Time for Lee Kuan Yew to learn from Deng Xiaoping's Legacy

Singapore has been touted around the world as an economic miracle. Lee Kuan Yew, the CEO and Chief Marketing Officer of the country, has been held up high as a model statesman of the island state and Asian Economic Tiger. The PAP government likes to boast about how Chinese officials come to Singapore to learn from the ruling party about how to run a nation. Lee Kuan Yew was not afraid to boast about Chinese officials wanting to run their country the way Singapore does [link].

Yet, Lee knew that China would soon rise to the world stage and surpass what little Singapore could ever accomplish. Instead of China learning from Singapore, Singapore would be learning from China. The elder Lee once said to Deng Xiaoping [link],

‘Whatever we can do, you will do better. We are the descendants of the landless peasants of South China, you have the literati, you have the top brains, you have the poets, the artists.’

Indeed, the time has come for Singapore's political elite to take a page out of China's economic leadership.

Singapore Economy Would Suffer if China Property Boom Collapses

One of the hot topics circling in the global financial news and blogosphere is the potential overheating of the Chinese economy and property market bubble. Home prices in Beijing, for example, have risen to 22 times income levels, a new high that exacerbates housing affordability problems and that raises serious questions about the sustainability of housing prices on the basis of fundamental valuations.

At the same time, reports of China's shadow banking system have started to emerge. A recent video report by TheStreet talks about the "Shark Loan" phenomenon in China. The "Shark Loan" process typically starts with a homeowner taking out a loan on the equity of his house, from a commercial bank, based on the appreciation in the market value of the house due to the booming property market. The homeowner then re-lends the proceeds from the loan to a Shark-Loan operation at a substantially higher interest rate than the homeowner is paying the bank. The Shark-Loan operation, in turn, lends the money it has borrowed from the homeowner, at an even higher interest rate, to a speculator who then bets on the housing market once again. In effect, the Shark-Loan operators are acting as "shadow bankers" in the provision of credit to speculators who would not otherwise get access to capital through traditional funding sources.

The impact of the "Shark-Loan" operations is to circumvent the constraints on credit imposed by the state that are designed to cool the credit bubble that is fueling the property boom. The Shark-loan Shadow Bankers allow the housing bubble to continue its inflation by channeling credit around the legal banking system from homeowners into the hands of speculators, who then further inflate housing prices with their purchases of property. The whole system works beautifully for everybody as long as housing prices continue to rise. But once housing prices fall and the bubble bursts, the entire system of ponzi finance will come crashing down like a house of cards.