Month: November 2017

Revisiting Westpac and the Reserve Bank

Michael Reddell Financial stabilty, Reserve Bank, Uncategorized

Last week I wrote a post about the Reserve Bank’s announcement that it had increased Westpac New Zealand Limited’s minimum capital requirements –  by quite significant amounts – “after it failed to comply with regulatory obligations relating to its status as an internal models bank”.

Two things in particular annoyed me last week:

  • the complete lack of any serious explanation, from either the Reserve Bank or Westpac, as to what had gone on and why, how and by whom the errors were uncovered, what remedial steps had been taken (in both institutions), how we could be sure similar problems didn’t exist in other banks, and
  • the absence from both statements (Reserve Bank and Westpac) of any reference to Westpac’s directors, even though under our system of bank regulation and supervision, the directors have primary responsibility for attesting to the accuracy of disclosure statements, and face potential civil and criminal penalties for (strict liability) offences for publishing false information.

One can understand why Westpac would not want to say anything more, even if (for example) they thought the Reserve Bank had overreacted: don’t upset the regulator is one of the watchwords of the banks, because even if your concern might be justified on one point, the Reserve Bank has many other ways to get back at you on other issues (where, eg, approvals are needed) if you make life difficult.

The Reserve Bank’s stance is more disconcerting.  It is, after all, a government regulatory agency, responsible to the public for the exercise of its statutory powers, and for the management of its own operations.    And yet, as so often with monetary policy, they seem to think it is up to them to decide how much they will graciously tell us, rather than to be accountable and answer the questions that people have.  I gather they are refusing to explain themselves further at all.  If, as it says it is, the government is serious about increasing the transparency of the Reserve Bank, this is just another example of why reform –  and a new culture –  is needed.

When I wrote last week, there were several things I didn’t notice.

First, I noticed the lack of any sign of contrition in the Westpac statement, but didn’t go on to draw the obvious conclusion that lack of any sign of contrition –  even feigned for the public – might suggest that they felt they were being rather unjustly dealt with in this matter.    Had they been caught out doing seriously bad stuff, you’d have expected them to, if anything, overdo the public contrition (mea culpa, mea culpa, mea maxima culpa and all that).

Second, the Reserve Bank’s statement was clearly designed to have us believe that there had been systematic problems for nine years now, ever since Westpac was first accredited to use internal models.  Why do I say that?  This is what they said.

The report found that Westpac:

  • currently operates 17 (out of 35) unapproved capital models;
  • has used 21 (out of 32) additional unapproved capital models since it was accredited as an internal models bank in 2008;

But someone pointed out to me Westpac’s initial disclosure of the problems in its September 2016 disclosure statement.   In that statement (page 9) Westpac disclosed a couple of trivial errors dating back to 2008 (in sum, lifting risk-weighted assets by $44 million on a balance sheet of $86 billion).  And what about the model approvals errors?  Well, this is what the directors’ disclosure says:

“The Bank has identified that it has been operating versions of the following capital models without obtaining the Reserve Bank’s prior approval as required under the revised version of the Reserve Bank’s Capital Adequacy Framework (Internal Models Based Approach)(BS2B) that came into effect on 1 July 2014”

If it is correct that prior to July 2014 internal models banks did not require Reserve Bank approvals for specific models (and I have now have vague recollections of internal discussions on exactly this point in 2013/14, and an earlier version of BS2B does not have the requirement) that would put a rather different light on Westpac’s errors than was implied in the Reserve Bank statement.    Transition problems associated with a pretty new requirement look rather different than a failure that had run for nine years since the inception of the Basle II regime.

The original conception of allowing banks to use internal models to calculate risk-weighted assets (for capital adequacy purposes) had not been to have the Reserve Bank micromanaging the process, but rather reaching an overall judgement about the ability of banks to responsibly use such models, while imposing supervisory overlays where the Reserve Bank thought the models were producing insufficiently cautious results (as we did from day one in respect of housing mortgage exposures).  Over the years, the Reserve Bank grew less confident in the internal models approach, culminating (apparently) in the 2014 requirement that all models have prior Reserve Bank approval.

As the situation stands now

Registered banks may only use approved internal models for the calculation of their regulatory capital adequacy requirement. Banks must advise the Reserve Bank of all proposed changes to their estimates and models before implementing them.

There are specific requirements laid down about the information banks have to submit to the Reserve Bank when seeking such approvals. I’ve been told that the Reserve Bank can then take up to 18 months to work through the process of approving any change (there are, after all, 32 models for Westpac alone, and four internal-models banks).

The Reserve Bank also requires that

A bank that has been accredited to use the IRB approach must maintain a compendium of approved models with the Reserve Bank. This compendium has to be agreed to by the Reserve Bank and only models listed in that compendium may be used for regulatory capital purposes. The compendium is to be reviewed and relevant sections are to be updated at least once a year. The compendium must be updated as soon as practicable after a model change has been approved by the Reserve Bank. The compendium lists basic model-related information such as version number, approval date, risk drivers, key parameters, as well as information from the most recent annual validation report on RWA, EAD, validation date and model outlook, and any other model-related information required by the Reserve Bank.

All of which sounds sensible enough, but it raises some obvious questions.  If this was a new requirement in 2014 (but in fact whenever the requirement was introduced), surely the Reserve Bank would have insisted on a compendium from each bank of the models that bank was using at the time, and then would have put in place a process to (a) monitor any changes it was approving, and (b) ensure, whether by directors’ attestation or whatever, that any changes to the models banks were using actually had prior Reserve Bank approval.  But did any of this happen?

Since we don’t have anything in the way of a good explanation from either Westpac or the Reserve Bank we can only guess at what must have happened.  I’m pretty sure Westpac didn’t consciously set out to deceive the Reserve Bank –  the banks are gun-shy, terrified of breaching conditions of registration –  and the Reserve Bank’s own statement seems to accept that story.

Perhaps there is a clue in this line from the Reserve Bank statement as to what the independent investigation found.  Westpac New Zealand

failed to put in place the systems and controls an internal models bank is required to have under its conditions of registration.

Most or all of the risk modelling work is likely to have been being done in Sydney (by the parent bank) and not by Westpac New Zealand at all.   Quite possibly, people on this side of the Tasman only ever see the bottom line numbers, and pay no attention to the modelling or (small?) changes in it.    Perhaps Sydney went on refining risk models, including updating the models for changes in data composition (as the composition of individual loan portfolios changes), and just didn’t know that they were now (unlike the first few years as an IRB bank) required to notify and get Reserve Bank approval for each and every change?   If so, it is still a system failure –  and potentially of concern for the way it highlights how things could go more seriously wrong –  and shouldn’t have been allowed to happen, but it doesn’t seem like the most serious failing in the world.  Did the Reserve Bank see Westpac’s model compendium in 2015, and if so did they confirm with the Westpac risk people in Sydney (presumably who they are primarily dealing with) that the models in the compendium, and only those models, were being used?  If so, why it did it take another year to uncover the problems.  And if not, why not?

Without a proper explanation, we don’t know if this is the story.   But depositors and creditors should be owed an explanation by Westpac, and the public are owed one by our regulator, the Reserve Bank.

The third thing I didn’t pay much attention to last week was the statement that Westpac now had a total capital ratio (share of risk-weighted assets) of 16.1 per cent.  It seemed surprisingly high, but it was higher than the (temporarily increased) regulatory minima, and than the level Westpac had undertaken to maintain, so I passed over it quickly, and I shouldn’t have.

Here are Westpac New Zealand’s capital ratios (common equity tier one, and total capital) for the last couple of years.  The data are taken from disclosure statements and, for September 2017, from Westpac’s press release last week.

wpac capital ratios

I couldn’t find any reference anywhere to Westpac New Zealand Limited having issued any capital instruments on market in the September 2017 quarter.    But the Westpac New Zealand branch did issue $US1.25 billion of perpetual subordinated contingent convertible notes in September.  Those instruments would qualify as Tier One capital (though, of course, not as common equity).  Since we don’t yet have the September disclosure statement, we can’t be sure what went on, but it looks as though the proceeds of that issue might have been used to subscribe to (eg) a private placement of similar securities by Westpac New Zealand to its parent.  Whatever the story,  it seems unlikely that the sudden increase in Westpac New Zealand’s capital ratio had nothing to do with the fight they were then no doubt in with the Reserve Bank about the appropriate response to the model-approvals issue.

Again, we deserve a better explanation from the Reserve Bank (and Westpac) as to what actually went on.  For example, did the Reserve Bank insist that Westpac take on more capital, even beyond the temporarily increased regulatory minima, and then let Westpac raise the additional capital before letting the public (and depositors/creditors) in on what was going on?  Perhaps not, but the alternative –  in which Westpac New Zealand just happened to decide to raise more capital just before the regulatory sanction was announced  –  seems a bit implausible.  The news coverage would have been at least subtly different if last week’s announcement of the model approvals errors had been accompanied by the statement that Westpac New Zealand would need now to take steps to increase its level of capital (as distinct from just glossing over a fait accompli).

Which also brings us back to the unanswered questions?   We don’t know how much difference the use of unapproved models actually made to Westpac’s risk-weighted assets –  in fact, we don’t even know if the Reserve Bank knows.   And we don’t know if the Reserve Bank insisted on this new capital –  although it seems likely given that they noted that

In addition, the Reserve Bank has accepted an undertaking by Westpac to maintain its total capital ratio above 15.1 percent until all existing issues have been resolved.

when 15.1 per cent is well above even the temporarily higher regulatory minima for Westpac.

But if so, is the penalty proportionate to the offence?  It is impossible to tell, on the information the Reserve Bank has so far made available, and that isn’t a good state of affairs –  no basis for holding this (weakly-accountable) regulator to account.

And, to return to one of the questions I posed last week, why wouldn’t prosecution of the directors have been a more appropriate penalty, and one better-aligned with the design of the regulatory framework?  I’m not suggesting anyone should have gone to prison, but if what actually went on here was a governance design failure, surely it is an obvious case for trying out the penalty regime designed to ensure that directors do their job (of, among other things, ensuring that management do their job)?  A fine on each director –  for what are, after all, strict liability offences –  looks as though it could have been a more appropriate penalty.    But if such prosecutions had been contested, that might have forced the Reserve Bank to disclose more, including about their own system failures, than perhaps they would have been comfortable with?   Bureaucrats protect themselves, and their bureau.

As I said last week, I hope journalists use the opportunity of the Financial Stability Report press conference next week to pose some of these questions to the “acting Governor” and Geoff Bascand, the new Head of Financial Stability.  They can’t force the Reserve Bank to answer questions, but if the Bank continues to stonewall, in the face of repeated questions from multiple journalists, in a news conference that is live-streamed, it won’t be a good look for the Reserve Bank (or for Geoff Bascand personally, if he is still in the race to become the next Governor).

 

 

Looking for a successful outward-oriented economic strategy 

Michael Reddell Exports, New Zealand economic performance, Uncategorized

I could bore you with thoughts on (a) Supreme Court rulings on the duties of trustees to disclose material to members/beneficiaries, or (b) even more recondite rulings on severability (the conditions under which, having inserted an invalid and unenforceable provision into a deed, the discovery of that invalid provision invalidates (or not) the rest of the deed).  Doing so might help straighten out my thinking for a meeting this afternoon, but it would bore you witless.

Instead, I’ll just leave with a link to a piece I wrote that appeared on the New Zealand Centre for Political Research website over the weekend.

A month or so ago, on the day the new government was to be sworn in, I wrote a post here about the apparent tension between the government’s stated ambition to increase the outward-orientation of the New Zealand economy (including the appointment of a Minister for Export Growth) and various specific policies the new government seeemed committed to, which seemed likely to reduce exports as a share of GDP (all else equal).  In some cases, those policies represented overdue elimination of explicit or (more often) implicit subsidies.  In other cases, no doubt some sort of case could be made for each of the policies on their own merits.  Nonetheless, taken together they looked likely to continue to shrink the foreign trade share of the New Zealand economy (the actual outcome under the previous government, despite the regularly restated goal to substantially increase exports as a share of GDP.

In that earlier post, I included this chart, of exports and imports as a share of GDP, back to 1971/72.

trade shares

There are some data revisions due out later this week.  It would be very surprising if they changed the broad picture.  Foreign trade has been becoming less important as a share of New Zealand’s economy, even though every successful case of economic transformation I’m aware of has involved getting the preconditions right that result in more domestic firms successfully taking on the world market.

There are some unavoidable factors that explain a temporary diversion of resources towards the domestic economy: the repair and rebuild process after the Cantervury earthquakes being the most obvious. But the peak of that process has passed, and yet Treasury’s advice in the PREFU was that the downward trend (in exports/GDP) would continue.  The problems look structural.

A few days after that earlier post I was mildly encouraged to see references in the Speech from the Throne to the need to lift productivity in New Zealand.  Exports were highlighted in this paragraph

This means working smarter, with new technologies, reducing the export of raw commodities and adding more value in New Zealand. For example, by securing the supply for forestry processing, greater investment in fishing and aquaculture, increasing skills and training, and more research and development to add value to dairy and other products and to create new technologies.

I couldn’t track down old Speeches from the Throne, but it did strike me as the sort of stuff almost any government could have (and probably did) say for at least the last 50 years.   The previous government, for example, claimed to be keen on aquaculture, and removing regulatory roadblocks to it.  Forest processing as a big theme in the 1950s when the government led the formation of Tasman Pulp and Paper (and my old hometown of Kawerau).  And so on.

And yet, as the old line has it, if one does the same stuff over and over again, why would one expect a different result?  We’ve been drifting behind the rest of the advanced world –  and have had no productivity growth at all in the last five years –  and foreign trade as a share of GDP hasn’t been sustainably increased for 25 years now.

Muriel Newman, former ACT MP, at NZ CPR saw that earlier post and asked if I’d like to do something shorter, and a bit more policy-focused for their newsletter.    The result is here.

I noted that there are lots of things that could be dealt with to lift our economic performance

I hope that the new ministers are going to turn their minds pretty quickly to how they might achieve the sort of reorientation in the economy that their own campaign recognised is needed. Regional development funds aren’t likely to be the answer; in fact, over the last 15 years, “the regions” have generally done better than “the cities”.   Auckland has been the laggard (again in per capita terms).

There are plenty of things that could be done to lift the competitiveness of the New Zealand economy.  For example, we now have a company tax rate that is above that of the median OECD country.   Lower taxes on the returns to business investment are one of best ways of getting more such investment.   We also already have one of the highest minimum wages rate, relative to median incomes, of any OECD countries.  Reforming our land use and planning laws could markedly lower the cost of housing, and help ensure that people and businesses can locate in the best locations.

In response, Muriel Newman asked a bunch of other regulatory issues.  I noted that I agreed that there was plenty of room for improvement on many fronts

But it is worth remembering that things on the regulatory front are typically not worse here than in most other advanced countries (indeed, we often score a little better than average on summary measures).   There is a lot we could do to remove roadblocks in these areas, but if we are to understand why NZ has continued to do badly relative to other advanced countries, i think we need to focus on things that are different here than abroad.  As per the column, our company tax rate is now high, and our minimum wage is high (both relative to other OECD countries).  But we are also very remote, in an era when personal connections seem to matter more than ever, and we have an immigration policy that is very unusual by international standards.  Of other OECD countries, only Australia and Canada come close to our target inflow (and Israel will take any Jewis person who wants to come –  that is a different issue).

And to revert to the concluding paragraphs of the NZCPR article

Defenders of our very high target rate of immigration talk constantly about skill shortages.  But OECD data show that New Zealand workers are already among the most skilled around.  We don’t need more workers – skilled or otherwise.  In fact, because of how difficult it is to base internationally competitive businesses here, there is an almost irreconcilable tension between continuing to drive the population up, wanting to deal with the pressing environmental issues associated with natural resource exports, and still wanting First World living standards.  The best way to square the circle would be to cut back sharply on the target rates of non-citizen immigration.

There isn’t anything necessarily wrong, in principle, with a growing population.  But successive governments have been putting the cart before the horse – driving the population up in the idle hope that a bigger population might somehow spark higher productivity growth.  In a location that isn’t a natural home to lots of people, that was never very likely.  Instead, we need to focus instead on the able people we already have – and to heed the wisdom of the New Zealanders who’ve been leaving.   Without a change of course, we seem set to slowly drift ever further behind other advanced countries, increasingly unable to offer our people the world-leading living standards we once delivered and could, with the right policies, once again aspire to.

It is a shame that the new government shows no interest in tackling our anomalous, and deeply unfit-for–this-location, immigration policy (indeed, there are now reports they are in no hurry even to fix the manifest problems around student visas and associated work rights).  Unless they do so –  and in the process achieve a substantial sustained reduction in the real exchange rate –  it is very difficult to see a path through which the Minister for Export Growth will get to the end of his term and be able to point to a sustainable turnaround in performance, and a trajectory for exports (and imports) as a share of GDP that might offer some hope of New Zealand one day catching up with the rest of the advanced world again.

Growth in debt, but barely at all in New Zealand

Michael Reddell Financial stabilty, Housing

I’m a bit tied up for the next couple of days, and so posting might be light and insubstantial  My share in the stewardship of a financial entity that has now operated for decades without appropriate authorisations and approvals is somewhat time-consuming (thank goodness we have a Reserve Bank to deal with cases where major commercial banks don’t follow the rules).

But for today, I’m just going to leave you with a simple chart. presumably constructed by Moody’s from BIS data, that I found in a newsletter last night.  It shows the change in the ratio of business and household debt to GDP between 2007 (just prior to the recession and financial crisis) and 2017 for 41 advanced and emerging countries.

household and corporate debt

In some quarters you hear a lot about high and rising debt in New Zealand.  I’ve pointed out previously that the “rising” bit is mostly wrong –  and that levels comparison across countries are difficult to do meaningfully, because of issues such as the tax treatment of debt.  Despite the surge in house prices in the last few years, household debt as a share of GDP isn’t much higher now than it was in 2007.

What this chart highlights is that New Zealand is towards the end of the spectrum with the least increases in private debt as a share of GDP.   Of these 41 countries, only five advanced economies and two emerging ones had less of an increase (more of a fall) than New Zealand.

And here is a slightly more detailed chart on the specific New Zealand data, showing credit for each of the three sectors the Reserve Bank reports, as a share of GDP.

credit

In the years leading up to 2007 we did, indeed, see a big increase in private sector indebtedness (as a share of GDP), across households, farms, and non-farm business.  In the crisis-prediction literature it was a classic warning sign –  taking on lots of new loans very quickly is often associated with a serious deterioration in credit standards.    But it didn’t come to anything much, at least outside the (small) finance company sector.

Sure, we had a serious recession in 2008/09 –  as most other countries did (it was largely a global phenomenon, with roots in the US in particular) –  but our core financial sector came through the recession unscathed.  Banks weren’t perfect by any means (they are run by humans in a world of imperfect information so that is hardly surprising) and of course there was some increase in loan losses and provisions.  But nothing to threaten the soundness of any major institution or the system as a whole.

There probably are some serious questions to ask about what has gone on, and what might yet happen, in some of the countries in the chart that have had big recent increases in debt to GDP ratios –   China most notably –  but as was the case pre-2007, a big increase in debt is unlikely to be any sort of safe predictor of future financial sector problems.

And whatever the situation abroad, New Zealand at present doesn’t look like one of those places where anyone should be concerned about financial system risks.  Yes, our house prices are cruelly high, but the structural policy failings that took them there don’t show any sign of being sustainably fixed.  And there just hasn’t been much new debt taken out for other purposes.

All this is, of course, backed up by successive waves of stress tests undertaken by the Reserve Bank.   Which does leave you wondering why we now have such a regulatorily-distorted and suppressed market in housing credit.

 

More questions than answers

Michael Reddell Financial stabilty, Reserve Bank, Uncategorized

When a Reserve Bank press release turned up yesterday afternoon, announcing that the Reserve Bank had temporarily increased the minimum capital requirements for Westpac’s New Zealand subsidiary, after breaches had been discovered in Westpac’s compliance with its conditions of registration, my initial reaction was a slightly flippant one.  It must, I thought, be nice for the Reserve Bank to be able to impose penalties when banks don’t do as they should, but it is a shame that there is no effective penalty operating in reverse.   When the Reserve Bank misses its inflation target, imposes new controls with threadbare justification, flouts the principles of the Official Information Act, allows OCR decisions to leak, or attempts to silence a leading critic what happens?  Well, nothing really.

But as I reflected on the Reserve Bank’s statement and the Westpac New Zealand, both reproduced here, I became increasingly uneasy.

This is what we know from the Reserve Bank

Westpac New Zealand Limited (Westpac) has had its minimum regulatory capital requirements increased after it failed to comply with regulatory obligations relating to its status as an internal models bank.

Internal models banks are accredited by the Reserve Bank to use approved risk models to calculate how much regulatory capital they need to hold. Westpac used a number of models that had not been approved by the Reserve Bank, and materially failed to meet requirements around model governance, processes and documentation.

The Reserve Bank required Westpac to commission an independent report into its compliance with internal models regulatory requirements. The report found that Westpac:
·currently operates 17 (out of 35) unapproved capital models;
·has used 21 (out of 32) additional unapproved capital models since it was accredited as an internal models bank in 2008; and
·failed to put in place the systems and controls an internal models bank is required to have under its conditions of registration.

The Reserve Bank has decided that Westpac’s conditions of registration should be amended to increase its minimum capital levels until the shortcomings and
non-compliance identified in the independent report have been remedied.  …..

In addition, the Reserve Bank has accepted an undertaking by Westpac to maintain its total capital ratio above 15.1 percent until all existing issues have been resolved.  The Reserve Bank has given Westpac 18 months to satisfy the Reserve Bank that it has sufficiently addressed those issues or it risks losing accreditation to operate as an internal models bank.

There is nothing additional in the Westpac statement, but they don’t appear to dispute either the Reserve Bank’s findings or its response.

There are a few things to clear away.  First, the temporary increase in the minimum capital requirements for Westpac New Zealand does not constitute a financial penalty at all.    Arguably that might be true even if it increased the actual amount of capital Westpac had to hold (Modigliani-Miller and all that), but this measure does not do that.    The Reserve Bank statement tells us that as 30 September, Westpac’s total capital ratio was 16.1 per cent.

That doesn’t mean it is no penalty at all.   I’m sure there has been a great deal of very uncomfortable anguishing in recent months both among Westpac New Zealand directors and senior management, and at head office (and the main board) in Sydney.  APRA is likely to have taken a very dim view of this sort of mismanagement by an Australian bank’s subsidiary.  And, of course, a lot of scarce staff time is now going to have be devoted to sorting these issues out over the next 18 months.  That resource has an opportunity cost –  other things those people could have been used for, which might have boosted the bank’s earnings.

But what I found more striking was how little either the Reserve Bank or Westpac statements said about breaches of conditions of registration which appear to go to the heart of our system of prudential supervision.

There is, for example, nothing at all in the Westpac statement about how these errors happened (use of numerous unathorised models, dating back to 2008), and not much contrition either.  The closest they come is this

WNZL is disappointed not to have met the RBNZ’s requirements in this area.

And our system of banking supervision is supposed to, at least in principle and in law, rely very heavily on attestations from each individual director that the bank they are directors of is fully in compliance with the conditions of registration (which includes provisions around calculation of minimum capital requirements and associated models).  But there is no apology from the directors, and no sign that any director has lost his or her job.   Potential heavy civil and criminal penalties –  including potential imprisonment –  are supposed to sufficiently focus the attention of directors that depositors and other creditors can rely on the information banks publish.  Westpac’s clearly haven’t been able to rely on their disclosure statements for almost a decade.  And yet there is no specific mention of the directors in the Reserve Bank’s statement either.

There is also nothing in either statement (Reserve Bank or Westpac) about the quantitative significance of the errors.   The Reserve Bank tells us that they accept that Westpac did not deliberately set out to reduce its regulatory capital, but intent and effect are two different things.    These problems appear to have been known about for more than a year –  Westpac tells us they first reported them in their September 2016 Disclosure Statement.  But was the effect, over the years since 2008, to reduce the amount of capital Westpac had to hold relative to what it would have been if they’d been using Reserve Bank approved models?  Or does no one –  at the Reserve Bank or Westpac –  yet know?   When the issues are sorted out will Westpac New Zealand be required to restate its capital ratios for the whole period since 2008?

The Reserve Bank’s own processes also seem lax at best.    And this comes closer to home for me, since I sat for a long time on the Bank’s internal Financial System Oversight committee.  The precise mandate of that committee was never fully clear –  in a sense, it was to provide advice on whatever issues the Governor wanted advice on –  and we didn’t typically do individual bank issues at this level of detail.  But that Committee provided advice to the then Governor to go forward with Basle II and, in particular (back in 2008), to allow the big banks to use internal-models based approaches to calculating regulatory capital requirements.    I don’t recall if anyone ever asked how we –  the Reserve Bank –  could be confident, on an ongoing basis, that an internal-models bank was actually using approved models.  But had anyone done so, I’m pretty sure the answer would have been along the lines of “director attestations” and the stiff potential civil and criminal penalties directors could face for what are, after all, strict liability offences (directors don’t have to be shown to have intended to mislead –  it is enough that their statements were subsequently found to be false.)

For a long time the concern was that any questions we (the Bank) asked of bank management would weaken the incentive on directors to get things right –  they might, after all, claim they had relied on us.   But that mentality had been changing in the last decade –  eg the Reserve Bank started collecting private information that creditors don’t have access to.     But where were the questions around Westpac’s models?  After all, it wasn’t a single model where someone overloooked getting Reserve Bank sign-off, but roughly half of all the models, stretching back years.

If there is nothing in the Reserve Bank statement about steps the Bank may have taken to improve its own monitoring and recordkeeping (given that they had to grant approval, how did they not know that so many models were being used and had had no approval?), there is also nothing about any steps they may have taken to assure themselves that there are not similar problems in any of the other IRB banks.   Have they even asked the question?  Surely, one would think, but mightn’t we expect to be told?

As I noted, there was no mention of the directors in the Reserve Bank statement.  But did the Reserve Bank consider taking prosecutions against Westpac’s directors, who signed false disclosure statements over the years from 2008 to 2016?  If not, why not?  If the directors believed (as presumably they did) that the statements they were signed were correct, did they have reasonable grounds for that belief?  What procedures or inquiries had they instituted over eight years that (a) they had confidence in, and (b) still proved wrong?  The Reserve Bank insists on independent directors: those on the Westpac NZ board look quite impressive, but what were they doing all those years?

If the Reserve Bank has lost confidence in a system of rather condign punishment of directors, perhaps it should tell us so, and seek legislative changes.  But if it really still believes that director attestations have a central role in the framework, surely this is as good an episode, and time, to make an example of someone as there is ever likely to be?  After all, it was about a core aspect of the regulatory framework (capital requirements), and comes at times when there are no jitters around the health of the financial system.  If there is no penalty for directors, no doubt directors of other banks will take note.

And then there is the question of the other (apparent) breaches of the conditions of registration. I don’t make a habit of reading Disclosure Statements (and don’t bank with Westpac anyway –  although, come to think of it, the Reserve Bank Superannuation scheme, that the “acting Governor” is a trustee of, does).  But I had a quick look at the latest Westpac statement.  On page 2, there is half page of disclosures of things Westpac NZ is not compliant with.  Several appear to be dealt with by yesterday’s announcement, but another five don’t.   Perhaps they are all pretty small matters –  they look that way to this lay reader – but banks are supposed to be fully compliant.   It is the law.

From the Reserve Bank’s side, the press statement went out in the name of Deputy Governor (and new Head of Financial Stability) Geoff Bascand.  But he has been in the role for less than two months now.  By contrast, “acting Governor” Grant Spencer was head of financial stability from 2007 to 2017, spanning the entire period of the use of internal models, and one of his direct reports, the head of prudential supervision, has also been in his role that entire time.    One would hope that the Reserve Bank’s Board is now asking some pretty serious questions about just what went on, about how the Reserve Bank has handled these issues over the last decade, and about how much confidence New Zealanders can have in an avowedly hands-off system.

Most probably, the empirical significance of this protracted breach of the rules will prove to have been small.  For that small mercy, we should of course be grateful.  But it is also small comfort because the fact that such breaches could go on for so long –  and the statements aren’t even clear how they came to light – leaves one wondering about what other gaps we (or the Reserve Bank, or Westpac or other IRB banks) might not yet know about.  Often enough, such problems only come to light when it is too late.   In many other central banks and regulatory agencies, if they hear about this episiode, there will be tut-tutting along the lines of “well, that is what you get when you don’t have on-site supervision of banks”.  Personally I wouldn’t want to see New Zealand go that way, but my confidence in our approach has taken a blow in the last 24 hours.

The Reserve Bank has a review of capital requirements underway at present.  I hope final decisions are not going to be made before a new Governor is in place.   There is plenty of unease around the use of internal-models for calculating capital requirements –  especially for rather vanilla banks such as those operating here.  Personally, I’d be comfortable moving away from that system, back to a standardised model for calculating capital (which would, among other things, put Kiwibank –  somewhat put upon by the Reserve Bank – and TSB on the same footing as the large banks).  But, for now, the law is the law, and needs to be seen to be enforced.  A breach of this sort, with little serious direct penalty, risks undermining confidence in our system.

And, of course, there is the small matter of openness.  Not every aspect of the Reserve Bank’s dealing with an individual bank can be published, but there are a lot of questions –  including about the Reserve Bank itself –  to which we really should be entitled to more answers than the Bank has yet given us.

I hope some journalists are willing to pursue the matter further.  Questions could be directed to David McLean, the well-regarded Westpac NZ CEO, to the Board members past and present (especially the independents), perhaps to the parent bank in Sydney, and –  of course –  to Grant Spencer and Geoff Bascand –  if not before then at their next (financial stability) press conference, which is now only a couple of weeks away.

 

 

 

Towards a more open central bank

Michael Reddell Reserve Bank Act reforms, Transparency

Earlier in the week I wrote a post making the case for reform of the Reserve Bank to be done in such in a way that encourages a much more open central bank, at least in its monetary policy dimensions (there are similar, but different, issues around the other areas of the Bank’s responsibilities).     That post was prompted by the public efforts of the “acting Governor” and his deputy (and acknowledged candidate to be the new Governor) to push back against (a) external members on a new statutory Monetary Policy Committee, and particularly (b) to resist any suggestion of any greater transparency around monetary policy.   As I illustrated in that post, what these officials dislike are systems that work well, and have become established, in places as diverse as the United Kingdom, Sweden, and the United States.  There is no obvious reason why such an approach could not work well in New Zealand.  And it is not as if the Reserve Bank’s reputation now stands so high that no sane person can envisage any possible room for improvement.

I gather that Spencer and Bascand have since given other interviews restating again their opposition to reforms along these lines.  Whatever their views, it is astonishing that they are carrying on this campaign in public –  even as Bascand has been privately making his case to be the next Governor.  They are bureaucrats, who are paid to operate under the laws, and governance arrangements, that Parliament – acting on behalf of the people –  establishes.  Good statutory provisions governing powerful public agencies involve striking a balance between, on the one hand, drawing on technical expertise, and on the other hand, protecting the interests of citizens against over-mighty bureaucrats advancing their personal interests and/or the interests of their bureau.    Openness and transparency are among those protections.  It is perhaps telling that Bank officials are keen on openness when it allows them to advance their views on this issue –  to protect their patch –  but not when it might prove awkward for them.   Graeme Wheeler was much the same  –  last year willing to go public to tell us that for one controversial OCR decision every single one of his advisers had supported him, but then willing to fight all the way to the Ombudsman to prevent citizens seeing comparable numbers for other decisions (even ones well in the past).  The only principle that seems to guide them on such matters is patch protection and self-interest, precisely the things we need protection against (and the sorts of things that motivated the Official Information Act 35 years ago).

In the purpose provisions of the Official Information Act, the very first item is this

to increase progressively the availability of official information to the people of New Zealand in order—

  • to enable their more effective participation in the making and administration of laws and policies; and
  • to promote the accountability of Ministers of the Crown and officials,—

and thereby to enhance respect for the law and to promote the good government of New Zealand

It is a mindset that has never taken hold at the Reserve Bank.    And thus it was encouraging that in the Speech from the Throne the other day there was an explicit commitment to “improving transparency” around monetary policy.

But after my post the other day, someone got in touch to point out that I’d left out one argument for a more open (monetary policy) central bank.  This correspondent noted that they would have

….added another argument for the value of individual responsibility of committee members: Central banks should stop pretending that the future is knowable, and the economy well understood. Monolithic representation of THE Bank view perpetuates that dangerous myth.

I agree entirely.  To have left it out the other day was an oversight, but it was also something implicit in many of the other arguments and international experiences.

Getting monetary policy roughly right –  the best than anyone can hope for –  is a process of discovery, iteration, revision and so on.  It isn’t a case of one wise person, or even a handful of wise bureaucrats, consulting the secret oracle, and revealing truth to the peasants.   Members of a monetary policy committee –  or the Governor under current NZ law –  get to make the final decision on the OCR, but they know no more about how the economy works, or what might happen next, than any number of other observers.  Indeed, of the four members of Wheeler’s advisory Governing Committe, only one could be considered pretty much fulltime focused on monetary policy (the chief economist).  Of course, they have more analytical resources at their command –  but, in fact, those are our resources, paid for by taxpayers.

When it suits them, the Bank will –  correctly –  emphasise just how much uncertainty there is about the appropriate monetary policy, and how the economy and inflation might unfold in future.  But, if so, what do they have to be afraid of from a much greater degree of openness?

I went back and listened again to the relevant bits of Thursday’s press conference.  Governor-aspirant Geoff Bascand was quite explicit that he thought people needed to focus on the issues that “the Bank” had set out in its Monetary Policy Statement, on “the risks ‘the Bank’ was considering”, on “the substance”.  Bascand didn’t want people focusing on the other issues, or divergences of views, and so on.

It is the same old mindset: we know “the truth”, we know which issues are important and which aren’t, we know how best to balance risks, and so on. And “we” can’t possibly risk letting people know that there might, at times, be genuine differences of view among able people at the Reserve Bank.   But what evidence do they have for such claims?  Either of the degree of knowledge they (implicitly) claim for themselves. or for the level of risk they claim explicitly to worry about.    Instead, life is just easier for bureaucrats if we maintain the secrecy, and continue to channel a monolithic view –  monolithic this time, monolithic next time, monolithic the time after, even though each of those monolithic views may be quite different from each other.

It would bore readers to run through the evidence for how often the Governor’s monolithic view has been wrong (or central banks in other countries have been wrong).  Sometimes one could count him culpable. At other times, things just turned different than most people –  inside or outside the Bank –  reasonably thought likely.  That is the nature of the beast: things are highly uncertain and nothing is gained, no one’s interests (probably not even those of really capable bureaucrats) are advanced by keeping on pretending otherwise.  The evidence to the contrary is there almost every time any central bank sits down and deliberates on monetary policy.  Mostly, it seems as of Spencer, Bascand, and McDermott have settled in a comfortable rut.  It may suit them, but that isn’t a good argument in institutional design.

I noted the other day the Supreme Court offers a good counter-example.   Final appellate decisions are, in some ways, quite like OCR decisions.  They aren’t necessarily “the truth”, but they are final.   Smart lawyers make sophisticated arguments on either side of any particular case.  Smart judges often enough disagree among themselves.  Some decisions end up being made by a 5:0 vote, but many are 3:2 decisions, and the Chief Justice can easily be in a minority.    Court hearings are, typically, open, and decisions – in the affirmative, and dissenting –  are typically published.    Only an idealist would pretend that the decision is “truth” –  the only possible, or sensible, way of reading the facts and relevant statutes.  But that particular panel of judges –  chosen for their character and expertise –  gets to make the final decision.

It isn’t clear why monetary policy should be so different.  It is even more provisional since, although each OCR decision is final, the panel is back every couple of months looking at an only slightly different set of facts, but sometimes reading them in quite different ways.  I’m not suggesting –  at the ludicrous extreme –  broadcasting meetings of a Monetary Policy Committee, but I can see no possible harm – to the public, or to a well-managed Reserve Bank – from shifting to a culture of much more radical openness, suited to the specifics of monetary policy.   Why shouldn’t the relevant background papers be published, even with a bit of a lag?  Doing so would not only gives stakeholders more a sense of the quality of the staff analysis, it would allow outsiders to point to things staff might (being human) have missed.    Why shouldn’t dissenting opinions, carefully crafted, be included in the minutes (much as the appellate judges do)?  And why shouldn’t members of the MPC –  each independent statutory appointees, and accountable as such –  be giving thoughtful speeches, or interviews, outlining how they see the issues around monetary policy, in ways that invite input from outsiders.  Capable people –  the only sort who should hold these roles –  need have nothing to fear from the contest of ideas.  From such exchanges, from such scrutiny, usually better decisions –  still imperfect –  will emerge.  And the public will have a better sense of the limits of what they can expect from any agency in an area so (inevitably) riddled with uncertainty.

Openness can be messy.  There will be mis-steps at times.  But that is nature of a free and open society.    Choreographed uniformity of view should be left to Xi Jinping.  I noticed a day or so ago that Robert Kaplan, head of Dallas Fed, was on the wires observing

“History has shown that normally when we have a substantial overshoot the Fed ultimately needs to take actions to play catch-up,” Kaplan said in an interview with the Financial Times.

Kaplan said he was actively considering “appropriate next steps” when asked if he was willing to consider a rate rise at the upcoming Fed meeting, FT reported.

I’m sure there are plenty of people around the Fed who will disagree with Kaplan’s particular perspective.  But the question for old-school bureaucrats like Spencer and Bascand is what possible harm, to the conduct of monetary policy or the interests of the American people, is done by such openness?  I can’t see any.  I hope the Minister of Finance –  helped by the forthcoming Independent Expert Advisory Panel –  will draw the same sort of conclusion, and ensure that the new legislation is crafted, and key appointments are made, accordingly.

The costs of Brexit

Michael Reddell Trade, UK

That was the theme of a presentation in Wellington on Monday, organised by the research institute Motu, by visiting British economist Richard Harris.  Harris is a professor of economics at the Durham University business school, but had apparently spent some time at Waikato early in his career.

The presentation was promoted as an update on the Brexit negotiations, seven months into the two year Article 50 notice period.  Of course, it takes not much more than a cursory glance at your British media outlet of choice to know that things are not going that well, not helped by the tenuous hold on office the current government has.   Competing agendas all round don’t help either.  Plenty of people in the British government –  and the Opposition –  didn’t want to leave.  For them, minimal change from the status quo would be the best outcome. But for those who actually favoured Brexit that solution would, understandably be anathema –  the goal for many of them was to restore the UK’s freedom of action to that of a typical sovereign state.    And on the other side, some countries face pretty bad outcomes if there is a hard British exit.  For others it isn’t much of an issue. For some it might even be an opportunity, to attract multinationals –  including in the financial sector – that have operations currently based in Britain.    And although everyone knows that rising trade barriers comes at a (likely) cost to all countries, the EU doesn’t want any other countries –  or regions –  getting the idea that leaving the EU was a serious option.

Harris’s presentation helped me see more clearly where the EU “divorce bill” demands are coming from, and put the numbers in some sort of context.  At present the UK pays a net 14.6 billion pounds a year into the EU, and the sort of numbers observers like the FT think the EU might accept are only the equivalent of two or three years’ “membership fee”, in a club that apparently operates five year budgets.  At present though, as the FT observes, a number acceptable to Brussels would be “deadly” in Westminster.

It was also interesting to see some numbers on how restrictions on trade between the UK and the rest of the EU would rise if there is no trade deal and the two sides fall back to trading on WTO terms.   On goods, tariffs would rise from zero at present to around 4.4 per cent on average.   On services, where barriers are mostly non-tariff, the restrictions would rise from a tariff-equivalent of around 2 per cent to something nearer 8 per cent.   In principle, the UK could offset this to some extent by securing early trade agreements with other countries –  including countries that the EU does not have deals with –  but good deals, with significant countries, aren’t likely to be secured easily or quickly.  As various commentators have noted, the EU-Canada trade agreement took eight years. New Zealand is already among several countries objecting to early EU/UK proposals to divvy up agricultural import quotas.

Even though there is a lot of talk about smoothing the customs barriers between the UK and rest of the EU –  including on the Ireland/Northern Ireland border –  to faciliate, for example, the value-chains in manufacturing that rely on the seamless movement of goods, there doesn’t seem to be any great optimism as to whether any of these schemes can be made to work well.   That matters, even more than to the UK, for Ireland in particular, which has a very large share of its trade with the UK (and not just with Northern Ireland).  The Irish have been making opportunistic bids to try to semi-detach Northern Ireland from the rest of the UK.

It was pretty clear that Harris hadn’t voted for Brexit, and didn’t support it now.  But he had a pretty hard-headed assessment: the decision had been made and there was no imaginable way it was going to be reversed.   He couldn’t see how effective deals could be in place in March 2019, and even talk of transitional periods beyond that had all sorts of (technical and political) problems.  He envisages a pretty “hard Brexit”, and is very gloomy as to how the UK will cope.

In fact, that was one of the odder aspects of his talk.  He presented a (familiar) chart showing that in the 20 years to 2007. British productivity growth had been faster than that in most other major advanced economies.  But since 2007 there has been no productivity growth at all in the UK.  No one quite knows why, or even how much of what we see might be measurement and how much genuine.  Performance has been poor recently, but that has nothing apparent to do with Brexit.

And yet Harris used this record to claim that if Britain was to take advantage of Brexit, it needed to have a high productivity economy to benefit from comparative advantage.  He said it twice, so it presumably was an intentional statement.  But Stage 1 economics students learn that everyone has a comparative advantage: economy B might be better at producing all sorts of different goods that economy A (that’s absolute advantage), but comparative advantage just tells you that economy A will nonetheless be occupied producing the things it is relatively less bad at producing.     Misunderstanding that point didn’t fill me with confidence in the rest of the presentation, although I’m guessing he just meant that one might be more optimistic about British economic outcomes –  in or out of the EU –  if it was managing decent productivity growth now.

Harris did present the results of a couple of modelling exercises that have been done on how large the real economic costs of Brexit might be.  They usefully highlight that the costs won’t just fall on the United Kingdom –  indeed, one of them envisages job losses (transitional presumably) twice as large for the rest of the EU as for the UK (the EU is of course much larger).    There are losses in this scenario because, even with full free trade with the rest of the world (which won’t happen any time soon), there are typically fewer profitable trade opportunities with places further away than with places close to home (one of NZ’s problems).

In one paper (by Vandenbussche et al), it is estimated that the level of British GDP will fall by 4.5 per cent in a “hard Brexit”.   What I hadn’t realised –  or thought about before –  is that Britain might not be the biggest loser.  In this particular model, Irish GDP would fall by almost 6 per cent, and that of Malta –  with close historic ties to the UK –  would also fall by 5 per cent.    If a 5 per cent loss of GDP seems large, no one really knows the likely absolute magnitudes. Harris quoted estimates from another study by Dhingra et al: they in turn had bad and less-bad scenarios, but the central estimate of lost GDP for the UK was around 2 per cent.

There is a pretty widespread view among economists that these costs, whatever the precise number, are both large and avoidable.  Of course, they might be avoidable, if Brexit was to free up Britain to adopt far-reaching microeconomic reform and liberalisation.  Sadly, that doesn’t seem remotely likely at present –  and of course, many of the costly restrictions the UK imposes now (eg land use restrictions) are entirely home-grown.

Instead, economic elites lament the choice to exit the EU and wish, longingly, that it could be reversed.  That sentiment is perhaps particularly evident in places like the IMF and the OECD –  and Harris cited quite a bit of material from the latter organisation, which has an institutional bias away from the national in favour of the multinational.

I suspect, by the tone of the questions, and the sympathetic murmurs when Harris made particular points, that there weren’t many people in Monday’s seminar who were sympathetic to Brexit.  I am.  Were I a Brit, I’m pretty sure I’d have voted for it –  although, in truth, I’m not sure I’ve ever voted in New Zealand for a programme that might reduce GDP per capita by 4 per cent.  But Brexit has just never seemed primarily like an economic issue, and that seems to be the difference between the public –  polls suggest they are still pretty evenly divided as they were last June –  and most economists.

And so I stuck up my hand and suggested that if we’d been doing this sort of modelling 60 years ago, as territories pondered the possibility of independence from Britain, the results would surely have shown that, for almost all of them, they would be worse off economically than if they’d stayed with Britain.  (And that modelling would never have allowed for the gross mismanagement that followed in many of the newly independent African countries in particular).  And yet if they had been presented with estimates of a 5 per cent loss of GDP, how many would have turned down the chance to be independent – to be free?  Even now, decades on, few probably regret the independence choice –  Somalis might be an exception.   The essence of my point of course was along the lines of why shouldn’t Britons today make a similar choice about the EU.  (And, of course, a 4 per cent loss of productivity sounds big, but it is the loss of 2 or 3 years productivity growth in normal times, invisible over a 50 year horizon.  Adding another week’s annual leave probably reduces GDP per capita by a couple of per cent.)

I’ve made this point here previously, but I was interested in how Harris was going to respond to it.  His response was to acknowledge that many Scots had certainly favoured independence, even at an economic cost – although of course they, like the Quebecois in the 1990s – decided to stay part of the larger country.  But then he fell back on avoidance, arguing that the issues were different for India or Zambia, as their cultures had been squelched by the British etc, and no one could suggest that anything of the sort could be said of Britain and the EU.  Had I had the chance of a rejoinder, I’d have noted that my points would have applied to the choices New Zealand, Australia, and Canada (and Ireland –  although the cultural issues were a bit different) had made to progress towards full economic and political independence.  It may well have come at a cost, but few then –  and fewer now –  will have regretted the choice.  And in all three countries the predominant population was English.  Probably few Slovaks regret their divorce from the Czechs.

Harris’s fallback was that “the EU was always only an economic club, and it remains an economic club”.      That was the conceit of many in Britain.  It was never the vision of the founders of the EU, or of those driving it today.  The very treaties envisage an ‘ever-closer union”, and even today newspapers such as the FT are full of talk of plans for closer banking or fiscal unions, even talk of an EU finance minister.   New entrants to the EU – although not Britain, Sweden and Denmark –  are obliged to commit to enter the euro.  And –  as a matter of conscious and deliberate choice –  being part of the EU means individual nations surrender the right to legislate for themselves in many areas.  That is a (lost, or foregone) freedom that many Britons seemed (and seem) willing to pay some price to reclaim.  If you don’t value the nation state –  or you aspire to some mega European state –  you’ll think that choice irrational.  But most people do seem to value the nation state –  and not just in the UK.    And the British exit polls last year suggested that it was just those sorts of “chart one’s own destiny” considerations that counted with those voting to leave.

Nearly half (49%) of leave voters said the biggest single reason for wanting to leave the EU was “the principle that decisions about the UK should be taken in the UK”. One third (33%) said the main reason was that leaving “offered the best chance for the UK to regain control over immigration and its own borders.” Just over one in eight (13%) said remaining would mean having no choice “about how the EU expanded its membership or its powers in the years ahead.” Only just over one in twenty (6%) said their main reason was that “when it comes to trade and the economy, the UK would benefit more from being outside the EU than from being part of it.”

In the end, who knows whether it will matter much.  All the modelling assumes that the EU itself carries on much as it is.  A pessimist – perhaps an optimist –  might wonder whether the EU itself will last in its current form for much longer.  Public opinion in other EU countries seems to ebb and flow.   The next recession –  whenever it is –  is just going to accentuate the tensions already apparent in many countries, given that few EU countries have any material “fiscal space” and the ECB is likely to go into the recession with interest rates already at or below zero.  Perhaps in the end Britain will prove to be a pathbreaker –  something the eurocrats and EU-oriented elites must fear very deeply.

Harris concluded with a couple of slides making the point as to how little trade New Zealand firms/individuals and those in the UK now do.   He was inclined to the view that, therefore, what happens around Brexit doesn’t really matter to us.   I’m not sure he is right there –  even setting aside wishful thinking about full free trade between us, including in agriculture.    Even in the transition, a disruptive hard Brexit is the sort of event that could –  in the wrong circumstances –  matter for the world economy in 2019.  And for a small country, looking to materially increase its export orientation, we should certainly be hoping that a country of the size and sophistication of the UK can make it –  and prosper –  alone.  If they can’t, it wouldn’t bode well for us.

Anne-Marie Brady’s new paper

Michael Reddell China, NZ politics, Uncategorized

Canterbury University politics professor Anne-Marie Brady has published today a follow-up to her substantial paper on Chinese party/government influence-seeking activities, particularly in New Zealand.   In the new short paper, published under the auspices of a NATO-funded project “Small States and the New Security Environment (SSANSE)”,  she poses specific challenges to our new government to do something about the issue, and the threat it poses to New Zealand and New Zealanders (including the many ethnic Chinese citizens).

[UPDATE 23/2/18.  Anne-Marie Brady has asked me to clarify that while NATO (under its “Science for Peace and Security” programme) funds the overall SSANSE initiative, most the funding goes to three NATO-nation based academics.  In her case the support amounts only to a couple of airfares to attend two offshore conferences, and accommodation for those events.]

Her abstract reads as follows

New Zealand—along with other nations—is being targeted by a concerted foreign interference campaign by the People’s Republic of China (PRC). The campaign aims to gain support for the Chinese Communist Party (CCP) government’s political and economic agendas by co-opting political and economic elites. It also seeks to access strategic information and resources. China’s efforts undermine the integrity of our political system, threaten our sovereignty, and directly affect the rights of Chinese New Zealanders to freedom of speech, association, and religion. The new Labour-New Zealand First-Greens government must develop an internally-focused resilience strategy that will protect the integrity of democratic processes and institutions, and should work with other like-minded democracies to address this challenge.

When I read that “must” in the final sentence, of course I strongly agreed that it should be so, but was not at all optimistic that it will.

She summarises her key findings as

  • China’s covert, corrupting, and coercive political influence activities in New Zealand are now at a critical level. 
  • The New Zealand government needs to make legislative and policy changes that will better protect New Zealand’s interests and help to protect our nation against foreign interference activities more broadly.

Coming just a day after the news that a leading publisher in Australia had pulled out, at the last minute, of publishing a book on exactly these sorts of issues in Australia, it was a reminder that we aren’t alone in facing these issues.  Where we may stand alone is the determination of our political and business elites to ignore the issue, and just hope any fuss dies away quickly without too much upset to Beijing.

As she has argued already in her main paper, the active Chinese intrusion has become a much more serious threat in the last few years, under Xi Jinping

United front work has now taken on a level of importance not seen in China since the years before 1949, when the CCP was in opposition. The CCP’s united front activities incorporate co-opting elites, information management, persuasion, and accessing strategic information and resources. It has also frequently been a means of facilitating espionage. One of the key goals of united front work is to influence the decision-making of foreign governments and societies in China’s favour.

New Zealand appears to have been a test zone for many of China’s united front efforts in recent years. Australia has also been severely affected; and the government there has now made strenuous efforts to deal with China’s influence activities.

She links to a nice ABC article on the issue in the Australian context.  I’ve linked previously to an article on the law changes the Australian government is currently proposing.

Brady notes that New Zealand is of interest to China for both economic and geopolitical reasons.  Much of it is covered in the main paper, but some of these lines were new to me and some are apparently dealt with in her new book.

New Zealand’s economic, political, and military relationship with China is seen by Beijing as an exemplar to Australia, the small island nations in the South Pacific, and more broadly, other Western states. New Zealand is valuable to China, as well as to other states such as Russia, as a soft underbelly through which to access Five Eyes intelligence. New Zealand is also a potential strategic site for the PLA-Navy’s Southern Hemisphere naval facilities and a future Beidou-2 ground station—there are already several of these in Antarctica.

Whenever Chinese navy ships visit Auckland, I’m afraid I can’t help thinking of Soviet Union and Nazi Germany parallels –  surely we’d never have had their vessels visiting?  Would even our governments contemplate granting naval facilities to China –  an actively aggressive naval power?  I hope not.

Does it all matter?

Some of these activities endanger New Zealand’s national security directly, while others will have a more long-term corrosive effect. The impact of China’s political influence activities on New Zealand democracy has been profound: a curtailing of freedom of speech, religion, and association for the ethnic Chinese community, a silencing of debates on China in the wider public sphere, and a corrupting influence on the political system through the blurring of personal, political and economic interests. Small states such as New Zealand are particularly vulnerable to foreign interference: the media has limited resources and lacks competition; the tertiary education sector is small and —despite the laws on academic freedom—easily intimidated or coopted.

On that latter point, while Canterbury University has apparently stood up for Brady’s right to speak and write in ways that Chinese interests don’t like, that same university hosts one of the Chinese funded and controlled Confucius Institutes.

As she notes, New Zealand governments have embraced this relationship with China, something that intensified under the most-recent National-led government.

What should be done?  At an overarching level she says

The Labour-New Zealand First-Greens government must now develop an internally-focused resilience strategy that will protect the integrity of our democratic processes and institutions. New Zealand should work with other like-minded democracies such as Australia and Canada to address the challenge posed by foreign influence activities—what some are now calling hybrid warfare. The new government should follow Australia’s example in speaking up publicly on the issue of China’s influence activities in New Zealand and make it clear that interference in New Zealand’s domestic politics will no longer be tolerated.

Getting specific she calls on the government to

The Labour-New Zealand First-Greens government must instruct their MPs to refuse any further involvement in China’s united front activities.

That would be Raymond Huo I presume.

The new government needs to establish a genuine and positive relationship with the New Zealand Chinese community, independent of the united front organizations authorized by the CCP that are aimed at controlling the Chinese population in New Zealand and controlling Chinese language discourse in New Zealand.

And there is a list of six other specifics

  • The new Minister of SIS must instruct the SIS to engage in an in-depth investigation of China’s subversion and espionage activities in New Zealand. NZ SIS can draw on the experience of the Australian agency ASIO, which conducted a similar investigation two years ago. 
  • The Prime Minister should instruct the Department of Prime Minister and Cabinet to follow Australia’s example and engage in an in-depth inquiry into China’s political influence activities in New Zealand. 
  • The Minister of Commerce and Consumer Affairs should instruct the Commerce Commission to investigate the CCP’s interference in our Chinese language media sector— which breaches our monopoly laws and our democratic requirement for a free and independent media. 
  • The Attorney General must draft new laws on political donations and foreign influence activities. 
  • The New Zealand Parliament must pass the long overdue Anti-Money Laundering and Countering Financing of Terrorism legislation.
  • The new government can take a leaf out of the previous National government’s book and appoint its own people in strategically important government-organized non-governmental organizations (GONGOs) which help shape and articulate our China policy, such as the NZ China Council and the Asia New Zealand Foundation.

I’m not sure the Commerce Commission is quite the right body to look at the effective Party/state control of the Chinese language media.  And I’m also not entirely sure how much confidence I would have in either the New Zealand intelligence services or DPMC, but I’m certainly supportive of the sort of direction she calls for.

She mentions the ASIO report.   As an example of the more realistic hard-headed mentality now afoot in Australia, consider this extract from the Director-General’s overview in the latest ASIO Annual Report

During this reporting period, ASIO identified a number of states and other actors conducting espionage and foreign interference against Australia. Our investigations revealed countries undertaking intelligence operations to access sensitive Australian Government and industry information. We identified foreign powers clandestinely seeking to shape the opinions of members of the Australian public, media organisations and government officials in order to advance their country’s own political objectives. Ethnic and religious communities in Australia were also the subject of covert influence operations designed to diminish their criticism of foreign governments. These activities—undertaken covertly to obscure the role of foreign governments—represent a threat to our sovereignty, the integrity of our national institutions and the exercise of our citizens’ rights.

You will look in vain for anything similar in our SIS Annual Report.  Then again, the Minister for the SIS was the same Chris Finlayson who was reduced to personally attacking Professor Brady at a recent election meeting.

I’m also sympathetic to her call regarding appointments to the New Zealand China Council and the Asia New Zealand Foundation.  Over the last couple of months I’ve kept an eye on the China Council’s Twitter feed: it is little more than just a propaganda feed, accentuating the positive, eliminating the negative, and more given to adulation than critical analysis.    Between the preferences of the (previous) government, and the personal economic interests of many of the key figures involved, perhaps it isn’t too surprising.

But it is also why I’m not very optimistic Professor Brady’s calls will come to anything.   Foreign policy –  perhaps especially towards China –  has been depressingly bipartisan –  and there is little sign on these sorts of issues that the Greens or New Zealand First are really any different.   Why would our new Prime Minister be inclined to do things differently when her own party president was just recently offering congratulations to the Chinese Communist Party on the occasion of the recent 19th Party Congress?  The Labour mayor of Auckland was apparently the recipient of large offshore Chinese donations to his election campaign.  I gather that Helen Clark has rubbished the sorts of concerns Professor Brady has raised.

And the National Party Opposition won’t be pressing her to –  not only do they have a Communist Party member in their caucus, but their party president was also offering warm fraternal greetings to the butchers of Beijing.   The system seems to be corrupted already, so what motivation does anyone inside it have to start to turn things around?  Perhaps external pressure might help –  if he had any political standing left himself, Malcolm Turnbull might well turn the fire back on the New Zealand government, and question the way it was allowing New Zealand to be used in Chinese party/goverment interests?

As Professor Brady notes, the standard response is always along the lines of

It has often been said that New Zealand is not important to China and that if we offend the Chinese government we risk our trade with them. It is simply not true that New Zealand is not important to China. And when our national interests may be threatened, the government should be prepared to weather temporary short-term blow back, for long-term political and economic gains.

And as I’ve pointed out previously, Australia does much more of its foreign trade with China than New Zealand does, and countries make their own prosperity.  China hasn’t made New Zealand, or Australia, rich: our own people and own resources have done that.  But the firms –  public and private –  with a direct vested interest in keeping on good terms with China have access and political clout.  One of things we need to remember is that the interests of businesses (and universities) who deal in countries ruled by evil regimes, are not necessarily remotely well-aligned to the interests and values of New Zealanders.   Selling to China, on government-controlled terms, isn’t much different than, say, selling to the Mafia.  There might be money to be made.  But in both causes, the sellers are enablers, and then make themselves dependents, quite severely morally compromised.

And if I were ever remotely hopeful that the sort of changes Professor Brady (admirably) calls for might come to pass, there was just another reminder of how our elites view these things.  At a corporate function last week, former Prime Minister John Key

…spoke at length about New Zealand’s relationship with China. “As PM I went to China seven times and everyone knows that I’m a massive China fan. I think the opportunities are enormous, the country is amazing, and the leadership is doing extremely well,”

I guess the leadership is doing “extremely well” at securing its own position, advancing China’s interests (over against the rule of international law) in the South China Sea, in expanding their influence in countries like our own, in extending the reach of the Party ever further in China itself, and pressing on with the chilling social credit scheme, to give the state ever more control over the populace.  Oh, and the small matter of an ever-more-distorted credit-driven economy that can’t even come close to replicating the material living standard available in the freer democratic bits of east Asia.

The system –  our system, as well as theirs – is corrupted.  Their corruption and destruction is conscious and deliberate.

It all also leaves me slightly uneasy about a comment I saw from Professor Brady suggesting that any inquiry needed to take place in secret.  Perhaps there are some national security issues where secrecy would be important, but if there is any hope of sustained change it can probably only come from something that happens openly, and which enables New Zealanders to see what their leaders have done –  pursuing some mix of a warped view of national interest, and of private and personal business interests.   Who, after all, would the secret reports be delivered to, but the same political leaders who have allowed this suborning of our system, and our people, to go on.  Someone wrote to me yesterday that ” this isn’t an oligarchic or anti-democratic society”.  That’s right.  But it can be a supine one, too ready to ignore what doesn’t affect most of us (non-Chinese New Zealanders) very much on a day to day basis.

UPDATE:

If you refuse to open your eyes, or read, it is hardly surprising you might not see anything.

Andrew Little, the Minister Responsible for the SIS, said he was not aware of any undue Chinese influence.
“I don’t see evidence of undue influence in New Zealand, whether it’s New Zealand politics, or New Zealand communities generally.

“We have a growing Chinese community. We have a strongly developing trade relationship and diplomatic relationship with China. I don’t think those things, on their own, connote undue influence.

“If there’s other things she says constitutes undue influence, we’d have to know what that is.”

 

An open central bank is the way to go

Michael Reddell Reserve Bank Act reforms

The new government is setting up a process to review the Reserve Bank Act, including –  but not limited to –  giving effect to Labour’s campaign promises to introduce some sort of employment objective to the Reserve Bank Act and to create a statutory committtee, including external appointees, to take OCR decisions.

It is a once-in-a-generation opportunity to reshape the central bank, a key policymaking (and implementing) institution in our economy and financial system.   As the Minister has pointed out, the current Act was written almost 30 years ago.  Lots of things about monetary policy, and the wider role of the Bank, turned out differently that was expected, or perhaps hoped for, thirty years ago.   Little about the New Zealand system has been followed by other countries who’ve reformed their central banks in the years since.

Of course, the bureaucrats at the Reserve Bank (“the old guard” as Bernard Hickey described them last week) aren’t keen on change at all.  Bureaucrats rarely are.  For years they have been successful in keeping secret their preferences –  Graeme Wheeler refused to release any of the work they’d done on reform issues and options a few years ago –  but last week they went public.    Unlawfully appointed “acting Governor” Grant Spencer, and his deputy –  and declared candidate to be the next Governor –  Geoff Bascand, used the platform of the Monetary Policy Statement press conference to outline their opposition to change –  or at least to any change that might diminish the power of Reserve Bank management (ie them, or people like them).

Spencer loftily declared that, of course, they weren’t opposed to a committee.  In fact, they supported one. But, in his words, they already had a committee, they thought it worked well (perhaps unsurprisingly since they are members of that  – purely advisory –  committee), and would be happy to see it established in law.   But, asked about outsiders on the committee –  something the government had promised, both in the Labour Party campaign, and in the Speech from the Throne the previous day-  Spencer was very wary.  How, he wondered, could we sure of finding enough suitable people without insuperable conflicts of interest? (How, I wonder, do we manage with almost every other agency of the state?)  Worse still was the idea that the members of any new Monetary Policy Committee might individually be held to account, and their views on the OCR be known to the public.   Why, Spencer declared, it could turn into a “circus”, with much too much focus on monetary policy –  as, he asserted, it had in some other countries.  Bascand worried that people might focus on the views of members of the committee, not on the issues “the Bank” wanted to focus on.

It was like some sort of blast from the past. Many bureaucrats, for example, hated the idea of the Official Information Act too.  Open government is an anathema to most.  But of considerable benefit to citizens.    Not one of the three “old guard” sitting at the top table at that Reserve Bank press conference has ever shown any serious or sustained interest in open government, especially as it applies to the Reserve Bank.  They are, in practice, devotees, to the “cult of the expert”, in which the public is told only what the “wise experts” determine they should know.   Thus, our Reserve Bank will happily tell you what they think the OCR will be in 2020 –  by when the decisionmaker will have changed, and the PTA and Act too –  but they fight tooth and nail, too often with the support of the Ombudsman, to keep secret their current deliberations, current analysis, or the advice the “acting Governor” receives on current monetary policy.   It is tidy, to be sure.  Open government isn’t –  in fact, it is often a bit messy.  But it benefits citizens, and over time actually makes for better government institutions and policies as well.

As I noted the other day, despite claims that an open central bank could turn into a “circus”, neither Spencer nor Bascand has offered any evidence in support of their claim.  There are aspects of how central banks work in other countries that, at times, career central bankers don’t like. But the interests of career central bankers and bureaucrats and those of the public don’t necessarily overlap much, if at all.

Each country has its own system, with its own idiosyncracies.  Many of those provisions aren’t –  and probably shouldn’t be – written into law.  Institutional cultures need to evolve.

But in Canada, they manage to run an open programme of research and dialogue as part of each five-yearly review of the inflation target.  In Sweden, members of the monetary policy decisionmaking board can, and do, articulate their views, not just in speeches around the decisions, but in substantive records in the minutes.  At the Bank of England, the Governor has been willing to be out-voted (and for that to be in the published minutes), even to vote differently than his own senior executives (some of whom are members of the Monetary Policy Committee).  The Bank of England runs a staff blog that, at least at its foundation, was sold as an opportunity for staff to challenge established orthodoxies (it is a good blog, although it never quite delivered on that –  unrealistic promise).  In the United States, senior researchers have been free to publish papers and books that disagree quite strongly with the way the Fed has run monetary policy.   The Atlanta and New York Feds have competing, and published, nowcasting models of current GDP growth.  John Williams –  head of the San Francisco Fed –  was not long ago out in public suggesting that the Fed shift away from inflation targeting, towards something more levels-focused.  As I noted then

I’m not persuaded by Williams’ case, but what struck me is how open the system is when such a senior figure can openly make such a case.  The markets didn’t melt down. The political system didn’t grind to a halt.  Rather an able senior official made his case, and people individually assessed the argument on its merits.

The FOMC doesn’t publish minutes as detailed as those of the Riksbank, but voting members can record their dissent from a majority decision, and they (and other regional Fed heads) can and do use speeches to articulate their own thinking about the economy and monetary policy. It is rarely, if ever, as explicit as “I’ll be voting for a 25 point increase at the next meeting”,  but outlining how that particular person thinks about the economy, the risks, and perhaps the challenges/opportunities the Fed faces.

My impression –  and I’ve kept an eye on these things for a long time –  is that the Swedish, British and US system all work well.    I’ve heard current and former Governors of some of these places moan about the systems, and individuals –  Stefan Ingves of the Riksbank, who was famously wrong in his disagreement with Lars Svensson, was here only about three years ago.   But since the whole point of dispersed, and open systems, is to limit the power of a single Governor, that unease should more likely be seen as a feature than as a bug.  Same goes for the claims of Spencer and Bascand here.

There have been concerns –  again from internal career people –  that externals on Monetary Policy Committees may use the visibility of a public platform to pursue their next career opportunity.    This was strongly asserted of one particular member of the Bank of England MPC in its early days –  a member who made life difficult for the Bank of England management.

It is, probably, a bit of an issue.  But it is no less so for management people.  I”m old-fashioned enough to think that Governors of the Reserve Bank (like Prime Ministers)should retire, and settle for gardening, charity work or whatever.  But it isn’t the way public life now runs.  Don Brash was on the board of our largest bank just a few years after ceasing being Governor, Ben Bernanke makes large amounts of money from his new roles in the financial sector,  Glenn Stevens has just signed-up as adviser to a macro hedge fund, and if I recall rightly when Graeme Wheeler announced he wasn’t seeking a second term as Governor he indicated that he had always planned to do only five years and then to step back into Board roles.    There is empirical evidence that the prospect of the “next job” has, at the margin, influenced monetary policy decisions that central bankers have made, and real concern that it can affect regulatory policy decisions.     These aren’t just issues for central banks –  and they certainly aren’t just issues for part-time external members of policy boards.

And the other issue that often gets raised is the potential for “confusion” or heightened market volatility.    The public, and markets, just won’t (it is suggested) be able to cope with differences of view in plain sight.  Strangely enough, they seem to in other countries.  There is no evidence I’m aware of suggesting that market conditions are less volatile here because we have a secretive monolithic central bank, but if such evidence exists perhaps the Bank could publish it, or point us to it.  If anything, there is a possible counter-argument (which I wouldn’t want to make much of) that if it is known that a variety of voters on a monetary policy committee have different views, and different (explicit or implicit) models, and if those views are being updated in public periodicially, market adjustment might be easier and less disupted than being restricted to a six-weekly decree from the mountain-top.  As I say, I wouldn’t want to make much of that argument –  open government is good in its own right, and seems to work (in central banks) in various other democratic countries –  but it is just to note that the argument doesn’t run all one way, even on this narrow point.

The “acting Governor” attempted to back his opposition to any sort of open acknowledgement of differences of view –  on a subject where, the Bank rightly and regularly reminds us, there is huge uncertainty –  by comparison with the Cabinet.

Cabinet collective responsibility has, historically, been an important part of our system of government.  In ye olden days – ie before MMP –  all our government ministers were, without exception, from a single political party.  They were elected on a common platform and, even if there were intense rivalries among them, they expected to seek re-election on a common platform.  These days, of course, we have often have ministers outside Cabinet who are representing parties not considered part of the government, and those ministers –  not having a common programme –  are not bound by the conventions (which is all they are) of Cabinet collective responsibility.

But even if Cabinet collective responsibility is one legitimate model, it is hardly the only one.  In Parliament, for example, laws are debated and passed, and who voted for the law and who voted against it is no secret.  MPs lobby, and are lobbied, give speeches, go on disagreeing after the final vote, but the law is the law.  The authority and robustness of the law is not diminished by robust open debate.  If anything, it is the alternative that would worry us –  the Chinese People’s Congress anyone?  Our local authorities mostly debate things openly –  majorities win, minorities lose, and life goes on.   And talking of the law, no one seems to think it a problem, that a bench of judges on the Supreme Court will often divide 3:2, and the Chief Justice might well be on the losing side.  Dissenting views can be, and typically are, properly documented and made available.

And it is worth reminding ourselves the nature of the OCR decisions. They aren’t once-for-all decisions, but ones that are revisted every couple of months, precisely because new data come available, and what to make of that data remains very uncertain.   There are, often enough, no self-evidently “correct” answers.   It is the sort of climate in which good decisionmaking is likely to be advanced by as open an approach as possible, and public confidence in the quality of the decisionmaking is likely to be advanced by the ability of citizens to assess the arguments (and the quality of the argumentation) of those given statutory power to make these decisions.  Truth doesn’t simply flow from the Reserve Bank to the public.

And the open approach seems to work in a variety of other countries.  It isn’t the only approach that can work.  But it does work, without obvious problems, in Sweden, in the UK, in the United States, three otherwise quite different countries.  There is no reason why it shouldn’t work here.

How might a reformed Reserve Bank work in respect of monetary policy?

  • The (monetary) policy targets should be set by the Minister of Finance in each year’s Budget (essentially the UK system),
  • all members of the statutory Monetary Policy Committee should be appointed directly by the Minister of Finance (the Australian system),
  • all members should be subject to confirmation hearings at Parliament’s Finance and Expenditure Committee.   Members would not be subject to parliamentary ratification, but the committee could publish any serious concerns it hard (essentially the UK system),
  • probably a five member committee (Governor, a Deputy Governor, and three non-executive members), with all members having overlapping five year terms (the Swedish system has a majority of external members),
  • a statutory requirement to publish the minutes of MPC meetings, including the numerical vote on any OCR decision, within two weeks of the meeting date (publication of minutes, on a timely basis, is now pretty standard),
  • publication of all the background documents for each monetary policy decision within two months of the relevant policy annoucement,
  • no statutory prohibitions on the ability of individual members to make speeches or give interviews on monetary policy matters (pretty standard these days).

On that final bullet point, I don’t think this is a matter for statute, and it is something the new Monetary Policy Committee should work out for themselves over time.  Institutional cultures need to be able to be able to evolve.  Having said that, I would strongly favour a more open approach –  of the sort that works well in several countries abroad – and would encourage the government to appoint people (as Governor and as committee members) who are committed to building an open institution, and yet who can engage effectively, and with mutual respect, with each other.

I’d also establish a statutory provision allowing the Minister of Finance to appoint an external reviewer perhaps every five years, to encourage periodic  independent external review of how the system is working, and of how the Bank has been conducting monetary policy.

Many of the issues are about culture rather than statute, but I would hope that the new Governor will look carefully at encouraging staff to engage more openly on policy and analytical issues.   Blogs have been adopted by several overseas central banks, but the precise vehicle is less the issue than the cultural change that should be encouraged.

None of this sketch outline should be considered as the details of what I might recommend to the government’s review when it gets underway.  There are lots of fine-grained details to consider in reshaping the statutory provisions around monetary policy, and quite a few interdependencies among them (let alone interdependencies with other functions, and issues around what –  precisely –  an MPC would and wouldn’t be responsible for).  If they invite proper submissions, I will make one –  and publish it –  but my point today has really just been twofold:

  • open systems work well in various other countries –  including countries with central banks that are at least as well-regarded (generally better in my view) than our Reserve Bank, and
  • to sketch out a set of arrangements that look as though they could be workable for New Zealand and which could, with goodwill and the right people appointed, deliver us a more open, more effective, and better-regarded central bank for New Zealand.

And to suggest that, no matter how genuinely Spencer and Bascand might believe their points in opposition to serious reform, the views of the Reserve Bank “old guard” are best seen as (predictably) serving the interests of Bank management, rather than those of the public, and shouldn’t be taken very seriously unless they can advance much more evidence (than the zero so far) of the sort of potential problems the sorts of open systems that work well in other countries might credibly pose.

It isn’t clear how committed the government is to serious reform. But they have an open opportunity to put in place something much better and different, more suited for this generation.  Doing so will require good laws and good people.  I hope they don’t let the opportunities –  on either front –  slip by.

 

“I’m always very careful what I say to either man”

Michael Reddell China, NZ politics, Uncategorized

It was to the credit of TVNZ’s Q&A show –  probably our leading current affairs television programme –  that yesterday they gave some time to the question of the Chinese Communist Party (and state) activities in New Zealand.

The centrepiece was an interview with Canterbury University politics professor Anne-Marie Brady, about her recent substantial paper Magic Weapons: China’s political influence activities under Xi Jinping, which had a particular (and mostly well-documented) focus on New Zealand, and the great deference shown by much of the New Zealand establishment towards a brutal and expansionist regime.  And it was preceded by an interview with Beijing-based New Zealand economist Rodney Jones on various topics including (CP)TPP, China’s own political and economic direction (including the increasingly visible and dominant role of the Communist Party), and some of the concerns raised in Brady’s paper and in the Financial Times/Newsroom disclosures about the background of National MP –  and Chinese Communist Party member –  Jian Yang.

Jones noted –  and of course I largely agree with him –  that we should consider it simply unacceptable to have a member of the Chinese Communist Party as a member of our Parliament (noting the point various other commentators have made –  you only get to leave the Party by death or expulsion).  Same goes for former serving members of the military intelligence establishment of a regime such as that of China.   Jones called for bi-partisan agreement on these points between the National and Labour parties.  Formal accords don’t have a great track record, but frankly any political party that took serious our heritage as a longstanding open and free democratic society would not even consider having such a person in their ranks.   As I’ve noted previously, I’d make an exception for someone with Jian Yang’s background who has now genuinely “seen the light”, is willing to openly disown and criticise the regime he was once part of, wanting nothing now to do with the representatives in New Zealand of such an evil regime.   Oleg Gordievsky was a hero, and rightly honoured as such.

Professor Brady noted that China’s influence-seeking activities in countries such as ours operate on multiple levels (all documented more extensively in her paper).  She noted the way in which almost all the Chinese-language media in New Zealand is now under the thumb of the Chinese Communist Party.   She highlighted the issue of political donations, and the way in which our electoral finance laws allow large donations, including from foreign individuals and foreign-controlled entities, to find their way –  often anonymously –  to political parties.  She has previously noted the way that many former senior politicians now hold directorships and other positions in ways that either directly serve the interests of China, or (at least) provide a severe economic disincentive to ever saying anything that might displease China –  noting yesterday that in at least some cases these people will have got into these roles barely aware of the wider context. And she drew attention to the extraordinary way in which our business and political elites go out of their way to pander to such a dreadful regime.    She noted that the presidents of both the National and Labour parties, and various heads of universities, had been issuing positive statements around the recent 19th (Communist) Party Congress –  in a way which, as she noted, one could never imagine happening for a US political party convention.  I couldn’t find a record of vice-chancellors’ statements –  although given the amount of fee income they derive from Chinese students, and the (Chinese-controlled) Confucius Institutes  several allow as part of their universities, what she says wasn’t a great surprise.  As for Peter Goodfellow and Nigel Haworth, that did surprise me a bit, but sure enough a quick search took me to Xinhua/China Daily stories under the heading “Global chorus of praise for party leadership”, with quotes from these heads of our two largest political parties (along with those from various parties in other countries), prefaced this way

The ongoing 19th National Congress of the Communist Party of China has received messages of greeting from foreign leaders, political parties and organizations around the world. They speak highly of the Party’s leadership as well as China’s socioeconomic development and global contributions, and express full confidence that the CPC will lead China to even greater success. The following is an edited summary of these messages.

These people –  these parties –  are a disgrace, selling out their (our) birthright for a mess of potage.    All the more so at a conference which set the public seal on the ascendancy of Xi Jinping, whose term in office has been marked by ever-less freedom, an ever-more instrusive state, a much more internationally aggressive foreign policy……as we see the stepped up United Front Work programme of influence-seeking in other countries.  It is as if our political parties had lost any sense of self-respect.

Brady urged New Zealand to take the issues more seriously, and to look to work closely with Australia and Canada, countries which face similar issues to those in New Zealand –  and where the governments have been more willing to confront the problems.   She highlighted the quote from a Chinese diplomat that appears in her paper

after Premier Li Keqiang visited New Zealand in 2017, a Chinese diplomat favourably compared New Zealand-China relations to the level of closeness China had with Albania in the early 1960s.

As she noted, we should hope that this was very far from true.  Albania had been the most isolated member of the eastern-bloc then, and we should not be comfortable as the most isolated member of the western-bloc now.   In making that comment she was probably alluding to the reports of growing unease among our traditional partners about the closeness of New Zealand governments (and our political/business establishment) to China.

But in many respect Brady was mostly traversing –  although presenting it to a wider audience –  ground that her fascinating paper has already made familiar.  My main reason for writing this post was some mix of astonishment and further dismay at the panel discussion that followed the Brady interview.   There were three panellists: Josie Pagani (who has Labour affiliations), Laila Harre (former Alliance Cabinet minister), and former diplomat and now lobbyist Charles Finny.   Add in the presenter, and they were all falling over themselves to play down any sort of issue –  with the possible exception of something around political donations, with Laila Harre using the opportunity to make the case for state-funding of political parties.

The word “racist” was never explicitly mentioned, but the panellists and presenters seemed to live in terror of being denounced as “racist” if they raised any concerns about a foreign government’s activities in New Zealand.    It was, after all, exactly the approach taken by (now) senior Opposition MP (and former Attorney-General) Chris Finlayson, who then added in a touch of personal abuse of Professor Brady for “good” measure.   Pagani expressed concern that there was “an element of singling out individuals” (MPs Jian Yang and Raymond Huo) about the paper, and the presenter chimed in with the suggestion that no one raises concerns about (American-born and raised) Greens minister, Julie-Anne Genter.

I’m not sure about anyone else, but I’ve explicitly addressed the Genter situation here previously.  Had Genter worked for the American military intelligence system, and spent her time hob-nobbing with the American Embassy, articulating American positions on issues, I’d have many of the same concerns as I have about Jian Yang (with the –  not trivial – difference that the United States is a historic friend and ally).  It probably wouldn’t be appropriate for such a person to be in our Parliament, as we could not be confident that their national loyalties lay exclusively with New Zealand.  But here’s the thing: no one has ever raised a shred of evidence to suggest that Genter’s past or present includes anything of that sort.    (Personally, I’d be reluctant to vote for someone for Parliament who had immigrated from anywhere as an adult, but there is still a material difference between Jian Yang –  and Raymond Huo –  and Julie-Anne Genter.  And the important differences aren’t about skin colour or sex, but about demonstrable patterns of conduct.)

But the most vocal, and egregious, of the panellists was the lobbyist Charles Finny.  He has sallied forth in defence of Jian Yang previously, and I wrote about his comments here.   He’s a lobbyist, whose livelihood, depends on “getting on” with the main political parties –  which does make one wonder about TVNZ’s judgement about having as a panellist someone who will be ever-emollient at best.  He knows a great deal about China, but can’t afford to say what he knows openly.

Here is some of what I wrote about Finny’s previous effort in defence of Jian Yang.

Finny’s article is headed “Time for NZ political parties to take the migrant vote seriously” (actually I was pretty sure Labour had been doing just that in South Auckland for decades), but his focus is on the ethnic Chinese vote, and Jian Yang.

On the last day of the Westie experience [some years ago] I was introduced to a National Party candidate, Dr Jian Yang. He was teaching in the political science department at the University of Auckland. We talked about his academic background, about what he had done in China before leaving for Australia (where he completed his PhD at ANU), about the China-New Zealand relationship and about the Chinese Embassy and Consulate network in New Zealand.

It was clear Dr Yang was very well-connected to the leadership of the Chinese communities in New Zealand, as well as to the Embassy of the People’s Republic of China and its Auckland Consulate. He also had significant connections in China, both to government figures, and to the business community. This was the first of many meetings I have had with Dr Yang. We have met in his context as a MP, as a member of select committees and at social functions. We have travelled together to China and elsewhere as part of official delegations. It is my understanding that Dr Yang has become one of National’s most successful fundraisers, in much the same way Raymond Huo is important for the Labour Party’s fundraising efforts.

Did they, one wonders, back in 2010/11 discuss Yang’s background in the Communist Party and his teaching role in the Chinese foreign intelligence services?

What is astonishing is that one of New Zealand’s most-experienced China experts is, at least in public, untroubled by any of this: the close connections to a foreign government’s embassy, even as he serves as a member of the New Zealand Parliament, or the key role he describes both Yang, and Labour’s Raymond Huo playing in party fundraising?  Not that many decades ago, the convention – perhaps not always rigorously observed – was that elected politicians stayed well clear of party fundraising efforts, for good reasons to help maintain the integrity of the parliamentary system.

Finny is in full defence mode for Yang (and presumably Huo).

But it was a strange campaign period, with political players employing various strategies. Among the twists and turns, a rather strange and well-coordinated analysis/investigation was undertaken and then reported by Newsroom and the Financial Times about the past of Dr Yang. Subsequent coverage has led to calls for Dr Yang’s resignation.

Now, I have been involved in politics long enough to know that there are few stories of substance to emerge in the middle of an election campaign by coincidence (particularly ones that are so thoroughly researched). This was a story suggested by someone who had an agenda of some sort – and the timing was intentional.

If 10 days before an election isn’t a reasonable time to ask questions about a candidate’s background. I’m not sure when is? And it isn’t as if, to date, anything those media outlets reported has been disproved or refuted?

And Finny has nothing at all to say about Professor Brady’s paper, the timing of which was determined by the dates of an international conference she was presenting at. As he talks up – no doubt correctly – the importance of the migrant vote, surely suggestions that a major foreign power might be actively engaged in attempting to control most of the local Chinese-language media, and Chinese cultural associations, might have been worthy of some mention?

In his comments yesterday, Finny went further.   He confirmed that he had known right back in 2010/11 that Jian Yang had served in the Chinese military intelligence system.  The voters, of course, were not so fortunate, until Newsroom and the Financial Times finally revealed that background a couple of months ago.

Finny confirmed that he knew both Jian Yang and Raymond Huo, the latter less well.  He observed that he thought it was great that we had Chinese MPs, and had no problem with them being in our Parliament.  But then he went on to note that he was always very careful what he said to either man, because he knew that both of them were very close to the Chinese Embassy.  One could only shake one’s head in some mix of astonishment and despair that a leading former diplomat is just fine with having two people in our Parliament whom he doesn’t feel confident about talking openly to, apparently because he thinks that anything he says could end up back at the Chinese Embassy.    Out of his own mouth…….

There was a belated (and lame) attempt to cover himself, as Finny observed that “many of us are close to other countries’ embassies.  I don’t suppose that anyone has concerns that if someone in public life in New Zealand talks to Charles Finny that whatever they say might end up with the American, Australia, or whatever embassy he had in mind.  There is quite a difference between having a good working relationship with the embassy of another country –  probably quite important if you are involved in trade lobbying etc –  and having divided loyalties.  Charles Finny served New Zealand for decades as a diplomat, and I’m sure no one has reason to doubt his national loyalties.  Were he to move to the United States, get elected to Congress, and maintain very close ties to the New Zealand Embassy, Americans might reasonably have doubts (in that hypothetical).

Finny also attempted to defend Jian Yang and Raymond Huo by suggesting that their first loyalties might well be to New Zealand, but that they would have views about how New Zealand’s interests might be best served.  I suspect Arthur Seyss-Inquart had views about how Austria’s best interests in the 1930s were served too, or Jozef Tiso in Slovakia.  It is a defence almost impossible to take seriously.  We need to know that our MPs have a national loyalty only to New Zealand, and the best interests of New Zealanders, and not to an advancement of a foreign power’s view of those interests.

After all, if (private citizen and lobbyist) Charles Finny is always “very careful” about what he says in the presence of Jian Yang or Raymond Huo, how much more uneasy should we be our the presence of these MPs in the caucuses of our two main political parties (one previously in the government caucus, the other now)?   Should those MPs’ peers always be “very careful” what they say in the presence of Yang and Huo?  Finny’s advice would appear to be so.    Both serve on select committees, which benefit from departmental briefings –  indeed, given the shortage of experienced Labour MPs, Huo will almost certainly be chairing a select committee this term.  Would Finny regard it as acceptable for these men –  who he is “always careful” with – to serve as ministers in our government?  In any of these fora –  caucuses, select committees, Cabinet (or travel with senior ministers) –  there is likely to be information or angles that the Chinese Embassy would regard as valuable.  I’m not suggesting either man passes on such information: it was Finny who appeared to make that claim.  It was an extraordinary concession.

As for Josie Pagani claiming that there was “an element of singling out individuals”, well in a way she is correct.  Brady’s paper singles out specific individuals about whom there are specific reasons for concern –  the exact opposite, for example, of tarring an entire community.  Here are the some of specific paragraphs from Brady’s paper.

On Jian Yang she has several pages of material, including

As widely reported in the New Zealand and international media in 2017, Yang Jian worked for fifteen years in China’s military intelligence sector. It was a history which he has admitted he concealed on his New Zealand permanent residency application and job applications in New Zealand,104 as well as his public profile in New Zealand—at least in English sources.

However in an article in the People’s Daily (Renmin ribao) magazine, Huanqiu renwu (Global People) in 2013, which was republished in a number of websites, Yang Jian gave an extensive interview detailing aspects of his earliest years, his career in China, and subsequent activities in Australia and New Zealand. Yang Jian entered the PLA-Air Force Engineering College to study English in 1978; he taught at the same college for five years after graduation, trained at the People’s Liberation Army Luoyang Foreign Languages Institute for his first Masters degree, studied for a year at the Hopkins-Nanjing Center for US-China Studies at Nanjing University, and after that, from 1990 to 1993 taught English to students at the Luoyang Foreign Languages Institute who were studying to intercept and decipher English language communications.

Yang Jian does not mention his 15 year career and studies with the PLA on his National Party online cv, and it also does not appear on the online cv provided for his profile when he was a lecturer at the University of Auckland. But he did provide this information in a cv in English to be circulated to Chinese officials which he gave to the New Zealand Embassy in China, preparatory to a visit to China in 2012, the year after he entered parliament.  And a Chinese language report promoting the setting up of the National Party’s Blue Dragons organization (an ethnic Chinese youth group within that party), highlights his studies at the Luoyang Foreign Languages Institute, while not mentioning any other details about his working life or other tertiary studies when he was living in China. The Financial Times speculated that these selective mentions of his past links with the Luoyang Foreign Languages Institute were meant as a “dog whistle” to the Chinese community in New Zealand.

She goes on to note to his role as key fundraiser, access to material that someone with his background would never get as an official, and noting that “Yang is seen at most official events involving the PRC embassy and the ethnic Chinese community in New Zealand.”

And of Huo she writes

Even more so than Yang Jian, who until the recent controversy, was not often quoted in the New Zealand non-Chinese language media, the Labour Party’s ethnic Chinese MP, Raymond Huo霍建强 works very publicly with China’s united front organizations in New Zealand and promotes their policies in English and Chinese. Huo was a Member of Parliament from 2008 to 2014, then returned to Parliament again in 2017 when a list position became vacant. In 2009, at a meeting organized by the Peaceful Reunification of China Association of New Zealand to celebrate Tibetan Serf Liberation Day, Huo said that as a “person from China” (中国人) he would promote China’s Tibet policies to the New Zealand Parliament.

Huo works very closely with the PRC representatives in New Zealand.  In 2014, at a meeting to discuss promotion of New Zealand’s Chinese Language Week (led by Huo and Johanna Coughlan) Huo said that “Advisors from Chinese communities will be duly appointed with close consultation with the Chinese diplomats and community leaders.”   Huo also has close contacts with the Zhi Gong Party 致公党 (one of the eight minor parties under the control of the United Front Work Department). The Zhi Gong Party is a united front link to liaise with overseas Chinese communities, as demonstrated in a meeting between Zhi Gong Party leaders and Huo to promote the New Zealand OBOR Foundation and Think Tank.

It was Huo who made the decision to translate Labour’s 2017 election campaign slogan “Let’s do it” into a quote from Xi Jinping (撸起袖子加油干, which literally means “roll up your sleeves and work hard”). Huo told journalists at the Labour campaign launch that the Chinese translation “auspiciously equates to a New Year’s message from President Xi Jinping encouraging China to ‘roll its sleeves up’.”   However, inauspiciously, in colloquial Chinese, Xi’s phrase can also be read as “roll up your sleeves and …..[expletive deleted] hard” and the verb (撸) has connotations of masturbation. Xi’s catchphrase has been widely satirized in Chinese social media.  Nonetheless, the phrase is now the politically correct slogan for promoting OBOR, both in China and abroad. The use of Xi’s political catchphrase in the Labour campaign, indicates how tone deaf Huo and those in the Chinese community he works with are to how the phrase would be received in the New Zealand political environment. In 2014, when asked about the issue of Chinese political influence in New Zealand, Huo told RNZ National, “Generally the Chinese community is excited about the prospect of China having more influence in New Zealand” and added, “many Chinese community members told him a powerful China meant a backer, either psychologically or in the real sense.”

And these are people establishment figures like Charles Finny think are just fine to serve in our Parliament?   Even if they do choose to be “very careful” about what they say in these presence of these MPs?  Extraordinary.

Of course, both Jian Yang and Raymond Huo continue to lie low.  TVNZ approached them for comment –  and I suspect would have been only to happy to have broadcast an interview with either.  Jian Yang apparently had nothing to add to what he has already said –  including that he had falsely represented his past on immigration or citizenship papers because the Chinese authorities told him to –  and Raymond Huo was quoted as rejecting “any insinuations against his character”.  Perhaps he should take that up with Charles Finny.

It was pretty extraordinary when, in the previous Parliament, Todd Barclay refused to front the press, or be interviewed by Police.  But at least there was his right to avoid self-incrimination in a potential criminal context to consider.  For two newly-re-elected MPs to simply refuse to front serious questions about their past and present activities, raised by major media outlets, serious academics, and (now) a leading lobbyist and former senior diplomat is just extraordinary.

What is perhaps more extraordinary is that they are presumably doing this on advice.  No one doubts that if the whips and party leaders told them to front up (or else), they would do so.  So we can only assume that the party leaders are complicit in their refusal to front up to the voters.

Sadly, that wouldn’t be very surprising.    Bill English tells the media they will simply have to talk to Jian Yang, while knowing that Jian Yang is refusing to front up to any English-language media.  And questions as to whether is appropriate to have a Communist Party member and former Chinese intelligence officer in his caucus, and as a key fundraiser, are really matters for the leader.  In fact, in the post-election reshuffle, Jian Yang actually won a small promotion –  now National Party spokesman on statistics.

The current Prime Minister and the leader of the Green Party are totally silent on the matter.  And although our Deputy Prime Minister and Minister of Foreign Affairs did utter the odd concerned noise before he took office, there has been nothing since.    The latest line –  reported by Newsroom –  now that he has rejoined the establishment  is that

However, Peters said he did not raise the issue with [Chinese foreign minister] Wang, blaming previous governments for not taking action.

Perhaps, but you are the government now, and the issues haven’t gone away.   Perhaps even more incredible –  or par for the course –  was this

Peters said he had never wanted an inquiry into China’s influence in New Zealand.

“I raised two things, I said the fact the Australians had expressed serious concern and that this was, in terms of the Brady report, a highly internationally recognised thesis and finding – I didn’t ask for a full-scale public inquiry and I’m not asking for one now.”

However, a press release issued by Peters on September 19, titled “China’s Growing Control in New Zealand Must Be Investigated”, quoted Brady as saying “a special commission was needed to investigate China’s impact on our democracy”.

Which might be slightly less concerning if there was any sign, even a shred, that the Minister of Foreign Affairs or the Prime Minister were taking the issue seriously in private, and were willing to do anything about it.

Is there really no political figure, in our entire political system, willing to stand up for the interests and values of New Zealanders, for our heritage as one of the longest-established democracies in the world?  Or to recognise, and openly call out, the nature of the Chinese regime?  Hard to believe really –  decades ago our then Labour government was at the forefront of resisting the appeasement of Germany – but for now the evidence seems to point in one direction, and it isn’t encouraging,

 

 

Competitiveness indicators well out of line

Michael Reddell Exchange rate, New Zealand economic performance, Productivity

In my post yesterday, buried well down amid long and fairly geeky material, I showed this chart.

wages and nomina GDP phw an unadj.png

Using official SNZ data, it suggests that over the last 15 years or so nominal wage rates in New Zealand have risen materially faster than the income-generating capacity of the New Zealand economy (nominal GDP per hour worked –  a measure that takes account of the terms of trade).   Since a big part of what New Zealand firms are selling when they try to compete internationally is (the fruits of) New Zealand labour, it probably shouldn’t be too surprising that our tradables sector producers have been struggling. As a reminder, we’ve had no growth in (a proxy measures of) real tradables sector GDP since around 2000 –  two whole governments ago.

The OECD publishes a real exchange series, all the way back to 1970, using real unit labour cost data.  Unit labour costs are, in effect, wages adjusted for productivity growth.  The real exchange rate measures compares how our economy has done on this competitiveness measure.

OECD real ULC

(There are other real exchange rate measures in which the fine details are less stark, but the picture is very similar.)

Broadly speaking, our real exchange rate was trending gradually downwards for the first 30 years of the series.  And each trough was a bit lower than the one before it.  That was, more or less, what one might have expected.  New Zealand’s productivity performance had been lousy relative to those of other OECD countries, and countries with weak relative productivity performance should expect to experience a depreciating real exchange rate.   On one telling, the weaker exchange rate helps offset the disadvantage of the lagging productivity.  On another, given that tradables prices are set internationally, a country with a weak productivity growth performance will tend to have weaker (than other countries) non-tradables inflation.    Another way of expressing the real exchange rate is the price of non-tradables relative to the (internationally set) price of tradables.

But over the last 15 years or so, we’ve seen something quite different.  The real exchange rate isn’t trending downwards any longer.   In fact, there has been a really sharp increase.   Competitiveness, on this measure, has been severely impaired.

It is not as if, after all, productivity growth has suddenly accelerated in New Zealand relative to other advanced countries.  We’ve done no better than hold our own against the median of the older advanced economies, and we’ve been achieving much less productivity growth than, say, the former communist eastern and central European OECD countries.     But on this measure, the real exchange rate recently has been 40 per cent above the average level in the 1990s, and even higher than it was in the early 1970s.

But aren’t the terms of trade extraordinarily high too?  Well, in fact, no.     They’ve increased quite a lot in the last 15 years or so, but here is a chart showing the terms of trade back to 1914 (using the long-term historical research series on the SNZ website and, since 1987, official SNZ data).

TOT back to 1914

Current levels aren’t much different from the average level for the quarter-century after World War Two.

On this OECD measure, the real exchange rate is higher than it was in the early 1970s (the previous peak in the terms of trade).  But since then, productivity growth (real GDP per hour worked) is estimated to have been far less than the median advanced economy experienced over that period.  In other words, the median OECD country (those 22 for which the OECD has data for the whole period) managed productivity growth  of around 150 per cent over 1970 to 2015 (the most recent year for which there is data for all countries) and New Zealand managed productivity growth of only 75 per cent.  It would take almost a 50 per cent increase in New Zealand’s productivity –  all other countries showing no growth –  to recover the relative position we had in 1970.

Competitiveness is a really major issue for the New Zealand economy.  It isn’t so much of an issue for the firms that operate here now –  they’ve survived and adapted.  It is more about the firms that never started-up, or which started up and couldn’t make it, or which started, flourished and found that they could prosper rather better abroad.   As trade shares (of GDP) shrink, in many respects this is a de-globalising economy.

Which made it rather odd to hear the (economist purporting to be the) “acting Governor” of the Reserve Bank declare that he, and the Bank, were comfortable with the level of the real exchange rate after the recent 5 per cent fall.  He declared that the exchange rate was now close to “sustainable, fair value”.    Taking a real economic perspective, it is anything but.

Such imbalances don’t have anything much to do with monetary policy, but they are symptoms of policy failures that need addressing urgently if we are to finally begin to turn around many decades –  stretching back even 20 years before 1970 –  of sustained economic underperformance.