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Chitchat PRC Bad Debts will Bring Down Sinkieland

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Singapore Highlights Asia’s China Problem

The arrival of casinos and the dicey dynamics that follow remains controversial in conservative Singapore. So much so that, six years on, folks still avoid the “C-word,” opting for the vague, sanitized term “integrated resorts.”

Odd, considering Singapore has been gambling big for years - sometimes very badly. We saw that in the late 2000s with the Government of Singapore Investment Corp.’s bets on UBS, Citigroup and other banks. According to Chee Soon Juan, leader of the opposition Singapore Democratic Party, GIC, the sovereign wealth fund, and Temasek Holdings, a state investment firm, blew a combined $80 billion on ill-advised wagers on western icons in 2007 and 2008 alone.

Now comes news of just how dismal a year 2015 was for Singapore Inc. The value of Temasek’s portfolio plunged 9% to $180 billion in the fiscal year ended March 31, the first drop since the wreckage of 2009. That period followed the 2008 collapse of Lehman Brother and the resulting chaos in the biggest economy. Singapore’s 2015 debacle, instead, bears China’s fingerprints, as equity markets in the second-biggest economy hit a wall.

It raises a prickly question Asia has yet to answer: how dangerous is it for highly-developed economies to bet their future on an unbalanced, opaque developing one?

To be fair, Temasek’s long-term win rate takes some of the sting out of 2015. By some measures, it’s averaged 15% returns since the mid-1970s. Yet there’s no candy coating what went wrong last year. Its plans to generate 8% return went awry in China, which, along with Singapore holdings, accounts for 54% of its portfolio. That left tiny Singapore hugely exposed to the more than 20% drop in the China’s CSI 300 Index. Those losses reverberated back in Singapore’s direction, knocking 18% out of the Straits Times Index in the 12 months ended March 31.

Odds are, such losses will continue as China slumps, skimming cash from Singapore’s export-driven economy and markets. In that sense, Singapore is a microcosm of Asia’s China problem. For years, the mainland’s 10% growth had neighbors rapidly redirecting trade and financial interests China’s way. Its voracious demand for commodities and manufactured goods lifted gross domestic product rates across Asia. That’s especially so since 2008, as Beijing’s epic stimulus jolts picked up the slack from a hobbled U.S. economy and a Europe in crisis.

The dark side, of course, is that China’s boom fed complacency. It took the onus off governments to diversify growth engines and enliven private sectors. Singapore Inc.’s stumble last year indicates the good times are over. As Chinese GDP sinks toward 6%, or even lower, South Korean exporters will be hard-pressed to find new markets. China’s downshift is complicating Japan’s hopes of ending its deflationary nightmare once and for all (Japan’s Government Pension Investment Fund, it’s worth noting, lost $50 billion last year). The same goes for Taiwan’s efforts to rebalance growth away from the dying personal-computer business. Singapore, too, will rue the day it put off replacing its trade-driven model.

Less developed economies are even more at risk. Malaysia, for example, has done little to boost competitiveness and wean the economy off resources. China’s travails are bad news for Indonesia and the Philippines, as officials seek to improve infrastructure, cut red tape and eradicate corruption. Vietnam will regret not acting faster to curtail state-owned enterprises and build a vibrant private sector.

Here, Singapore is both a microcosm and, well, a rosebush. Wine makers often surround their vines with such shrubberies because they’re vulnerable to disease and warn vintners when their grapes are at risk. With its small, open economy, Singapore often plays that role for governments around the globe. Right now, its early-warning system is flashing “danger.”

China is a key source of the uncertainty bearing down on Asia. That’s sure to continue as President Xi Jinping’s stimulus efforts reap fewer returns, pumping less growth into neighboring economies that have been lazily riding the dragon’s coattails. The trouble with China’s contribution to Asian GDP and markets is that investors don’t get how ephemeral it may be - at least for the next few years.

With 1.4 billion people, rising living standards and history’s greatest urbanization story, China’s long-term potential is boundless. To reach it, Xi’s government needs to rein in a gigantic state sector stifling the development of a vibrant private sector. It also must clamp down on the runaway credit and investment putting China on a debt-crisis trajectory.

Xi has two main policy options, both of which auger poorly for Singapore and its peers. One, accelerate efforts to recalibrate growth engines and rein in debt, credit and other bubbles. Two, continue to muddle through today’s difficulties with additional stimulus moves. Option one would be short-term negative for growth, but a long-run positive as China becomes a more stable and reliable growth engine. Option two might sound great today, but it increases the odds China will crash in ways that make Brexit seem like a minor market hiccup.

China’s casino-like markets demonstrate how much heavy-lifting is needed. Its opaquely-managed companies are a direct reflection of the immaturity and excesses inherent to China Inc. And those risks are now making the rounds to other governments placing big bets on China’s growth - like Singapore.

It’s ironic, really. The button-down city state figured welcoming Sheldon Adelson and his fellow Las Vegas tycoons was a low-risk gamble as millions of Chinese punters visited to sit at its green-felt tables. And then Singapore Inc. gets cleaned out by China’s Inc.’s failure to even the odds its economic boom will pay off for Asia.
 
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