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GIC Deputy Chairman Tony Keng Yam Tan

Asia's Most Mysterious Investor


Asia's Most Mysterious Investor


In this exclusive interview, Dr. Tan gives his insights on the global economy in the aftermath of the financial crisis, and the opportunities for Asian banks.



Asia's Most Mysterious Investor

By Yi-Shan Chen
From CommonWealth Magazine (vol. 438 )

Founded in 1981, the Government of Singapore Investment Corp. (GIC) is Singapore's biggest sovereign wealth fund management company, tasked with managing Singapore's foreign exchange reserves. According to government figures, Singapore's foreign exchange reserves stood at US$189 billion at the end of November 2009, exceeding the US$172 billion held by the relatively better known Temasek Holdings.

The mystery surrounding GIC is evident from the fact that its first published annual report was for 2008 – 28 years after the company's founding – and the information contained in that report was limited, listing only asset allocation and return on investment, while declining to specify the scope of the assets under management.

With Minister Mentor Lee Kuan Yew, Singapore's first prime minister, still holding the chairmanship, GIC's importance is clear. Of the company's two vice chairmen, one is incumbent Prime Minister Lee Hsien Loong and the other, former Deputy Prime Minister Tony Keng Yam Tan, will arrive in Taiwan on January 18 to take part in the inaugural CommonWealth Magazine Economic Forum.

Hot Pick to Succeed LKY

A doctor of mathematics who got his start as a banker, the 69-year-old Tan is highly respected in Singapore as the politician with the best economic vision. When Lee Kuan Yew yielded the reins of power in 1990, the capable Tan was seen as the odds-on favorite to succeed him.

By the time he retired in 2005, Tan had served a decade as Singapore's deputy first prime minister while concurrently serving as defense minister. Today, he not only serves on the board of GIC but is also chairman of a newspaper publishing group and supervises allocation of a five-year five-billion Singapore dollar scientific research plan fund.

Big Rise in RMB-backed Assets

Markets will become even more rattled as slackening global economic growth over the next five to 10 years means return on investment will be unable to keep pace with years past, Tan said during an exclusive interview with CommonWealth Magazine. In the wake of the financial crisis, the role of developing countries in global economic growth will rise from the 20 percent of years gone by to account for more than half, and Tan believes that over time, GIC's investments in developing countries will hold a greater weight in its portfolio than those in the mature markets of Europe and North America.

He also discussed for the first time the possibility of GIC modifying its policy of weighting investment income targets against an average inflation index of three currency regions -- the U.S., Japan and the European Union -- by including China in the mix, in what would be the most significant change in the company's 28-year history.

Economists say such a move would signal that Singapore intends to significantly increase its holdings of renminbi-backed assets. With the global status and pioneering nature of the Singapore sovereign wealth fund, such a move could have a deep and far-ranging impact on the world's central banks and the global financial sector.

Highlights of the interview follow:

Q: You are the expert in economic affairs, as well as someone who foresaw the financial crisis before it actually happened. How does the financial crisis change the economic landscape?

A: To answer this question, we need to look back from a historical perspective. GIC was set up in 1981, a time when the world's inflation rate was at a record high. In the USA, the interest rate was over 12% to 13%. Over time, inflation slowed down and has resulted in interest rates going down from 13% to 2%. By and large, probably the wealth of every country increased. (The period) was called the great moderation.

During that period, trade and capital inflows become free flowing. Singapore benefited from this. GIC was almost set up at the same time as this great moderation. Everything was rosy. It was an extraordinary time.

Over Half of Future Lies in Asia

From 2007 to now, what was the major change? In about 2007, GIC became very concerned about asset prices. Because we saw all asset prices go up in very technical terms: we saw equity prices (achieve) "perfection." Perfection means it is assumed that high returns and growth will last forever. But it is impossible. So we took a major decision in early 2007 to (move into) government bonds and cash. It wasn't until early 2009 that we decided to come back to securities.

What has changed? One major change is that investing will become much harder and returns will be much lower in the next 10 years. Economic growth rate will be lower and markets will be volatile and unsettled, (making it) very hard to provide a stable return.

Another change is, 10 years ago, 80% of world economic growth took place in the USA and Europe. The share has steadily declined since then. The share of the world economy coming from Asia (is now) over 50%. By and large, economic growth will be longer and stronger in Asia than in the west.

Is Asian Real Estate Another Bubble?

Q: A lot of people worry about asset bubble in Asia. What does GIC think about this? Do you think that irrational prosperity exists?

A: The mandate of GIC is given by Singapore's government. We try to preserve the purchasing power of our foreign reserves. The return target is the G3 inflation rate. So according to this mandate, for GIC, we are very cautious about the risk. We try to earn reasonable returns, not to maximize returns, which we think contain high risk. We are a conservative investor and will always be. Our basic investment policy is to always look at the downside of any investment, such as default or any risk involved. Our belief is if you look carefully at the downside, the upside will take care of itself for several years. We have earned a nominal rate of 8-9% in the past. It is quite substantial if you operate such big funds. We will still use this philosophy.

I can tell you we are not stopping real estate investment. We hope to buy at reasonable prices and hold (the property) for a long time, hopefully 20 years to get benefits. We do not trade in and out.

Once-in-a-Lifetime Shot for Asian Banks

Q: GIC is an investor in Citigroup. Western financial institutions got hurt by the recent credit crisis. How do you see the landscape of the financial industry in the future? Do you think Asian banks will replace their western counterparts?

A: I think it has essentially provided Asian banks a once in a lifetime opportunity to increase their market share. The reason is very simple: because the financial crisis came from the USA. In Asia, we went through the 1997 crisis, and (our) banks and also governments learned the lesson to make sure that banks act in a very conservative way.

Asian banks are in much better shape, with higher capital ratios and higher capacity to expand lending. The only qualification to make this happen is capacity. Once you play a global role, you must have global capacity. For example, you must have 24-hour ability to engage companies, not only in Asia but in Europe and America. This is a once in a lifetime chance for Asia. But what can be realized depends on what you can do. There is a long way to go.

Q: Because of the shift of economic power, will GIC change its asset allocation policy? For example, invest more in Asia?

A: You can find out more in our annual report. What I can say is since GIC was established in 1981, we have only invested in public equity and bonds. But with the shift of world growth from USA and Europe to emerging countries, particularly in Asia, our view is over a period of time we will invest more in emerging markets than in Europe and the USA.

However, GIC does not have asset allocation targets. We care more about whether we can see good value. Certainly, value will come from economic growth. We believe over a period of time, GIC will invest more in emerging markets than in the US and Europe.

Q: GIC's return target is G3 (US, Europe and Japan) inflation rate. Does GIC intend to modify the target because of the shift in economic power?

A: That's a very big question because the definition of global inflation as in a sense the average of the inflation rates of Europe and America is arbitrary, 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 look again as to whether our definition of the global inflation rate as the average of the inflation rates of US, Europe and Japan is the right one or not, and whether we should include countries like China, because that will be more realistic.

Q:  Do you think it's the time to think about this shift?

A: We're thinking about this, because you have to, because we could see for example during this crisis that China has come out of it fairly well. It maintained its growth rate at 8%, it's in a strong position with its very large reserves, more than US$2 trillion, and it must continue to actually be responsible for a large part of the world's growth. You can see the way this has changed how major decisions are made today. It's no longer the G7 of industrialized countries that make decisions but the G20, which includes countries like China, Brazil and Indonesia, and I think this is a reflection of how economic wealth and influence is shifting from Europe and America to the emerging countries.