By Adam Skuse
Despite its proximity to Hong Kong, often seen as the natural launchpad for Chinese firms looking to increase their overseas investments, Singapore is increasingly attracting Chinese interest. With recent predictions for Singapore's economic situation looking grim, the city state is increasingly looking to China as a means of offsetting the impact of economic turmoil in the US and Europe.
Following a slump in exports, Singapore's Trade and Industry Ministry said in November that it expects economic growth for 2012 to drop to between 1 percent and 3 percent, down from 5 percent for 2011. The situation could be compounded by employment issues, with the Singapore Manufacturer's Federation identifying the increased costs of hiring foreign workers due to tightened regulations as a concern.
As an entrepot island lacking in resources and dependent on its role as a middleman of world trade, the country has always been particularly exposed to downturns in the world economy.
However, a precedent for increased Chinese activity helping Singapore weather such troubles has already been set. It is thanks in part to China's stimulus plan in response to the 2008 financial crisis that Singapore bounced back so quickly from the economic well it suddenly found itself in.
In the first quarter of 2008, Singapore's GDP grew 17.6 percent year-on-year, according to data from Trading Economics. This plummeted to minus 12.5 percent in the following quarter, and remained negative through to the second quarter of 2009, when it rebounded to 19.5 percent.
Over this period, China's foreign direct investment to Singapore continued to grow relentlessly. Standing at $910 million in 2005, it almost doubled on average year-on-year to reach $9.35 billion in 2009.
According to official statistics, there were over 3,000 Chinese businesses registered in Singapore as of the end of August, while a recent survey by the Bank of China and Hurun Report said Singapore was the number one emigration target in Asia among high-net worth Chinese looking to relocate.
An influx of Chinese business interest prompted Citi's Singapore branch to set up a China desk in 2010 to cope with demand. By August 2011, the desk's revenues had doubled year-on-year, with deposits from Chinese clients up 33 percent. Alan Lin, head of global transaction services at Citi China, was quoted by the Straits Times as saying that the flow of Chinese companies to Singapore has stepped up in the past three to four years, with a shift towards emerging new companies.
While Hong Kong has obvious appeal to Chinese mainland companies, Singapore retains the edge in a number of areas.
At the beginning of 2011, Singapore tied first place with Switzerland in the Profit Opportunity Recommendation index published by US-based Business Environment Risk Intelligence, based on operations risk, political risk and foreign exchange risk. In the World Bank's Doing Business 2012: Doing Business in a More Transparent World report, released in October and based on regulations measured from June 2010 through May 2011, Singapore ranked top in terms of overall ease of doing business for the sixth year running, while Hong Kong was second.
Michael Zink, Singapore country chief for Citi, told the Wall Street Journal that “Hong Kong has done a wonderful job positioning itself as a place for ratings, equity funding and IPOs for China-based companies. But if you look at Singapore and how it's trying to compete, it's not just looking at Hong Kong. It says, 'how can we compete with London…New York.' There are many other centers in Asia who want to have that same kind of business.”
For Chinese firms looking to expand their overseas operations and shift their focus from the ailing economies of the US and Europe, Singapore offers a gateway to the resource-rich growth economies of the ASEAN, and beyond.
As an ASEAN member, Singapore has free trade access to all member states. It also benefits from the ASEAN tax treaty with India, which is more far-reaching than the double taxation agreement that China has.
Singapore Prime Minister Lee Hsien Loong and Chinese Premier Wen Jiabao met at the latest ASEAN conference in Bali in November, where they affirmed the excellent state of Singapore-China relations and also their commitment to increasing the connectivity of the ASEAN. Loong also urged the ASEAN to explore involving the private sector more in its programs.
This access is sweetened by the revised tax treaty agreed between Singapore and China in 2007. Highlights include withholding tax on dividends paid by a Chinese company to a Singapore resident being cut from 7 percent to 5 percent, provided that the recipient is a company that holds at least 25 percent of the capital of the Chinese company. For all other cases, the withholding tax on dividends was cut to 10 percent from 12 percent.
In addition, the Singapore Economic Development Board has said there are plans for key tax changes in strategic sectors to enhance Singapore's attractiveness as a regional hub. These will include an exemption for all interest payments made by banks from withholding tax, new tax benefits for shipping companies under a maritime sector initiative, and goods and services tax relief in the biomedical sector for imported clinical trial materials.
It was also announced in November that government agencies are spending $23 million developing an integrated system to consolidate and simplify the process of applying for business licenses. Due for launch in 2013, it will offer three times the number of licenses than are available on the current Online Business Licensing Service, allow businesses to apply for multiple licenses from different agencies, and also manage and keep track of all applications.
Singapore has also embarked on a number of ambitious infrastructure projects that will further its attractiveness to Chinese investment, and demonstrate its commitment to maintaining its lead in key competencies such as shipping and oil. As part of a drive to boost its shipping industry, work is underway on the $570-million phase one of the Sembcorp Marine integrated shipyard facility, due for completion in 2013.
Meanwhile, a huge excavation project under the Banyan Basin seabed is being carried out, which will result in a petrochemical storage facility able to hold the equivalent of 9 million barrels of oil. Costing some $450 million, it is due for completion in 2014.
In addition, Singapore is jumping on the renminbi train, positioning itself to be a major center for yuan internationalization in line with Beijing's ambitions for the rise of the currency's use in cross-border commerce. Deputy Prime Minister and finance minister Tharman Shanmugaratnam has reported having had “good discussions” with Chinese policy makers on the subject, and said Singapore can play a “helpful role as a financial center in that regard.”
The Monetary Authority of Singapore also set up a S$30 billion currency swap facility with the People’s Bank of China in 2010 to boost bilateral trade.
As the yuan program develops, it will further facilitate the operations of Chinese companies operating in Singapore, giving them more flexibility in their cash-flows and trade settlements.