Barry Porter reports on how Singapore is saving its citizens from themselves
Singapore has won widespread international acclaim in the past year for its visionary liberalisation and financial reforms. However, it appears not yet ready to shrug off its nanny state image.
Its latest batch of market reforms have left a clear impression the authorities feel the average Singaporean investor is still not mature enough to totally handle his or her own financial affairs.
New measures have been announced to ease listing criteria and heavy-handed state supervision. But at the same time, investors will be forced to punt less of their compulsory provident fund savings directly on the stock market and place more in approved unit trusts, government and statutory board bonds, and insurance.
The move is intended to make citizens more conservative and long-term orientated.
'Asian investors have not reached the savviness of western investors in terms of personal investments,' said Chong Yoon Chou, investment manager at Aberdeen Asset Management, justifying the government's protective stance.
'They seem to want to punt all their savings on the property market and short-term orientated stock market stakes.' At present, Singaporeans can invest as much as they like out of the investible portion of their Central Provident Fund (CPF) compulsory savings accounts in individual stocks.
But come December 1, this will be limited to just 50 per cent.
Simultaneously, the ceiling on investible CPF savings placed in government and statutory board bonds, insurance, unit trusts and fund management accounts will be raised from 80 per cent to 100 per cent.
Analysts say this should result in a shift to higher quality stocks as fund managers typically put their money in less speculative plays.
At present, just S$400 million (about HK$1.82 billion) of the $25 billion of CPF investible funds invested outside of property is placed in unit trusts. That is less than 2 per cent.
'We are looking at a dramatic change,' one fund manager said.
Announcing the changes last Saturday, Monetary Authority of Singapore (MAS) chairman Lee Hsien Loong said: 'Equity investors should think in terms of years, rather than weeks or days.
'The stock market is not an avenue for immediate riches, far less a sure-win lottery. These basic truths are sometimes forgotten in a stock market boom.' With the Straits Times Index's (STI) recent remarkable rally, the government has been concerned some Singaporeans have lost sight of the fact their CPF savings are intended to cover their financial needs upon retirement.
Instead, they seem preoccupied with making a fast buck.
Under the compulsory CPF system, employees contribute 20 per cent of their monthly salaries into a state-controlled savings scheme. Employers top this up with an additional 10 per cent.
Account-holders are allowed to draw down on their accumulated savings before retirement for only a very limited number of uses, such as buying a home or covering medical expenses. However, they are allowed some say over how a portion of the money is invested.
It is how some Singaporeans have chosen to gamble with this portion, and other savings, that has set alarm bells ringing. A recent runaway rush for initial public offerings (IPOs) has raised particular concern.
After tumbling about 50 per cent in the aftermath of the 1997 regional currency crash, the benchmark STI has rebounded about 150 per cent, recently touching record highs.
The good times are back and some punters may be delighted, but the MAS is clearly not.
Despite having just emerged from the worst financial collapse since World War II, the MAS has become fearful some amateur investors have already forgotten the basic fact that share prices can also fall.
It would much prefer to see a smoother, less-volatile market where investors have time to weigh up fundamentals and long-term prospects.
The last thing the MAS wants is for Singapore to rush straight back into another boom-bust cycle.
Recent IPOs have been heavily oversubscribed, with many seeing their share price rocketing 50-70 per cent over their first few days of trading, before often later coming sharply back down.
In one case, an IPO was oversubscribed 335 times.
Timothy Wong, research head at Vickers Ballas Securities, said: 'Singapore retail investors tend to move with a herd instinct and don't have the capacity to evaluate IPOs coming up. When you dip into your long-term savings, this could be detrimental to you.' Mr Lee, who is also Singapore's Deputy Prime Minister, said: 'When investors, especially retail investors, treat every IPO as if Santa Claus is coming to town, they are not likely to develop a more sophisticated understanding of the value of the shares, or the risks of share ownership.' This phenomenon is all the more worrying given the MAS' progressive shift towards deregulation and easier listing requirements.
To reflect the needs of emerging technology companies, the stock exchange has adopted new criteria allowing 'promising companies' which are not yet profitable to be listed as long as their market capitalisation exceeds $80 million. The new ruling came into effect on Monday. Previously, companies had to show a proven three-year profit track-record.
At the same time, supervision is changing towards a more disclosure-based regime, placing more emphasis on investors to decide on a stock's merits for themselves based on a wider range of available data.
For professional investors, this is seen as fine. For inexperienced amateurs, it could prove more worrying.
The CPF board previously tried protecting its investors by vetting Singapore-listed firms in which they could invest and granting them trustee status. CPF investors were allowed to place only 20 per cent of their investible funds in non-trustee stocks.
This system will now be abandoned. In recent years, approved trustee stocks performed no better than non-trustee stocks - in some cases much worse, causing much embarrassment.
As Mr Lee conceded: 'A trustee company can still go wrong, either because its business does badly, or because of some monkey-business.' By encouraging CPF investors to put their money in unit trusts, the fund's board appears to be acknowledging that stock-picking is best left to the professionals, not government officials.
Despite all this, Singapore's liberalisation drive still appears to be on track, albeit at a cautious pace.
Anand Aithal, chief strategist and joint regional research head at Goldman Sachs, said: 'Financial deregulation in Singapore is slow and deliberate. They are taking it one step at a time, stopping to check how they are doing at each stage.'