THE BLOG
01/27/2016 03:48 pm ET Updated Jan 25, 2017

US Then, China Now: Have We Learned Anything?

Between 2007 and 2008, Temasek Holdings and the Government of Singapore Investment Corporation (GIC) lost a combined US$80 billion of their assets in dubious investments in Western banks.

Here's how some of the deals unfolded. In the second half of 2007, Swiss bank UBS had written off US$33 billion due to bad debts and exposure to the U.S, subprime crisis. Despite this meltdown, the GIC injected nearly US$10 billion into the bank in December that year. Four months later, UBS wrote down another US$19 billion. The GIC made another investment of US$6.9 billion in January 2008, this time in Citigroup. Within months, the US banking giant collapsed and had to be rescued with a bailout of more than US$300 billion from the US government.

Not to be outdone, Temasek announced that it had invested US$3.1 in Barclays Bank in July 2007. A few months later, Barclays declared a US$2.7 billion write-down. Temasek also started to invest in Merrill Lynch in December 2007. Its CEO Ho Ching, who is also the wife of Prime Minister Lee Hsien Loong, gradually increased the fund's stake in Merrill, reaching US$5 billion in 2008. In September that same year, Merrill went bust and had to be taken over by Bank of America.

Then Finance Minister Tharman Shanmugaratnam, nevertheless, assured everyone that Temasek and the GIC had "assessed the proposals rigorously" before making the investments - the fact that Citi, UBS, Merrill and Barclays had all invested in the biggest Ponzi scheme in corporate history run by the Bernie Madoff scam notwithstanding.

To be clear, we were investing in incompetence, greed and outright corruption.

It is critical to point out that all this took place despite clear warning signals. Investment guru Jim Rogers had cautioned that "I'm shorting investment banks on Wall Street...It grieves me to see what Singapore is doing. They are going to lose money." Warren Buffet called the US financial situation a "time bomb" and that chasing that kind of money a "fool's game." Analyst Nouriel Roubini warned at the World Economic Forum in 2007 that the bubble created by the banks was in for a "hard landing" and the result was "painful consequences for the U.S. and the global economy."

As it turned out, the only thing that saved our funds from becoming irretrievably lost was the U.S. government pumping in trillions of dollars to bail out the banks.

Following the 2008 meltdown, the PAP government pivoted to China, again, taking our money with it to invest in the Middle Kingdom. The problem was that now it was China's turn to inflate the financial bubble with Beijing initiating a massive government stimulus program. The sudden and massive injection of capital encouraged borrowing which ran up China's debt-to-GDP ratio to a heady 300%.

Throw in the carry-over effects of the quantitative easing in the U.S. and the global financial system takes on a distinctly precarious tone. "This looks to me like 2007 all over again, but even worse," said William White, former chief economist of the Bank of International Settlement, who had called out the unstable debt markets before the 2008 crisis.

"China has a major adjustment problem," billionaire financier George Soros echoes White's views, "I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008." An adviser to the People's Bank of China pointed out that "China is in a bubble period so that is a big uncertainty for China now and that will have profound repercussions to the rest of the world economy. So I think Soros has a point."

When things started to slow down and profit-margins tightened, Chinese companies were taking on more debt just to service interest rates on their existing obligations. Its housing bubble is also a worrisome feature in the economic landscape - massive housing estates, now dubbed ghost cities, were built with no one moving in.

In mid-2015, jitters about Chinese economy sent the stock market crashing. At the beginning of 2016, China's stock market plunged again, prompting authorities to halt trading twice in four days. A week later, Beijing announced that the country had posted a 6.9% GDP growth in 2015 - its slowest in 25 years.

One of the problems that the world worries about is the economic numbers coming out from China - they are unreliable at best. Even the Premier, Li Keqiang, acknowledged that China's GDP figures were "man-made" and were "for reference only."

Unable (or unwilling) to marshal these insights, Singapore, led by Temasek and GIC, has become the biggest foreign investor in China. Temasek's investments in China, for instance, accounts for 27 percent of its portfolio - up from 23 percent two years ago. And because of this, our economy would suffer the most in the region in a Chinese economic downturn.

Immune to outbreaks of reason and caution, the two sovereign wealth funds continue to remain bullish about the Chinese market. Temasek brushes off the stock market tailspin as short-term volatility, adding that it is "very comfortable with the prospects of the Chinese banking system." The GIC likewise assures everyone that China's stock market is inherently robust and that the episode would not "derail [Beijing's] efforts and determination to get the economy on a sustainable path."

Such assurances would be comforting if not for the fact that Temasek had also said - at the height of the U.S. banking crisis - that Merrill Lynch was a "great franchise, which has existed through many crises through a long period of time."