FED CHAIRMAN BERNANKE MEETS WITH SINGAPORE

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SUBJECT: FED CHAIRMAN BERNANKE MEETS WITH SINGAPORE
LEADERSHIP


1. (SBU) Summary: China's economic development and its
economic relationship with the United States figured
prominently in separate meetings between Chairman of the
Federal Reserve Board Ben Bernanke and Prime Minister (PM)
Lee Hsien Loong and Minister Mentor (MM) Lee Kuan Yew. Both
the PM and MM emphasized that Singapore must continue to
innovate in order to remain competitive with China and India.
PM Lee speculated that an "ASEAN plus three" Free Trade
Agreement (FTA) could be forthcoming. End summary

U.S.-China
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2. (SBU) During September 15 discussions with GOS leadership
prior to G-7 and IMF/World Bank meetings, Chairman Bernanke
noted Treasury Secretary Paulson's recent comment that the
United States needed to engage China on a broader range of
economic issues beyond exchange rates. Bernanke added the
external deficit was not a problem the United States could
solve alone. The PM and MM agreed, suggesting that the
United States begin a high-level dialogue with the Chinese
focusing on long-term solutions and avoiding more "granular"
stumbling blocks. MM Lee said that the United States must
realize that the Chinese prefer to deal with trusted
interlocutors and that they would only make adjustments at a
cautious pace that allowed them to avoid disturbing social
stability. With this in mind, the MM suggested developing
relationships with the Chinese that were not subject to
changing administrations.


3. (SBU) According to MM Lee, one problem was that the
Chinese, having suffered through terrible deprivations, were
habitually worried about financial security, hence their high
savings rate. This mindset was gradually changing, he
continued, and wealthy and even middle-income Chinese were
starting to spend more, especially when traveling outside the
country, where the quality and availability of goods was
still better than in China. MM Lee said that the Chinese
government understood the need to make economic changes and
that China now had a large number of foreign-trained experts
in the public and private sectors who had the desire and
ability to carry out the changes. In his meeting, PM Lee
offered that, while China was generally moving in the right
direction, the government now needed to do more to stimulate
domestic spending. Both the MM and PM told Chairman Bernanke
that the Chinese government understood the need for a strong
U.S. economy and would not risk harming the relationship.

Singapore-China
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4. (SBU) Responding to Chairman Bernanke's question about
the size of Singapore's investments in China, PM Lee
described the investments as large taken on per capita basis,
and he also highlighted that more than 2,000 Chinese
companies operated in Singapore. Singaporeans and Chinese
had different methods of conducting business, so working in
China had proven more difficult than many people expected.
He said smaller Singaporean companies continued to be
competitive in the China market, however.

Singapore's Future
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5. (SBU) Both the PM and MM told Chairman Bernanke that,
although Singapore's economy was doing well, the country
needed to innovate to sustain its growth. For now this meant
focusing on areas where India and China could not yet offer
strong competition, such as systems, research and
development, creative media, and IPR-intensive businesses.
As China and India strengthened their laws and improved their
infrastructure, they will pose an even greater economic
threat to Singapore, cautioned MM Lee. Looking ahead, MM Lee
said the government was encouraging its Muslim population to
learn Arabic in the hope that Singapore could act as an entry
point for Middle Eastern investments in China.

Rising Energy Costs
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6. (SBU) In reply to Chairman Bernanke's observation that

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Singapore seemed unaffected by recent increases in oil
prices, PM Lee said that Singapore's proximity to Malaysia
and Indonesia had helped soften the blow. Both countries had
benefited from the price rise, he continued, which translated
into increased tourism for Singapore; Singapore's oil rig
construction industry had also benefited from the increase.
PM Lee noted that because Singapore did not subsidize energy,
domestic consumers had been hardest hit, with electricity
costs rising 30 percent.

East Asia FTA?
--------------


7. (SBU) Turning to regional issues, Chairman Bernanke asked
PM Lee about the possibility of an East Asia FTA. The PM
said that ASEAN is currently negotiating FTAs with Japan and
Korea, and that China supported this framework. PM Lee said
he suspected an "ASEAN plus three" (China, Japan, and Korea)
FTA might be possible in the future.


8. (U) A Federal Reserve official cleared this message.
HERBOLD