, Brazil, Russia and India, of course those countries would have much higher growth rates. It is due to different stages of development.

New Century Weekly: So, if China cannot maintain an economic growth like 8 per cent or more, what would happen? Have the Asian countries prepared for that situation?

SM Goh: If China does not grow by more than 8 per cent per year in the coming 10 years, it will have grave political social consequences, because China must grow by at least - I would say, roughly speaking - about 3 per cent just to absorb the employment. New people are entering the market, but that does not mean you are increasing the per capita income of the people. You are just merely standing still, or running on a treadmill. You are not going anywhere. So, in order to lift the standard of living of the people, you need to grow by more than 3, 4 per cent. So, you have got to grow by 8 per cent in order for people to feel the impact of growth. If you just grow by 6 per cent, yes, there is a gradual improvement of standard of living but the Chinese people’s aspirations have been aroused and I can see what is going on. You want to have fast growth. So, China needs to grow by 8 per cent per year to have an impact on the real income of the people. And China is able to do it. I think in the next 10 years, I believe China can sustain it. But then we have the other question, you have got to grow by more than 8 per cent per year, but it must be sustainable, or what we now call green growth. That means do not pollute the environment. Don’t just put in heavy industries all over the place and grow and grow, until the whole environment is spoiled. You have got to have green sustainable growth.

New Century Weekly: Thank you very much.