Day: October 6, 2017

Some Australian perspectives on PRC influence-seeking

Michael Reddell Australia, China, NZ politics, Uncategorized

For those interested in the activities of the People’s Republic of China and the Chinese Communist Party in this part of the world, Professor Anne-Marie Brady’s paper remains essential reading.   The material Professor Brady lays out on the New Zealand is deeply troubling, as is the near-complete subsequent silence from most of our political leaders.

But if New Zealand remains somewhat unique in having a Communist Party member and former member of the Chinese intelligence services –  who has never disavowed his past and remains very close to the People’s Republic of China embassy –  as a serving member of Parliament, the issues around PRC influence-seeking, pressure on the Chinese diaspora, and direct meddling in the domestic affairs of other countries aren’t unique to New Zealand. In yesterday’s post, I highlighted several links to contribution to the open and active debate on these issues in Australia.

But today a new collection of 22 articles, speeches etc on the issue of PRC activities in Australia (“The Giant Awakens” ) has been released by Vision Times, one of the relatively small number of remaining independent Chinese media in Australia (as in New Zealand, most of the Chinese media in Australia are now apparently under the effective control of the PRC).  More than half the authors are themselves ethnic Chinese, including a former PRC diplomat to Australia who defected a decade or so ago.

I haven’t read the entire collection, but of those I have read almost every piece struck a chord in one way or another, with so much of what is written about raising similar issues and concerns to those Professor Brady alerts us to in New Zealand.   I’d commend it to anyone interested in the subject, both because Australia (a) matters to us, and (b) seems to have very similar issues to us, and because…..well….sadly there is nothing similar in New Zealand.   The near-complete cone of silence still appears to hold.

I’d particularly commend the first paper in the collection by Professor Rory Medcalf, who is currently the Head of National Security College at the Australian National University.   It is an easy read –  only three pages – but an uncomfortable one.

A few extracts

Here in Australia we have seen the Chinese Communist Party involved in what appears to be multi-faceted campaign to influence our politics and independent policymaking. This includes propaganda and censorship in much of this nation’s Chinese-language media as well as channels of interference through intimidation of dissident voices and the establishment and mobilisation of pro-Beijing organisations on Australian soil. There is also the troubling question of political donations and their motives.

On political donations –  recall the magnitude of some of the disclosed donations here

It has also been reported recently that Australia’s main political parties have received close to $6 million in donations over the last few years from individuals associated with the Australian Council for the Promotion of the Peaceful Reunification of China. The Council, in turn, is reported to have connections to the United Front Work Department, an organisation which reports to the Central Committee of the Communist Party of China.

But whatever the mix of motives, one thing is clear. The donations were enough for the Director-General of the Australian Security Intelligence Organisation (ASIO) to take the highly unusual step of directly warning the major parties that they and Australia’s national security could be compromised by such donations. For the head of ASIO to take such a step suggests he was genuinely worried, from a national security and national interest point of view. Security agencies cannot take effective action on any of this because it has been entirely legal – all they can do is raise the alarm. It is now up to the political class to decide whether there is, within Australian democracy, enough self-respect to function without money linked to the Chinese Communist Party. This, after all, is a massive, secretive, self-interested and foreign organisation, with interests that can sometimes clash directly with Australia’s.

These issues are at least as much about the interests of ethnic Chinese New Zealanders and Australians

Indeed, much of the worry about such influence is within this country’s diverse Chinese communities. If, as a nation, we chose to ignore such concerns, we would be effectively treating such dissenting voices among our Chinese-Australian population as second-class Australians, whose freedom of thought and freedom of expression do not warrant protection.

So the issue of foreign interference needs to be addressed in a context of respect for the rights of Chinese Australians. That means this needs to be an issue that is seized and owned by the moderate, bipartisan centre of Australian politics. This way, the issue cannot be captured by extreme voices or be distorted, misconstrued or falsely portrayed as one of xenophobia.

One of the points I’ve been making in a New Zealand context is that our economic dependence on China is (often) much-exaggerated.

The risk is that we will buy the story that our economy is so comprehensively dependent on China that Australia cannot afford to cause China much difficulty on security and political issues, even when our interests diverge. Indeed, perceptions of Australia’s vulnerability to Chinese economic pressure are exaggerated. Economic pressure from China that would have the biggest impact on Australia – most notably through iron ore trade – would also impose restrictive costs on Beijing. Privately or publicly, Beijing criticises or complains to Canberra frequently over multiple issues. But the accompanying threats tend to be implicit or general – that the bilateral relationship will suffer some unspecified deterioration if Australia does not heed China’s wishes.

…..If Beijing felt it needed to send an economic signal to reinforce its displeasure, its initial response would likely involve non-tariff barriers over quarantine and safety standards, or making life difficult for businesses operating in China, with limited long-term economic impact on itself or Australia.

Beijing has adopted this approach towards South Korean business interests, yet has not succeeded in its goal of changing Seoul’s stance on missile defence cooperation with the United States. Economic vulnerability is often as much about perception as reality – and it is in China’s interests for Australia to imagine itself highly vulnerable. Already, some voices in business, academia and the media focus on the possible economic impacts of annoying China. The perception of economic harm can have an outsized effect on domestic interests, creating pressure for rapid political compromise. If we overreact to any Chinese economic threats and self-censor on issues perceived to be problematic for Beijing, it will not protect Australia from further pressure – it will signal that such pressure works.

And finally

Foreign interference in Australia is not solely a national security issue. It is a fundamental test of Australian social inclusiveness, cohesion, equity and democracy that we ensure all in this country have freedom of expression, freedom from fear and protection from untoward intervention by a foreign power.

It is a paper, part of a collection, that should be widely read in New Zealand.

In my post yesterday afternoon, I linked to an article published in the AFR by Peter Drysdale and John Denton, attempting to play down the issue of Chinese influence and suggesting that critics are “demonising” the People’s Republic, or indeed Chinese-Australians.   There is a nice, accessible, response to that article by John Fitzgerald, another Australian academic.

…for Australia, the issue at stake is not whether Leninism and liberal democracy can work happily and co-operatively in their separate jurisdictions but whether it is possible for a democracy to maintain jurisdictional separation in a dependent relationship with a Leninist state without adjusting its everyday modes of operation. Whatever we may think of authoritarian Leninist states, of which contemporary China is clearly one, they are founded on an ‘enemy mentality,’ and they have immense difficulty recognising the territorial and jurisdictional limits of their overweening hierarchical authority. How is a liberal Australia to deal with a Leninist China as that country becomes more assertive beyond its borders?

A bold free press is one of the few instruments a democracy has at its disposal to check the encroachment of a Leninist state into its jurisdiction. An open, respectful, and evidence-based conversation on this encroachment in the media is essential to getting Australia’s relationship with China right.

It is not demonising China to report what the Chinese government says about itself: that it is a wealthy and powerful Communist Party state that has no time for democratic accountable government, no independent courts, security, or media, that denies universal adult political participation, that offers no protection for the exercise of fundamental rights of freedom of speech, religion or assembly. In China this is called guoqing. There are no plans to change anytime soon. Similarly, querying the behaviour of a few named and alleged influence peddlers from China no more tarnishes the reputation of all Chinese Australians than querying the conduct of Putin’s agents in Washington impugns the loyalty of all Russian Americans.

Meanwhile, here in New Zealand the final election results will be declared tomorrow.  A self-confessed member of the Chinese Communist Party, former member of the Chinese intelligence services –  both facts hidden fron voters for years, and partially hidden from the New Zealand immigration and citizenship authorities “because that is what the Chinese authorities told us to do” – will once again be confirmed as a member of Parliament.  That alone –  the tip of the iceberg in the issues Professor Brady raises –  should be deeply troubling.  But our establishment elites seem unbothered.  Nothing is heard from the Prime Minister. Nothing is heard from the Leader of the Opposition.  Nothing is heard from the Green Party.  Nothing is heard from the Minister of Foreign Affairs.  And when last heard from, the Attorney-General and minister responsible for several of the intelligence services resorted to simply making stuff up.

“That was a Newsroom article, timed to damage the man politically.  I’m not going to respond to any of the allegations that have been made about/against him. I think it is disgraceful that a whole class of people have been singled out for racial abuse.  As for Professor Brady, I don’t think she likes any foreigners at all.”

The best response to erroneous claims is the facts. As far as I’m aware, nothing in the original Financial Times/Newsroom articles, nothing in Professor Brady’s paper, and nothing in yesterday New York Times article has been refuted.  I’ve not even seen anyone try.  Some mix of embarrassed silence, and brazening through, in the hope that the issue will just go away seems to be what our “leaders” now count as responsible leadership.

Deposit insurance wouldn’t put credit ratings at risk

Michael Reddell Banking, deposit insurance, Financial stabilty, Uncategorized

There was a curious paragraph in an article by Alex Tarrant on interest.co.nz last week on post-election positioning .  Tarrant was writing about, in particular, fiscal positioning and the possibility that whichever party leads the next government could find its fiscal commitments put under pretty severe pressure because of the policy exepctations of the minor parties (New Zealand First on its own, or in conjunction with the Greens).  He argues that if Labour ends up back in opposition

It will also allow Labour to imply that National must have offered more to Peters on big-spending policies than Labour was prepared to. The hope for Ardern and Grant Robertson would be that National suddenly finds itself being attacked on throwing fiscal responsibility out the window with a set of coalition bribes. And this after the entire campaign was fought by National on sound management of the government’s books and plans to repay government debt to 10% of GDP, from about 23% now.

This could be a huge boost for a resurgent Labour Party even if it does go back into opposition. “We wanted to form a responsible government, but couldn’t get NZ First to agree to responsible spending.”

Labour might even be able to point to how certain policies might have put the government’s credit rating at risk – my understanding is that NZ First’s and the Green’s bank deposit insurance schemes could fit this argument.

The government’s credit rating currently benefits from ratings agencies placing less weight on that government would bail out a failed bank here, with the Reserve Bank’s open bank resolution policy and there being no government deposit guarantee/insurance in New Zealand. If introducing one means rating agencies rethink this position, the argument would be that a lower credit score would lead to higher government borrowing costs. (Peters’ policy on deposit insurance regards majority-owned NZ-registered banks; the Greens want a broader scheme.)

The main bit of the argument didn’t strike me as terribly persuasive –  the warm feeling of fiscal virtue would surely be of little solace to most Labour people on the dark winter nights if they did end up back in opposition for another three years.

But what had really caught my eye was the specific suggestion that New Zealand First or Greens preferences for some sort of deposit insurance scheme might imperil the government’s credit rating.  I’d made a mental note to come back to it, but yesterday someone asked my view on the suggestion, which is the prompt for this morning’s post.

The New Zealand government’s credit ratings are very strong.   There are foreign currency and local currency credit ratings, but for New Zealand only the latter now matter (there is little or no foreign currency debt, and no apparent plans to raise more).  Of the three main ratings agencies, one gives the New Zealand government a AAA rating –  the best there is –  and the other two give the government an AA+ rating, just one notch down.   That makes sense.   We not only have a low level of government debt (per cent of GDP) but successive governments have proved to have the willingness and capacity to keep debt in check when bad stuff happens.  The last time the New Zealand government defaulted on its debt was in 1933 –  and we had lots of company then.

Relatedly, our banking system has been strong and pretty well-managed.  There were some pretty serious problems in the late 1980s, immediately post-liberalisation, particularly with financial institutions that had been wholly government-owned (Rural Bank, DFC, and BNZ).   But since then –  and before that period for that matter –  banks have been pretty strongly-capitalised, and appear to have done a pretty good job of making credit decisions.  Banks took too many risks (were too complacent) in the 2000s around funding liquidity –  and needed a lot of official support on that score during the 2008/09 international crisis period.  But despite a really big credit boom in the 2000s, even a severe recession and quite a slow recovery –  and levels of income (servicing capacity) typically quite a bit below what would previously have been expected –  led to no serious systemwide impairment of the banks’ assets.  Loan losses rose, as they do in every recession, but to quite a manageable extent.   It was a similar story in Australia, Canada and quite a few other advanced countries.  The government put itself on the hook for some finance company failures (through the deposit guarantee scheme) and the ill-advised AMI bailout.  But that was it.

And these days, almost a decade on, pretty demanding stress tests on banks’ loan portfolios suggest that even a savage recession and a very severe fall in house prices would not be enough to topple any of the banks, let alone the system as a whole.  That isn’t grounds for complacency –  in the wrong circumstances lending standards can deteriorate quite rapidly –  but on the sort of lending the banks have been doing over the last decade or two, the banking system itself looks pretty sound.

Rating agencies still worry a bit about the large negative net international investment position of New Zealand (the net claims of foreigners –  debt and equity –  on all New Zealand entities).  Personally, I think that is an overstated concern: the NIIP position has been large for 30 years, but hasn’t (as a share of GDP) been getting any larger.  Mostly it is the net offshore funding of the banking system.   What matters then, from a credit perspective, is the quality of the assets on bank balance sheets (see above).   In my reading of the literature, big increases in banks’ reliance on foreign funding have often been a warning sign (internationally).  That hasn’t been the story here for a long time.

New Zealand is the only OECD country now that does not have a deposit insurance system.   The official rhetoric for a long time has been that depositors need to recognise that they can, and will, lose their money if their bank fails.  It is supposed to promote market discipline.  The Open Bank Resolution tool was devised to try to buttress that “no bailouts” message –  or at least to give ministers options in a crisis.  The OBR is designed to ensure that a bank can be reopened immediately after it fails (thus keeping basic payments services going). It does so through a mechanism that involves “haircutting” the claims of creditors –  the size of the haircut designed to be larger than the plausible, but still unknown actual losses –  while providing public sector liquidity support and a government guarantee to the remaning claims.  Without such a guarantee, rational creditors would mostly withdraw the remaining funds they did have access to as soon as the failed bank reopened.  In practice, since in a small system with quite similar banks all banks are likely to face quite similar shocks, such a guarantee might well need to be extended to the other banks (although I’m not aware that this latter point has ever been conceded by authorities).

It is no secret that governments tend to bail-out failed banks, and often end up offering a degree of protection that goes beyond anything in formal deposit insurance system rules.  That is particular so for retail depositors, but in the last major crisis of 2008/09 it was often true of wholesale creditors too (eg extreme pressure was brought to bear on the Irish government, by other governments and EU entities, not to allow wholesale creditors to lose money when Irish banks failed).

The practice might, in some abstract world, be undesirable, but it happens.    There are some signs now that authorities are putting more effort into trying to build regimes that make it more feasible for wholesale creditors to be allowed to lose money, while not disrupting the continuity of payments systems etc.  But there is no sign of such movement as far as retail depositors are concerned.

And despite the rhetoric, New Zealand’s track record hasn’t been so very different.  Governments twice bailed out the BNZ in the late 80s and early 90s.  The temporary retail deposit guarantee scheme was introduced with bipartisan support in the midst of the 2008/09 crisis.  And AMI –  an insurance company, not even a bank –  was bailed out, on official advice, only a few years ago.    Of course, many small finance companies also failed, and there was no bailout to those depositors.   But a rational retail creditor of a significant retail bank is quite likely to assume that if there is a bank failure, he or she will in the end be protected by the government.

Rational ratings agencies know this too.   In their ratings –  or banks and of sovereigns –  they take account of the probability of official government support.     It is likely to be a matter of serious concern in a shonky banking system, and in a country with high pre-existing levels of government debt.  It isn’t likely to be of much concern in a country with a good track record of stable banking, a low level of government debt, and a good track of reining in fiscal pressures.  And that is true whether or not there is a formal deposit insurance scheme in place.

For a long time I was staunchly opposed to deposit insurance –  like pretty much everyone at the Reserve Bank.  But I changed my mind probably a decade ago.  I’m not so worried by the question of whether it is “fair” or not for ordinary depositors to face the risk of losing money –  there are plenty of other areas where such uncompensated losses happen (eg house prices fall back, or the value of one’s labour market skills drops) –  as by realpolitik considerations:

  • at point of failure, governments are almost certain, whatever they say now, to bail out retail depositors of major core institutions, and
  • a pre-specificed deposit insurance arrangement increases the chances of OBR itself being able to work, and thus of being able to impose losses on wholesale creditors (notably offshore ones).

In an earlier post I outlined a scenario:

Suppose a big bank is on the brink of failure.  Purely illustrative, let’s assume that one day some years hence the ANZ boards in New Zealand and Australia approach the respective governments and regulators, announcing “we are bust”.

Perhaps the Reserve Bank will favour adopting OBR for the New Zealand subsidiary (since the parent is also failing they can’t get the parent to stump up more capital to solve the problem that way).    But why would the Minister of Finance agree?

First, Australia doesn’t have a system like OBR and no one I’m aware of thinks it is remotely likely that an Australia government would simply let one of their big banks fail.  But in the very unlikely event they did, not only is there a statutory preference for Australian depositors over other creditors, but Australia has a deposit insurance scheme.

I’m not sure of the precise numbers, but as ANZ is our largest bank, perhaps a third of all New Zealanders will have deposits at ANZ.

So, if the New Zealand Minister of Finance is considering using OBR he has to weigh up:

  • the headlines, in which ANZ depositors in Australia would be protected, but ANZ depositors in New Zealand would immediately lose a large chunk of their money (an OBR ‘haircut’ of 30 per cent is perfectly plausible),
  • and, even with OBR, it is generally accepted (it is mentioned in the Bulletin) that the government would need to guarantee all the remaining deposits of the failed bank (otherwise depositors would rationally remove those funds ASAP from the failed bank)
  • and I’ve long  thought it likely that once the remaining funds of the failed bank are guaranteed, the government might also have to guarantee the deposits of the other banks in the system.  Banks rarely fail in isolation, and faced with the failure of a major banks, depositors might quite rationally prefer to shift their funds to the bank that now has the government guarantee.

And all this is before considering the huge pressure that would be likely to come on the New Zealand government, from the Australian government, to bail-out the combined ANZ group.  The damage to the overall ANZ brand, from allowing one very subsidiary to fail, would be quite large.  And Australian governments can play hardball.

So, the Minister of Finance (and PM) could apply OBR, but only by upsetting a huge number of voters (and voters’ families), upsetting the government of the foreign country most important to New Zealand, and still being left with large, fairly open-ended, guarantees on the books.

Or, they could simply write a cheque –  perhaps in some (superficially) harmonious trans-Tasman deal to jointly bail out parent and subsidiary  (the haggling would no doubt be quite acrimonious).  After all, our government accounts are in pretty reasonable shape by international standards.

And the real losses –  the bad loans –  have already happened.  It is just a question of who bears them.  And if one third of the population is bearing them –  in an institution that the Reserve Bank was supposed to have been supervising –  well, why not just spread them over all taxpayers?    And how reasonable is it to think that an 80 year pensioner, with $100000 in our largest bank, should have been expected to have been exercising more scrutiny and market discipline than our expert professional regulator (the Reserve Bank) succeeded in doing?  Or so will go the argument –  and it will get a lot of sympathy.

So quite probably there would be some sort of joint NZ/Australian government bailout of the Australian banks and their New Zealand subsidiaries.  The political incentives –  domestic and international –  are just too great to seriously envisage an alternative outcome.

But let’s suppose the Australian government was willing to jettison the New Zealand subsidiary and leave it entirely to us what to do.  The domestic political pressures to protect retail deposits will still be just as real.  In those circumstances, a pre-established deposit insurance scheme (eg for retail deposits up to perhaps $100000 per depositor) would make it more feasible for a Minister of Finance to (a) cap the government’s support, and (b) allow the OBR tool to be applied, under which wholesale creditors would be allowed to lose money.   It still might never happen –  there will still be unease about ongoing access to foreign funding markets for the other banks –  but the option is more feasible than at present (with no deposit insurance in place).  From a fiscal perspective, a pre-specified credible deposit insurance scheme –  funded by a levy, and backed by a credible bank supervision regime –  could actually reduce the fiscal risks associated with a banking crisis, rather than increase them.

Finally, it is worth keeping the numbers in some perspective.  At present, properly defined net Crown debt is about 9 per cent of GDP.    Total (book) equity of all our banks is currently around $37 billion.   Savage stress tests at present suggest little risk of a severe shakeout making material inroads on that buffer.    Banking systems tend not to lose much money on housing-dominated portfolios, when those loans are put in place in floating exchange rate systems without much government interference in the housing finance market.  But lets assume a really savage scenario, in which across the banking system all the equity is wiped out, and 50 per cent more, and the government chooses to recapitalise the banking system.  That would involve  the government assuming additional gross debt of around 20 per cent of GDP.  But much of that would be “backed” by the remaining good assets of the banking system (in time the recapitalised bank could be sold off again) –  it is only the amount the government injects that is beyond replacing existing equity that represents a net loss to the taxpayer.  That amount would be less than 10 per cent of GDP, even on these extremely pessimistic scenarios.   You’ll remember a recent post in which I cited some earlier New Zealand research suggesting that an increase in government debt of that sort of magnitude might raise bond yields by just a few basis points.

Of course, if New Zealand ever did face a really severe shakeout of this sort there would probably be many other problems –  including fiscal ones (tax revenues fall when economies shrink).  The sovereign credit ratings might well be cut.  Not only would there have been huge real losses of wealth within the community, but something very bad would have been revealed about the quality of our banking institutions, our private borrowers, and of our official regulators.  But, again, whether or not we had a formal deposit insurance scheme would almost certainly be a third-order issue in the midst of such a disaster.

At present, with very robust government finances, and a banking system which, to all appearances, is also extremely sound, the choice to introduce a well-structured deposit insurance scheme would be very unlikely to affect the government’s credit rating.   There is an argument that some observers –  rating agencies even? –  might see it as a refreshing dose of realism about how banking crises actually play out, establishing institutions that better respect that realism –  and which charge depositors (through a levy on protected deposits) for the insurance they will, almost inevitably, be provided with.  Priced insurance –  even if imperfectly priced –  is almost always better than unpriced insurance.

And in case anyone thinks deposit insurance is some sort of weird “out there” policy, not only does almost every other advanced country have such a scheme, but a few years ago Minister of Finance Bill English was quite happy to concede, in responding to parliamentary questions from Winston Peters, that there are reasonable arguments to be made for such a scheme (particularly in view of the quite different regimes operating in Australia and New Zealand for many of the same banks).  And he didn’t appear to worry that deposit insurance might threaten the government’s credit rating.

(I’ve argued here that a proper deposit insurance regime increases the chances of OBR being able to be used, especially for wholesale creditors.   My long-held view about OBR hasn’t really changed: it is mainly a tool that could prove quite useful in handling the failure of a small retail bank (eg TSB or SBS), at least if the relevant parliamentary seats (New Plymouth or Invercargill) were not, at the time of failure, held by the governing party.)