TREASURY U/S ADAMS' VISIT TO SINGAPORE

UNCLAS SECTION 01 OF 04 SINGAPORE 000689

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SUBJECT: TREASURY U/S ADAMS' VISIT TO SINGAPORE


1. (SBU) Summary: In meetings with Singapore's top
leadership, Treasury Under Secretary for International
Affairs Timothy Adams emphasized U.S. commitment to the
Southeast Asia region. Prime Minister Lee said that U.S.
preoccupation with other parts of the world fueled a
perception of neglect. He stressed that the United States
needed to play a key role in ASEAN integration through fora
such as the East Asia Summit (EAS). Both PM Lee and Senior
Minister Goh were relatively unconcerned about downside
risks associated with the Chiang Mai Initiative, arguing
that it provided reassurances to regional governments and a
bond market alternative to the IMF. U/S Adams underscored
U.S.-led efforts to increase Asia's IMF representation.
Despite Singapore's recent strong economic performance, PM
Lee stressed the need to close a growing income gap through
better education, workforce retraining, and continued
promotion of a high savings rate. PM Lee asserted that
obstacles to negotiating a bilateral Double Taxation
Agreement (DTA) could be surmounted. FM Yeo observed that
rising protectionist sentiment in the United States, and in
particular the Dubai ports deal controversy, was fueling the
perception that Muslim money was not welcome in the West;
Singapore was beginning to see an increase in flows of
petrodollar wealth to Southeast Asia as a result. SM Goh
told U/S Adams that he worried most about the destabilizing
effects of terrorism. He welcomed reduced tensions between
China and Taiwan, but said that rising strains between China
and Japan were reverberating throughout the region. End
Summary.


2. (U) Visiting Singapore for the first time February 24-
26, Treasury U/S Adams met with Prime Minister and Finance
Minister Lee Hsien Loong, Senior Minister and Monetary
Authority of Singapore Chairman Goh Chok Tong, and Foreign
Minister George Yeo. He also met with Government Investment
Corporation (GIC) Special Investments President Dr. Teh Kok
Peng, Singapore-based financial analysts and business
representatives from the U.S.-ASEAN Business Council.

Overcoming Misperceptions of U.S. Disinterest
--------------


3. (SBU) U/S Adams told PM Lee that part of the reason for
his visit to Singapore was to reaffirm U.S. commitment to
the region. PM Lee said that the perception of a
disinterested United States was not misplaced given its many
distractions elsewhere. He lamented this development,
stressing that the region was changing, and not just in
terms of the China-India economic growth story; the United
States also needed to keep an eye on other players in the
region. He noted that Singapore's trade with China had
increased nearly 50 percent in the past year and about 30
percent with India, albeit from a lower base. Together,
China, Hong Kong and Taiwan were now a larger trading
partner of Singapore's than the United States, he observed.

U.S. Role in ASEAN Integration
--------------


4. (SBU) Asked how the United States should respond to
ASEAN integration efforts such as the EAS, PM Lee said the
United States must participate in such fora.
Regionalization was inevitable, he argued; the only way for
the United States to cope would be to establish and maintain
deep links across the Pacific. He noted that even ASEAN
members seemingly more resistant to or suspicious of U.S.
engagement (e.g., Indonesia) privately welcomed a U.S.
presence in the region as a source of stability. PM Lee
suggested that it would be a real loss if the United States
distanced itself from ASEAN over Burma. FM Yeo stressed
that Asia could achieve another generation of peace, but
only if the United States stayed involved.


5. (SBU) SM Goh noted that, although China's rise had
helped spur greater ASEAN integration, this process began
much earlier. He recalled wryly that ASEAN was much more
serious about integration now than it had been during his
earlier stint as Trade and Industry Minister when goods
proposed by his neighbors for preferential treatment
included things like snow plows. Currently, this process
was well underway, underpinned by a number of free trade
agreements, including the ASEAN and China-ASEAN FTAs, as
well as an increasing number of open skies agreements, he

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said.

Chiang Mai Initiative a Useful "Psychological Arrangement"
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6. (SBU) U/S Adams said he worried that, in addition to the
EAS, undertakings such as the Chiang Mai Initiative were
moving Southeast Asia toward increasing regionalization and
less engagement with established global institutions. PM
Lee said that he did not anticipate any negative fallout
from the Chiang Mai Initiative, suggesting that it was only
natural for regional governments to support development of a
bond market alternative to the International Monetary Fund
(IMF). Chiang Mai will not solve all our problems, but it
will help mitigate future risks, he concluded. SM Goh
deemed the Chiang Mai Initiative a useful "psychological
arrangement" that reassured countries in the region, but
observed that if there were another financial crisis along
the lines of 1997-98, no country would be immune. He
highlighted a similar process in developing the Asian Bond
Fund, in which eleven Southeast Asian central banks
participated. Asked if India were involved, SM Goh said
that this would be possible under the EAS mechanism. He
dispelled the notion of a common Asian currency, arguing
that economic disparities among potential participants made
this a long-term endeavor, at best.

Increasing Asia's IMF Presence
--------------


7. (SBU) U/S Adams said that the United States was leading
an effort to reorganize the IMF's representation to give
more weight to Asian member countries. He cautioned that
European members, which would be obliged to relinquish IMF
Board seats in order to implement this restructuring, were
resisting these efforts.

Singapore's Economy: Strong but Uncertain
--------------


8. (U) Although Singapore had achieved strong economic
growth in 2004 and 2005, longer-term prospects depended on
strategic restructuring in areas such as education and
workforce retraining, PM Lee explained. Lower income
households were falling behind. Consistent annual growth
averaging 9 to 10 percent was a thing of the past and the
"trickle down" effect had commensurately diminished in
recent years, he said. PM Lee stressed that the government
could not sit idly by, nor could it promote a welfare state
system without engendering European-style side-effects.
Singapore instead had opted to encourage a high savings rate
and to fold a portion of these assets into the budget to
benefit lower income families. This mechanism, however, did
not fully address the wealth gap but rather only provided
reassurances to these groups, he admitted.


9. (U) SM Goh highlighted Singapore's ageing population and
the need to compete with China and India as particular areas
of concern for the economy; in addition, many Singaporeans,
well educated and fluent in English, were pursuing
opportunities overseas and not returning. "If we do not
keep running ahead of our competition, we will fall behind,"
he remarked. SM Goh denied that Singapore's very high
savings rate was a deliberate hedge against the country's
demographic transition, attributing it primarily to
Singapore's mandatory pension system, the Central Provident
Fund.


10. (SBU) Not believing in a post-industrial society,
Singapore emphasized strengthening both the services and
manufacturing sectors, PM Lee said. Hong Kong may have
relinquished its manufacturing base to the Pearl River Delta
across the border in China, he observed, but if Singapore
were to do something similar with Malaysia or Indonesia, the
result would be an inefficient "two countries, two systems"
arrangement.

Tax Treaty
--------------


11. (SBU) PM Lee said that Singapore greatly valued its
excellent relationship with the United States, best
exemplified by our Strategic Framework and Free Trade

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agreements. He expressed confidence that both countries
could conclude a DTA that would further bolster bilateral
economic ties. Although Singapore had certain interests to
protect, obstacles to negotiating a DTA such as agreed
mechanisms and obligations concerning information exchange
and limitation of benefits could be surmounted, he asserted.
During U/S Adams' meeting with the U.S.-ASEAN Business
Council, representatives from IBM, Citibank, and NOL
expressed strong support for a U.S.-Singapore DTA.

Rising U.S. Protectionism and China, the Middle East
-------------- --------------


12. (SBU) U/S Adams expressed concern about growing
protectionism in the United States, directed primarily at
China and most recently at Dubai following Dubai Ports
World's proposed $6.8 billion acquisition of P&O. PM Lee
concurred, observing that Washington seemed obsessed with
the purported China threat during his visit last year. U/S
Adams warned that a hard landing of the Chinese economy
would precipitate serious repercussion throughout the global
economy, particularly in the commodities and U.S. securities
markets. PM Lee assured U/S Adams that China did not want
to clash with the United States, although it might continue
to "cheat around the edges." FM Yeo said that the United
States needed to deftly hold China accountable for its
actions. This was especially challenging, he observed,
since China appeared to understand the United States better
than the United States did China.

Protectionist Tendencies Undermine Doha
--------------


13. (SBU) Asked about Singapore's views of the Doha Round,
PM Lee said that success was critical. He criticized the
overall negative tone among WTO members that made it
difficult to manage protectionism globally. U/S Adams noted
that a collapse of the Dubai ports deal could conceivably
undermine the Doha process and the free trade principles the
United States espouses.

Unwelcome in West, Petrodollars Flowing to Singapore
-------------- --------------


14. (SBU) FM Yeo expressed similar concern about the rising
protectionist tide, and noted that the Dubai ports
controversy solidified the growing perception that Muslim
money was not welcome in the West. He said that there had
been a shift in flows of petrodollar wealth toward financial
centers like Singapore and that the government was
encouraging development of Islamic banking as one way to tap
into this asset stream. While certain financial analysts
told U/S Adams they had noticed some up-tick in the amount
of petrodollars coming into Singapore, one Singapore-based
U.S. bank representative described the increase as "huge."

Terrorism Number One Concern
--------------


15. (SBU) Asked what he worried about most, SM Goh
questioned whether terrorism could be defeated. It was
imperative that the United States stay the course in Iraq
and remain firm with Iran lest the terrorists become
emboldened, he warned. Singapore was surrounded by Muslim
neighbors with populations that were becoming increasingly
conservative, he said. SM Goh felt reassured by recent
statements by Indonesia's Islamic party leaders that they
stood for fighting corruption and not for promoting a
theocracy. He observed that the problems in the southern
Philippines and Thailand had more to do with terrorism
"riding on the backs" of Islam than with the religion
itself.

China, Taiwan, Japan
--------------


16. (SBU) SM Goh said that he was heartened to see a
reduction in tensions over the past year or so between China
and Taiwan. President Bush's statements to Taiwan President
Chen Shui-bian and China's Anti-Secession Law had both
helped stabilize the situation, he observed; China was also
learning how to live with Taiwan-style democracy and had
therefore adopted a more nuanced approach to cross-Strait

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relations. Although he did not foresee open conflict
between China and Japan, increasing tensions fueled by
rising nationalism on both sides were reverberating
throughout the region, he said.


17. (U) Treasury Deputy Director for South and Southeast
Asia John Ciorciari, traveling with U/S Adams, cleared this
message.

HERBOLD