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3 Lessons From Financial Crises, China, and Oil Prices

Singapore banks have been under pressure lately.

The concerns of the day include their exposure to a slowdown in Chinese economic growth and the troubled oil and gas industry. Wee Ee Cheong, the chief executive of United Overseas Bank Ltd (SGX: U11), Singapore’s third-largest bank with total assets of S$316 billion, addressed both matters and more in a recent briefing for the bank’s 2015 fourth-quarter earnings. There are three important lessons to takeaway.

Financial crises don’t always happen 

This is Wee on financial crises:

“So, basically what we are trying to say is that externally – there will be a slowdown. But it is part of the business cycle. Not a crisis situation.

It is very different from 1998, in the Asian Crisis. The currency shock combined with high corporate leverage. 2008, the Lehman Crisis, is a liquidity crisis. But today, all these systemic risk I don’t think will happen. You look at the countries in Southeast Asia, they are strong in foreign reserve. You look at the banking. You look at the corporate balance sheets are in much better shape than before. So, we see the risk is very much manageable. It’s a slowdown, yes.”

For investors, it can be tempting to draw comparisons between the current issues with significant events in the past, like the 1998 Asian Financial Crisis or the 2008 Global Financial Crisis. Wee suggests that we should be looking at present facts instead, rather than painting each new crisis as similar to one that has happened in the past.

Putting a Chinese slowdown into perspective

Wee had spent time explaining his views on the future of China:

“China – again, we put things into perspective.

The [China] economy now accounts for 15% of the whole global GDP [gross domestic product]. Up from 6% ten years ago. Now, China is going through transformation. It’s no different from any country, including Singapore.

Now, given the base has increased so much, 6% growth [referring to China’s current GDP growth], you look at it – it’s five times more significant that five to ten years ago.

Because ten years ago, they grow 10%. Today, they grow 6% but the base has gone up a lot. So, I don’t see any hard landing in China. Especially in China is still the strongest in terms of the reserve. The world’s biggest. And most of the borrowing is still in renminbi. So, it’s a slowdown, but in the long run, I think it is still good for China.”

Wee makes a salient point here about the nature of growth. There might be times when growth accelerates and there might be times when growth slows down. In other words, growth does not come in a straight line.

Growth can become more challenging as a country gets bigger. But Wee alludes to the importance of focusing on the long term future, rather than worrying about the yearly growth pattern.

A small fire in oil and gas

During the briefing, Wee also shared some thoughts on the price of oil and its broader impacts: 

“When oil price is high, you ask me what is the risk? When the oil price is low, you ask me what is the risk? I cannot answer you.

But, frankly – if you look at some historical prospect – lower oil prices, historically, is not associated with recessions. You look at at the whole Asia countries which is dependent on oil imports. So, cheaper oil is benefitting everyone of us here.

So, generally, we see the impact is something manageable. It’s more about profitability rather than balance sheets for the bank. And given our strong balance sheets and reserves, we think we can manage and weather this volatility. And in fact, we see opportunity for us to strengthen our franchise in such times.”

The financial headlines tend to leap from one issue to the next. At one moment, high oil prices are considered to be bad for the economy. In the next moment, lower oil prices don’t seem good either.

The troubles surrounding major oil and gas players in Singapore such as Keppel Corporation Limited (SGX: BN4) and SembCorp Marine Ltd (SGX: S51) are dominating the headlines at the moment. Lost in the conversation is the benefit of lower oil prices, one of which is a lowering of costs for the likes of Singapore Airlines Ltd (SGX: C6L).

Investors might want to take a broader view. What is likely is that lower oil prices will be a boon for some and a bane for others. What is unlikely is that lower oil prices will affect all companies in the same manner.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.