Morgan Stanley's Xie Quit After Singapore E-Mail

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Morgan Stanley's Xie Quit After Singapore E-Mail

By Netty Ismail

Oct. 5 (Bloomberg) -- Andy Xie's resignation as Morgan Stanley's chief economist in Asia last week followed an e-mail in which he characterized Singapore as an economic failure that is dependent on illicit money from Indonesia and China.

Xie, who worked at Morgan Stanley for nine years, sent the e-mail to his colleagues after attending the International Monetary Fund and World Bank annual meetings last month in the Southeast Asian island state. The 46-year-old Shanghai-born economist questioned why Singapore was chosen to host the conference and said delegates ``were competing with each other to praise Singapore as the success story of globalization.''

``Actually, Singapore's success came mostly from being the money laundering center for corrupt Indonesian businessmen and government officials,'' Xie, who was based in Hong Kong before leaving Morgan Stanley on Sept. 29, wrote in the e-mail. ``Indonesia has no money. So Singapore isn't doing well.''

Singapore's $118 billion economy is recovering from three recessions since the 1997 Asian financial crisis, and is expecting growth of as much as 7.5 percent this year. The city- state is grappling with growing competition from China and India, two of the world's most populous nations, where labor costs are less than a quarter of those in Singapore.

In Guangzhou

Officials from the public relations departments of the Monetary Authority of Singapore and the government's information service declined to comment on the contents of the e-mail. They also declined to be identified.

Xie, 46, declined to comment on his departure when contacted on his mobile phone on Oct. 2 and said he hasn't decided on what he will do next.

``I'm not at liberty to comment on anything,'' Xie said. ``I'm in Guangzhou and I'm taking a break on top of a mountain. It's quite nice here.''

Prime Minister Lee Hsien Loong said in September that Singapore's economy may sustain annual growth of 3 percent to 5 percent for the next 10 to 15 years as the country expands industries from information technology to tourism.

``To sustain its economy, Singapore is building casinos to attract corruption money from China,'' Xie said.

Singapore is ending a four-decade ban on casinos. The government plans to triple tourism revenue to $19 billion and double visitors to 17 million by 2015.

Morgan Stanley confirmed the contents of the e-mail and said the New York-based firm doesn't elaborate on the reasons behind employee departures.

``This is an internal e-mail based on personal suppositions and aimed at stimulating internal debate amongst a small group of intended recipients,'' Cheung Po-ling, a Hong Kong-based spokeswoman for the world's largest securities firm by market value, said in a written statement. ``The e-mail expresses the views of one individual and does not in any way represent the views of the firm.''

`Strong Supporter'

``Morgan Stanley has been a very strong supporter of Singapore and has a great deal of respect for Singapore's achievements,'' Cheung said.

Morgan Stanley ranks sixth among merger advisers in Singapore this year, handling $1.5 billion of deals, according to data compiled by Bloomberg. It advised Temasek Holdings Pte., the Singapore government's investment company, in its purchase of a 9.9 percent stake in Mumbai-based Tata Teleservices Ltd. in March. Morgan Stanley, which ranks third among stock sale arrangers in Asia outside Japan this year, hasn't underwritten any deal in Singapore this year, according to Bloomberg data.

``I tried to find out why Singapore was chosen to host the conference,'' Xie wrote in the e-mail. ``Nobody knew. Some said that probably no one else wanted it. Some guessed that Singapore did a good selling job. I thought it was a strange choice because Singapore was so far from any action or the hot topic of China and India. Mumbai or Shanghai would be a lot more appropriate.''

`Fawning' Guests

At a dinner party hosted by Singapore Prime Minister Lee Hsien Loong, ``people fawned him like a prince,'' Xie wrote. ``These Western people didn't know what they were talking about,'' he wrote, describing the praise for Singapore as ``nauseating pleasantries.''

Xie, who said in September that the U.S. economy may fall into a recession in 2008, worked at the corporate finance division at Macquarie Bank in Singapore before joining Morgan Stanley in 1997. He spent five years as an economist with the World Bank, overseeing the bank's programs in Indonesia and other countries in the Asia-Pacific region, according to the New York-based firm's Web site.

Xie holds a doctorate in economics and a Master's degree in civil engineering from the Massachusetts Institute of Technology.

To contact the reporter on this story: Netty Ismail in Singapore [email protected]

From FEER:

Financial Center Pipedreams
October 2006

By Hugo Restall

There is no denying that for financiers, Singapore has plenty of buzz these days. When a large European bank held a reception there recently for its prime brokers to meet potential hedge fund clients, it expected a couple hundred people. Instead more than 700 showed up. The influx of fund managers and private bankers has helped create a shortage of high-end housing, and as a result prices have risen 20% to 30% in the last year. Office rents just posted a 13% quarter-on-quarter rise, the highest ever, and are expected to break through their 1996 peak within the next couple years.

So is Singapore succeeding in its ambition to become a regional financial center? In some ways, yes. It has certainly enhanced its attractiveness to certain segments of the financial sector. But at the same time it seems to be falling further behind in the race to become the pre-eminent integrated hub. The analogy some use is that Singapore is becoming the Zurich to Hong Kong’s London, or the Greenwich, Connecticut to Hong Kong’s Manhattan.

For high net-worth individuals, Singapore’s banking secrecy laws make it highly attractive as a place to stash funds out of sight of their own country’s authorities—especially since some havens like Switzerland have recently watered down their guarantees of confidentiality. The super-rich of Southeast Asia have long used Singapore as a bolt-hole, both from political instability and the long arm of the law. Now new money is flowing in not only from Europe, but also from China. That’s because since the 1997 handover, wealthy Chinese trust Hong Kong less as there is a perceived risk that mainland authorities will exert their authority there.

Meanwhile, Asia is in the middle of a hedge-fund boom, with assets flowing in at a rate of $12 billion to $15 billion per year. Singapore has offered tax breaks, simpler registration, and even mandates to manage some of its own massive pool of pension savings as enticements for fund managers to locate there. Since many of these individuals trade from wherever they happen to be and spend much time travelling around the region, they can essentially live wherever they want.

That means Singapore’s clean environment and efficient urban planning come into play. With Hong Kong’s air quality deteriorating rapidly and the government so weak it is unable to undertake the building of a cultural center in West Kowloon, it is no wonder that those who can move are doing so. Employers are beginning to rethink whether they need to pay Hong Kong’s higher costs in order to be close to the market. The exodus looks much like the way U.S. hedge funds have moved out of New York City to the suburbs or other cities.

However, the appearance that everything is going Singapore’s way is misleading. For one thing, the benefits of attracting fund managers are small. In this year’s budget, the government announced preferential tax treatment, meaning that the local coffers will only get a small bite of this growing pie. The local market may also get a slight boost, but the biggest pluses is the extra consumption and employment in the local economy. In fact, the bid is reminiscent of Singapore’s past efforts to attract targeted industries like the Internet or biotech. It usually ends up paying top dollar, and then repenting at leisure as it turns out that it jumped on the bandwagon too late.

Meanwhile, Hong Kong is actually solidifying its position as the premier financial center for East Asia. Its stock market is outpacing rivals in the race to become large and liquid enough to intermediate the huge flows of capital needed to reform China’s state-owned enterprises.

One proof of that should come later this month, when what could be the world’s largest IPO is scheduled. Hong Kong retail investors are already lining up to buy into Industrial and Commercial Bank of China. With $815 billion in assets, the bank is the largest on the mainland, is expected to raise as much as $21 billion, about $17 billion of that in Hong Kong and the remainder in Shanghai.

A flood of IPOs—$21.2 billion worth last year—is fueling Hong Kong’s self-confidence as the pre-eminent regional financial center. No longer does the city look over its shoulder at Shanghai. Instead it is Wall Street that it starting to get twitchy about the Hong Kong market’s ability to handle such massive offerings.

Meanwhile, the Singapore exchange, with a total market capitalization about one-quarter the size of Hong Kong at the end of last year, gets a few smaller Chinese companies listing, and for a while local investor interest was keen in these shares. But a derivatives trading scandal involving China Aviation Oil in late 2004 nearly blew up the company, and also raised questions about whether the Singaporean regulators were lowering their standards to attract listings. Trust in Chinese companies coming to Singapore evaporated almost overnight, and oversight had to be tightened in order to rebuild it.

Even in terms of being a center for fund management, Hong Kong is arguably maintaining or enlarging its lead over Singapore. It still attracts the larger funds, which want to be physically close to the main market so they can have plenty of contact with the managers of companies. Singapore doesn’t hold much appeal because its market is dominated by stodgy government-linked companies.

The real potential for a breakthrough lies in the development of an Asian bond market. The issuance of local currency bonds has more than quadrupled in the last 10 years from a very low base. Everyone agrees that the region would benefit hugely if it could reduce companies’ reliance on bank debt by making bond issues more accessible. So can Singapore take the lead?

It seems unlikely however that Singapore could develop this market on its own. One hurdle is the lack of a benchmark government security issued in a convertible local currency. India and China are the two giant sovereign issuers with the potential to create a market. And both are going to want to create their own financial centers.

Last March, India announced its intention to create a road map for convertibility of the rupee. Ultimately that will boost Mumbai’s ability to cut out Singapore as a gateway to India.

And there is talk of Chinese companies being allowed to issue yuan-denominated bonds in Hong Kong. It is not inconceivable for Beijing to make a pragmatic decision to promote Hong Kong as a bond trading center. Already Hong Kong banks are beginning to conduct yuan-denominated business.

The other countries in Southeast Asia are hardly likely to welcome Singaporean control over their access to capital. While relations are stable, the recent outburst of public anger in Thailand at the sale of former Prime Minister Thaksin Shinawatra’s family stake in Shin Corp. to the Singaporean government holding company Temasek shows the depth of suspicion lurking beneath the surface. Effigies of Prime Minister Lee Hsien Loong and his wife Ho Ching, the head of Temasek, were burned in the streets of Bangkok. Temasek has repeatedly faced problems investing abroad because it is perceived as an agent of the government, with political as well as commercial motivations. The conflict with Malaysia over the trading of Malaysian shares in Singapore in the 1990s also shows the regional unwillingness to cede market leadership to the city state.

Singapore is thus paying a price for its government-led economic model, which is intertwined with its system of social control at home. Instead of nurturing a domestic entrepreneurial class with its own vested interests, it has kept the commanding heights of the economy under the control of Singapore Inc. Therefore its financial institutions have not been welcomed abroad in the way that Switzerland’s have.

Individual institutions will also have to consider the political problems of doing business in Singapore. Market players were shocked this month by the sudden resignation of Morgan Stanley Asia economist Andy Xie, reportedly after he sent an internal email disparaging Singapore’s financial center ambitions: “Actually, Singapore’s success came mainly from being the money laundering centre for corrupt Indonesian businessmen and government officials. Indonesia has no money. So Singapore isn’t doing well. To sustain its economy, Singapore is building casinos to attract corrupt money from China.” Mr. Xie could not be reached to comment on his resignation.

Such undiplomatic remarks from an economist would never be welcomed by an investment bank. But Mr. Xie’s resignation suggests just how sensitive the political climate there is for financial institutions. For hedge funds, then, the question is to what extent they could take bets against the Singapore economy or prominent Singaporean companies without wearing out their welcome. Such concerns don’t enter the picture in Hong Kong, and indeed mainland China is not so thin-skinned. Ten years after the handover, Hong Kong’s freedom of information has unexpectedly proved resilient, while Singapore has failed to liberalize.

So it is difficult to see Singapore continuing to enjoy its current success. Fund managers may be happy to receive tax breaks, but their mobility and fickleness means there is not much of a network effect to keep them in Singapore for the long term. Meanwhile Indonesia is exerting pressure to conclude an extradition treaty and amend its secrecy laws in order to stop the outflow of illicit funds.

Singapore deserves credit for financial market deregulation since 1998 and the opening of the local banking sector to foreign competition. But as long as it pursues a strategy that alienates its neighbors, it will be unable to realize its ambition of becoming a fully fledged financial hub. Ultimately such centers depend on cooperative relationships, while at the moment Singapore is still seen as an opportunistic player.

Mr. Restall is editor of the review.

The purported text of his leaked e-mail:

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I participated in the panels on Commodity (sic) and China-India and in some obligatory dinner parties. On Friday night the Singapore prime minister invited the speakers at the meeting that the Singapore government organised. Trichet, Larry Summers, Paul Volker (sic) Chuck Price, the finance ministers of ASEAN countries were there. No government official from China was there …guess I was there to make it look like China was represented.

The dinner was turned into an Oprah with PM Lee Hsein Long (sic) at the center. The topic was on the future of globalization. People fawned him like a prince. Of course, he is. There are two reigning princes in the world that the Davos crowd kiss up to, Jordan and Singapore. The Davos crowd are Republican on economic issues and democratic on social issues. Somehow they manage to put aside their moral misgivings and kiss up to Lee Hsein Long and Abdullah.

I tried to find out why Singapore was chosen to host the conference. Nobody knew. Some thought it was a strange choice because Singapore was so far from any action or the hot topic of China and India. Mumbai or Shanghai would have been a lot more appropriate. ASEAN has been a failure. Its GDP in nominal dollar terms has not changed for 10 years. Singapore’s per capita income has not changed either at $25,000. China’s GDP in dollar terms has tripled during the same period.

I thought the questioners were competing with each other to praise Singapore as the success story of globalisation. Actually, Singapore’s success came mainly from being the money laundering center for corrupt Indonesian businessmen and government officials. Indonesia has no money. So Singapore isn’t doing well. To sustain its economy, Singapore is building casinos to attract corrupt money from China.

These western people didn’t know what they were talking about. Aside from the nauseating pleasantries some useful information came out of it. Trichet sounded very bullish on euro-zone economy (sic). He noted that euro-zone was catching up with the US in growth rate (sic) and talked about further gain in 2007. His tone was much more bullish than our house view. As Japan is surprising on the downside, I don't see how the rise of euro-yen could be stopped.

Larry Summers and Paul Volker (sic) were very worried about the US economy. As you probably know, Alan Greenspan is talking the same way. At the CLSA conference last week, he talked like one of his critics. There is fear of a US collapse. Many Americans think that an RMB reval (sic) would save the US. This is just a dream, in my view.

Most were worried about the future of globalisation due to income inequality. As average workers in the west are not seeing wage increase (sic), they may vote against globalisation. I thought that they were understating the benefit from cheap consumer goods. However, as inflation comes back, it does diminish the benefits for western consumers.

No-one was worried about the growth outlook for China and India. The Indian Planning Minister was very bullish, talking about 9% forever.

My sense is that policymakers are relexed (sic) about the short-term economic outlook but anticipate a US collapse at some point. Americans think that RMB reval could save the US. So they would keep pressuring China."

Andy Xie
Morgan Stanley