Published Date: 14 November 2003

Speech by Mr Lim Hng Kiang, Minister, Prime Minister's Office, Second Minister for Finance and Deputy Chairman, Monetary Authority of Singapore, at ACI Singapore 30th Anniversary Gala Dinner on Friday, 14th November 2003, 8.05pm, Ritz-Carlton Millenia Singapore

Mr Heering Ligthart, President, ACI Financial Markets Association
Mr Mervyn Fong, President, ACI Singapore
Distinguished Guests, ladies and gentlemen


1   I am happy to be here to celebrate ACI Singapore's 30th anniversary with you this evening. Turning 30 is a significant milestone.  ACI Singapore plays an important role in our treasury market. Your growth as an association has also mirrored Singapore's emergence as an international financial centre.


2   Our financial industry started out as a support industry for the commerce and trade sectors, contributing less than 3% of GDP during the 70s. Over the years, its importance to the economy grew and it has contributed significantly to the Singapore success story. We became a choice location for many financial institutions and multi-national corporations looking for a regional treasury hub. Our foreign exchange market flourished, and we have held the position as the world's 4th largest FX center since 1992. SIMEX also made a niche for itself as the leading futures exchange in the region. For a small country, Singapore has built up an impressive track record.

3   The dramatic growth was accompanied by prudent macro-economic and financial policies, which helped cushion us from the full impact of the Asian financial crisis when it swept through the region in 1997.

4   While the regional financial system was in turmoil, the financial industry worldwide was also undergoing revolutionary changes brought about by globalization and technological advancements. Singapore responded by undertaking a comprehensive review of its financial sector. We tapped the knowledge and expertise in the private sector and made the necessary changes to our policies and regulatory framework so as to allow players more room to innovate and take risks. We also embarked on market liberalization and put in place strategies to develop specific industries within the financial services sector. Six years on, our efforts are bearing fruit. The debt market has deepened and broadened. Total corporate debt issuance has grown by almost 4 times from S$23b in 1995 to S$89b at the end of last year. The SGS market has tripled in size, and daily turnover has grown by 10 times since the mid 90s. Fund management, a promising area that we have identified, grew from S$86b in 1995 to S$344b last year. We are also seeing significant momentum gathering in the wealth management industry.


5   The Asian FX market has had more than its fair share of changes over the past few years.

6   In the aftermath of the Asian crisis, financial institutions scaled back trading activities. Advancements in infocomms technology proliferated the growth of electronic trading and necessitated a rethink of business models. Increased competition and globalization also stirred up a wave of mergers and acquisitions in the corporate and financial sectors. The introduction of the Euro on 1 January 1999 also meant that there were fewer currencies to be traded.

7   FX market activity declined by almost 20% between 1998 and 2001, both in Asia and globally.  The number of players dipped as activity became concentrated in the hands of fewer banks - 85% of the market now rests in the hands of 20 banks1. The difficult economic environment and the drive towards economies of scale also precipitated the consolidation of trading activities into fewer centres.  With a decreased risk appetite, banks curbed proprietary positions, and placed more emphasis on fee-based income.

8   While the past few years might have been challenging, I believe the industry has emerged stronger, and is now in a better shape to face the opportunities and challenges of the future.


9    I see three key developments in the FX market today. They are (1) growth returning to the FX market; (2) possible rise in the use of Euro as a reserve currency; and (3) global attention on the FX regimes in Asia.

Growth in FX Activities

10   After living in the shadows for a few years, the FX market is seeing a return to growth. Low bond yields and lackluster equity markets have made investors - institutional and retail - thirsty for higher yielding instruments. Currency investments provide these yield-starved investors much needed relief.

11   There is also an emerging trend among investors to consider FX investments when formulating their investment strategy. Investors can gain diversification as well as yield enhancement either through a currency overlay strategy or by investing a proportion of their portfolio in currencies.


12   The second development is the growing sentiment that the euro could weaken the US dollar's stronghold as the reserve currency of the world. The notion of the Euro as a rival reserve currency to the US dollars, which accounts for almost two thirds of all official reserves, is not new. Such a possibility has been brewing since 1999. The currency's difficult debut quelled such talk for a while, until certain recent events revived it. 

13   The first factor is the strength of the Euro, which has been appreciating against the dollar back to the level when it was introduced. If this rise persists, reserve managers around the world may have to consider rebalancing their portfolios and increasing their Euro weightings for diversification and investment benefits.

14   The second factor is greater economic cooperation and trade links between Asia - an economic powerhouse - and the Euro-zone. The Chinese' recent statement at the 6th China-EU summit of leaders on 30 Oct that it wished to have the European Union as its biggest trading partner, is a case in point2.

15   The third factor is oil. Currently oil (as well as other commodities) are priced in dollars, which underpins the US' role as a global reserve currency. It was reported last month that Russia - the world's second largest oil producer - was considering selling its oil in Euros rather than dollars since it exports most of it to Europe. If this becomes a reality, it could create new dynamics on the FX market. It may never happen, but if it does, the concern would be the manner in which it materializes.

The FX Regimes in Asia

16   Asia, especially China, has without doubt been the focus of the European and the US policymakers of late. Asia has been urged to adopt greater foreign exchange rate flexibility, and in particular, China has been under pressure to revalue the Renminbi. The West has charged that Asian countries are keeping their currencies artificially low to boost export competitiveness. There are also concerns that rising Asian foreign exchange reserves at almost US$1.7 trillion could pose a risk to global financial stability. With mounting domestic pressures over job losses and political manoeuvring as elections loom, the US has been the loudest critic of Asian exchange rate regimes.

17   Asia is cautiously watching this development, especially the countries that were most affected by the Asian crisis. China has decided to retain the peg, but to alleviate global pressures, is taking steps to ease foreign exchange regulations and investment flows gradually. President Hu Jin Tao has also agreed to set up a study group with the US to look into the appropriate steps to reform the current peg system.

18   Most analysts believe that China cannot be expected to move overnight to dismantle its peg without severely damaging its banking system and causing havoc to its economy. Given that China is increasingly fuelling the world's economic locomotive, it will be in everyone's interest that this transition which must come about is managed in an orderly fashion.


19   Let me now speak a bit more about China and India, and how we are responding to the phenomenal growth of these two economies.

20   Asia can benefit from a prosperous and open China. China's rise is a "positive sum game" for the region. As much as China's exports have grown, so have its imports, and Asia has benefited. 33% of all East Asian-ex Japan exports now flow to China. China's rising affluence also means that it is a growing source of tourists to other parts of Asia, including Singapore. In addition, a rising Chinese middle-class would demand high-quality healthcare, education and sophisticated financial services.

21   India is Asia's other economic engine. It is a leader in information technology, and a competitive location for the BPO (business process outsourcing) market, particularly in the IT and software-development areas. As the global financial industry hops onto the bandwagon of offshoring and outsourcing, it is expected that India will attract as many as half of the two million jobs that would be created from the offshoring revolution3

22   Together with China, net private capital flows into both countries stood at US$59b last year, accounting for over four-fifths of the total inflows into the region . As our Prime Minister puts it, China has become the world's factory floor, while India has become its IT and back office.

23.   A recent report by Goldman Sachs predicts that barring any unforeseen circumstances, China will become the largest economy in the world by 2050, with US coming in second and India occupying third place. How do we position ourselves for such a massive change?

24   The pragmatic response is to develop greater trade linkages between other parts of Asia and these two powerhouses. China and India are also interested to see the region grow in tandem. During the ASEAN summit held on 7th and 8th October in Bali, ASEAN signed a framework agreement with China and India to conclude a free trade arrangement by 2010 and 2011, respectively.

25  As China and India grow, there will be new alignments and consolidation.  Singapore has to restructure and remake itself to remain competitive in the new global order.  We need to keep our costs competitive and build new capabilities.  We have embarked on this new strategy to keep ourselves flexible and nimble.

The Singapore Treasury Market

26   Our strategy will help ensure that our private sector remains vibrant and competitive.  The growth of the Singapore treasury market is a good testimony. Our market is now the Asia Pacific FX hub for almost half of the top 20 global players. FX activity in Singapore has grown by approximately 30% with an average daily trading volume of US$125 billion for the first half of 2003. Our market has benefited from the consolidation trend that aims to achieve greater operational efficiency and economies of scale. Just this year alone, a number of global players have consolidated their G3 FX trading during Asia-Pacific time zone into Singapore. The depth and liquidity of our market, as well as the critical mass present here have attracted these players. The fact that we have managed to maintain our costs at competitive levels is an added bonus.

27   In addition to front-office consolidation, we have seen several financial institutions relocating their treasury middle and back-office operations here over the past 15 months. These institutions took the view that Singapore's strong fundamentals, competitive cost structure and well-established financial market made us the best location to house these mission-critical functions.

28   Our treasury market has also matured and increased in sophistication, with a growing emphasis on derivative products and risk management. As long as we continue to innovate and stay ahead of competition, I am confident that Singapore will remain an important node in the global financial markets.


29   The Singapore economy is looking up after experiencing a difficult first half. The outlook has improved in recent months brought on by the cyclical upturn in the external environment and the improvement in global IT demand.  The recovery is likely to strengthen further into 20045.  The STI is at a 19-month high as global funds seeing the growth in this region, have begun flowing in. Singaporeans are also generally more upbeat about jobs and the economy.

30   On the other hand, nothing can be taken for granted in today's world. We will have to be adaptable and stay ahead in the learning curve. We will also foster even closer working relationship with professional associations like the ACI. The treasury market will always remain an important part of our financial landscape, and working hand in hand, I am sure we can continue the Singapore success story for future generations.

31   Have a pleasant evening. Thank you.


1 Source : Euromoney 2003 FX poll.
2 Bilateral trade stood at US$89b last year and the Chinese aims to triple it to US$280b by 2020.
3 Source : Deloitte Research
4 Source : United Nations Conference on Trade and Development (Unctad)
5 Barring unexpected shocks in the external environment, GDP growth is forecast to come in within the 3-5% range next year