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In 1992, Deng Xiaoping, the former leader of the Chinese Communist Party who was instrumental in leading China to a market economy, described Singapore (EWS) as a strict, well-managed country that China must learn from and excel. Fifteen years later, Wang Yang, a Politburo member, highlighted the Singapore Model as the best candidate for China to emulate. His enthusiasm is shared by Xi Jingping, the top-ranked member of the Central Secretariat of the Communist Party of China, who made a trip to Singapore in order to consult with former Prime Minister Lee Kuan and his son, Prime Minister Lee Hsien Loong, his top priority after being confirmed as China's next leader.

There is a reason that the Chinese apparatchiks have developed a new-found love for the Singapore Model: The economic tidal wave unleashed by Xiaoping's economic reforms is beginning to undermine the Communist Party of China's control. The rise of the merchant class along China's coast has fueled calls for a decentralization of power, and now the CPC is looking for a new political structure to adopt that will both placate China's burgeoning middle class and preserve its own power and prerogatives. Singapore has replaced the West as China's new economic role model.

Singapore Through Rose Colored Glasses

It's important to draw a line between what Chinese officials perceive the Singapore Model to be and what the Singapore Model actually is.

To Chinese officials, the Singapore Model is a political and economic panacea; a growing economy kept in relative social harmony without dissenting parties or the shackles of corruption. The populace is content and obedient to the ruling party. Democracy does not exist because it is not required for the harmonious operation of society. The only thing required is law and a clean, corrupt-free government to keep everyone happy and prosperous. Its hospitals are better and its streets are safer than the West. The schools in Singapore are nonpareil: According to scores released by the Trends in International Mathematics and Science Study in 2003 showed Singapore at the top of the world in 4th and 8th grade mathematics. Singapore gets all that in exchange for only 19% of GDP. Its tax rates are low, too: They account for only 14.2% of GDP.

What's not to like?

In the minds of many a Politburo member, the example of Singapore is a ringing validation of state-directed capitalism. This interpretation of the Singapore Model is naturally self-serving and incomplete. Singaporeans have opposition parties, for example. They have basic civil rights and are allowed the right of conscience, even when it conflicts with malum prohibitum ("it's wrong because the law says it is".) The Singaporean government not only restricts the behavior of its populace, it heavily restricts the prerogatives of its officials.

And that's not the only obstacle to China's ambitions. Singapore's government is unique, not only to Asia, but to the world.

Rising Executives and Board Members, Not Ministers

Even for the Asiatic cultural norms that place a high premium on learning, Singaporean officials are vastly overqualified on every rung of the ladder. In fact, the government of Singapore is run so much like a business that it's often referred to as "Singapore, Inc." Its civil service has more in common with workaholic, rising stars at Morgan Stanley than they do with lifelong bureaucrats. They are highly educated, skilled, and well motivated. They are extremely well compensated. Retesting is constant at every level of the civil service and inefficient members of government are rapidly replaced with little regard to seniority. The country has the highest trade-to-GDP ratio in the world at 407.9 percent, signifying the importance of trade to its economy. The country is currently the only Asian country with a AAA credit rating from all three major credit rating agencies - Standard & Poor's, Moody's, and Fitch.

You Are Who You Hang With

Singapore is a member of ASEAN (The Association of SouthEast Asian Nations), which allows it free-trade with the ASEAN member states. China has a separate agreement, but it's not as far reaching as what members of ASEAN enjoy. ASEAN also has a duty-free tax treaty with India, which China lacks. That makes Singapore preferable to China for the establishment of holding companies, branch offices and regional headquarters for international businesses wishing to target the Asian market. Perhaps more importantly, its policies are aligned with the WTO, the OECD and the International Accounting Standards Board.

Corruption-Free

To hear the most enthusiastic of the pro-Singapore Chinese bureaucrats tell it, the only significant obstacle to adapting the Singapore Model to China is to stamp out corruption, and success will surely follow.

What the intelligentsia of the CPC fail to grasp is just how corrupt Singapore isn't. Transparency International ranks Singapore as the fifth least corrupt country in the world. By Singaporean standards, Germany, Japan, the United Kingdom, France and the United States are hopelessly and inexcusably corrupt.

China, on the other hand, is the 75th most corrupt nation. That means that China is more corrupt than Italy, about par with Columbia, and only slightly less corrupt than Greece.

That's a long way to climb.

Singapore also offers protection for intellectual property rights, adhering to the WTO's TRIPS Agreement, the Berne Convention for the Protection of Literary and Artistic Works, and the Paris Convention for the Protection of Industrial Property. China is one of the world's most notorious offenders. In addition, Singapore holds the highest e-government ranking in the world.

Size And Location Matter A Lot

Located at the maritime center between India, Thailand, Malaysia, Indonesia, China, and the Philippines, Singapore's unique geography has transformed it into the energy hub of Asia. Its banking sector operations make Singapore "the Asian Switzerland"; an advantage unique to small island chains and non-political sovereigns that can't be replicated on China's scale. These singular advantages, along with the ease of doing business in one of the most multiracial, multicultural and multilingual urban areas on the planet, make the Singapore Model very difficult to copy.

Ease Of Doing Business

The following table, taken from 14 independent surveys conducted between 2009 and 2010, illustrates just how vast the disparity is between Singapore and China.

Click to enlarge

Stock Markets

If you are a foreign investor who is not already doing business in Hong Kong and have no family ties there, you have to obtain a temporary residency via to Hong Kong or Macau to trade Class A stocks on the Hong Kong Exchange. Foreigners are only allowed to trade Class B stocks, many of which are either dogs or issued by suspect, even fraudulent, enterprises. Investing in Singapore Exchange is a snap. Here are the four steps:

Step 1: Wake up, look in the mirror, and determine if you are 18 years of age or older.

Step 2: Try to remember if you've ever filed bankruptcy. If you've filed bankruptcy before, it must be discharged.

Step 3: Obtain a passport from your local Post Office. The passport I.D. Number doubles as your I.D. Number to trade on the Singapore Exchange. There's no need to actually travel to Singapore. The only purpose of the passport is to obtain the I.D. Number.

Step 4: Download and fill out the application form. This is available online at the Central Depository, Ltd, (CDP) which is a subsidiary of the SGX. You will also need a driver's license or proof of address. Mail the completed form and supporting documents to the CDP. Note that the documents be certified by either a notary public or a Justice of the Peace before submission.

Congratulations, you can now trade Asian stocks without flying to Asia. You can also sleep a little better at night knowing that your money is invested in a land where corporate fraud is punished by caning.

And you would have done very well: The Singapore Straits Times Index (STI) has outperformed its global peers of the advanced world over the tumultuous last few years, gaining 12.45% in the 2012 YTD as of mid-July and has continued to gain, recently penetrating the 3,000 mark. Of the six benchmarks listed below, the STI is also the least volatile.

In addition, Singapore has outperformed its fellow ASEAN economies by a wide margin.

If you're looking for fixed income with very little risk, you might also consider bonds. Due to Singapore's excellent governance and budget surplus, the government of Singapore doesn't have to finance deficits by selling its securities, which results in a much lower risk of default. That makes Singapore's sovereign debt an attractive alternative to the negative yield of German bunds.

Though it is an active issuer of debt - predominantly in order to provide a robust benchmark for its domestic corporate debt - Singapore's debt growth is modest compared to China's.

Conclusion

From a Chinese perspective, the Singapore Model is just one more economic paradigm to be studied, copied, and picked clean.

"'The American, Japanese and Soviet systems, we have eaten them raw and skinned them alive, copying them entirely," writes central committee member General Liu Yuan. Unfortunately, Singapore's success is a product of things the CPC can't mimic by passing a few reforms: its geographical location, meritocracy, strict anti-corruption laws, international partnerships and multicultural identity are unique to Singapore. Investors may wish to consider Singapore's relative safety and historically excellent returns when adding Asian equities to their portfolio.

Source: Why Chinese Officials Are In Love With The Singapore Model