Day: March 1, 2018

New Zealand and the PRC: links and questions

Michael Reddell China, NZ politics

Anne-Marie Brady has been at the forefront of identifying, and highlighting, the ways in which the People’s Republic of China, through the Communist Party’s United Front work programme, appears to have been attempting to influence, and interfere with, public life in New Zealand –  both among the local ethnic Chinese community, and more generally.  Her Magic Weapons paper remains required reading, and for all that apologists have attempted to brush aside the issues raised in the paper, no one has made any serious efffort to engage with, and refute, the concerns she has raised.

Most other New Zealand academics, with familiarity with the Chinese language, have stayed silent.  But another person –  with Chinese language –  who has written, quite extensively, about the New Zealand situation is the author of the pseudonymous blog Jichang Lulu.    He has a new and substantial piece (if characterised by an idiosyncratic style) on the United Front activities in New Zealand, which is likely to repay reading for anyone interested in these issues.  Whoever the author is, his usual focus is regions far from New Zealand (Nordics) but has been paying a lot of attention to the New Zealand situation in the last year or so and appears to be quite well-connected.   I linked the other day to his detailed piece on PRC efforts to attempt to bring Norway and Mongolia to heel.

Much focus in recent months has been on National Party list MP Jian Yang.  But, of course, National is in Opposition at present. Jichang Lulu has raised specific concerns about senior Labour backbencher Raymond Huo, who also appears to have close connection to the PRC regime.   From his latest post

According to a source with knowledge of the matter, recent requests from a CCP-unfriendly NZ Chinese organisation to have ministers send Chinese New Year greetings were reportedly redirected to Raymond Huo, effectively making the ruling party’s leading United Frontling, whose PRC-consonant views are well–known, the government’s gatekeeper to contacts with the Chinese community. In contrast, ministers and other politicians didn’t hesitate to attend celebrations with PRC diplomats. In other words, the Party-state, through its local advocates, can vicariously veto official support for something as apolitical as a calendrical festivity, at least when the persons seeking such support happen to have Chinese surnames.

Huo currently chairs Parliament’s justice committee –  responsible for the triennial review of the election, and for handling new electoral legislation more generally.  And the way governments typically turnover their members, there has to be a pretty significant chance that he’ll be a member of the executive before this parliamentary term is out.  Much focus in recent times has been on past and present ties of senior National Party figures to PRC interests.  But with Labour in government –  and their party president an effusive public supporter of Xi Jinping –  it is about time harder questions were asked of the new government.

Another thing worth reading (although behind a paywall) is an article in The Australian today under the heading Cold War: Freeze on China Ties.  It builds on reports last week that

university leaders were concerned about Chinese government attempts to dissuade ­students from coming to Australia to study. In an escalation of the pressure on universities, school visits have been cancelled, senior educational meetings in Beijing have been “postponed” and messages warning of the dangers of studying in Australia have been posted on the website of the ­Chinese embassy in Canberra.

claiming that

China is putting Australia into a diplomatic deep freeze, stalling on ministerial visits, deferring a trip by our top diplomat and putting off a broad range of lower-level ­exchanges to pressure Malcolm Turnbull over the new foreign ­interference laws and naval challenges to disputed Chinese claims in the South China Sea.

Government sources are reported as conceding that “there is a diplomatic and ­bureaucratic stalling over a range of visits, as Beijing voices its ­displeasure at foreign-­interference laws”.

I guess this is the sort of thing that the subservient apologists in our own political, bureaucratic and business establishment worry about.  But perhaps it should prompt them to think again about the nature of the regime they want to cosy up to.    The PRC might have some capacity to hurt individual New Zealand economic sectors –  as, say, the Mafia or organised crime might in other countries – but our prosperity as a nation is simply not based on those firms’ trade with China.   And sometimes, just occasionally, there are advantages to distance: Korea, Vietnam, or the Philippines (let alone Taiwan) have to live with the PRC on their doorstep.  We don’t, and it is surely time to reflect on what manner of regime they abet, whether actively or by silence.

The other day, New Zealand Prime Minister gave her first major foreign policy speech.  As far as I could tell, it was better than it could have been on the PRC.

China’s global influence has grown along with its economic weight.  Its leadership on issues like climate change and trade liberalisation could add momentum to our collective efforts in those areas.

Naturally, there are areas where we do not see eye to eye with China.  My government will speak honestly and openly with our friends in Beijing.  Whether it is about human rights, pursuing our trade interests, or the security and stability of our region.

Taking that approach isn’t about singling countries out, , but about taking a consistent approach on the issues and principles that matter to us.

It wasn’t very grovelly –  none of the nonsense Murray McCully was using just a few months ago about China saving us through the financial crisis of 2008/09 –  although anyone who thinks China is somehow at the forefront of global trade liberalisation hasn’t looked very closely (or doesn’t wish to).

By contrast, here is Julie Bishop quoted in that same Australian article

After Mr Trump said he would “love” Australia to join the US in military passages through Chinese disputed territorial waters, Mr Turnbull refused to say in advance when an operation would take place. Such an operation, which the US has conducted in the past, would contradict ­Beijing’s claims of sovereignty in the South China Sea and assert the right of free passage for international shipping.

In Australia, Ms Bishop said: “We have been traversing the South China Sea for many years in accordance with international law and we will continue to do that. Australia is an upholder and defender of the international rules-based order. We believe strongly in the principle of freedom of navigation and freedom of overflight, and we will continue to traverse the South China Sea as we have in the past”.

I’m no great fan of the current Australian government more generally, but there is a degree of realism about the nature of the regime, and its external threats, that seems deliberately absent from the utterances of our own leaders, of whatever party.

Prompted by the events of the last few days, I wonder whether journalists might consider asking a few questions of some of our political leaders:

  • what do the Prime Minister, the Minister of Foreign Affairs think of the PRC actions in recent days to remove the term limit on how long Xi Jinping can serve as President?  One might hope that any answers would be somewhat more serious –  more engaged with the level of international unease – than suggesting, say, that, after all, we have no term limits, and our head of state reigns for life.
  • since National Party president Peter Goodfellow and Labour Party president Nigel Haworth (and former Prime Minister Jenny Shipley) have quite recently been effusive in their praise of Xi Jinping and his approach (links in the Jichang Lulu piece), how do they view this latest step?  It is no good attempting to say “oh, we are just party functionaries we do the organising”: if you are willing to praise the foreign leader of an aggressive dictatorial state, that increasingly threatens not only the human rights of its own people but other nations, you owe us your take on this latest step.
  • and since Bill English refused ever to engage seriously on the issue of Jian Yang –  the former PLA intelligence official, who now concedes he misrepresented his past to enter New Zealand, and who maintains very close ties to the PRC authorities –  perhaps they could ask Simon Bridges, the new National Party leader.  Is he comfortable having such a person in his caucus, and (reportedly) as one of the party’s leading fundraisers.   Most likely, Bridges would fob journalists off as English did whenever anyone asked, or fall back on the slurs his shadow Attorney-General has relied on.  But even if he did, at least we would have a clearer steer on the character of the man, and the nature of the new generation of New Zealand’s political leadership.

 

 

Causes of financial crises

Michael Reddell Financial stabilty, Uncategorized

Earlier in the week I wrote about a couple of the surveys, of US academic economists, conducted out of the University of Chicago by the IGM economic experts panel.

But another of their 2017 surveys caught my eye.  It was about the financial crisis of 2008/09.

Panellists (US ones, and those of the sister European panel) were asked (with detailed wording of each item at the link)

Please rate the importance (0=none; 5= highest) of each item below (presented to panelists in randomized order) in contributing to the 2008 global financial crisis.

And this was how the results came back (using the version where respondents indicated how confident they were of their views).

2007 IGM weighted-graph

For the most part, the European and American responses were pretty similar (not that surprising given (a) that they were asked about the same events, and (b) that quite a few of the US panel were academics who’d migrated from Europe).  Perhaps the only material differences are on the questions around the role of savings and investment imbalances, and around the role of direct government involvement in the housing finance market.  In neither case do the (weighted) average respondents think these issues were top-tier factors but in Europe extremely large current account deficits (savings/investment imbalances) were much more salient (Ireland, Greece, Spain, as well as various eastern European countries) –  as were the “reinvestment” pressures on eg German banks.  And on other other hand, in the United States, between the role of the agencies (Fannie Mae et al), the FHA, and direct federal pressure on banks to lend to support home ownership, the government has a far larger role in housing finance than in most countries.  And US housing finace was the epicentre of the crisis.

In some ways, it is a funny mix of questions/options.  Even if all these factors contributed in one sense or another to the 2008 crisis, they must have done so in quite different ways.  Take, for example, funding runs, resulting from maturity mismatches (short-term liabilities funding long-term assets).  Clearly they were a phenomenon observed in the crisis –  whether at Bear Stearns or Northern Rock or…. –  but since every banking system in the world, strong or otherwise, operates that way, it isn’t clear that the funding structures (or the runs) were a material cause of the crisis.

And one can criticise the rating agencies all one likes –  and I’m sure most of the criticism is well-warranted – but few people were compelled to use credit ratings to guide their asset allocation choices.  And, for all their faults, the rating agencies were generally only responding to much the same incentives that drove other active participants in the system.

And what might lament that regulators and supervisors didn’t catch the building risks before the crisis broke, but (a) they rarely do, and (b) generally, prudential regulators did not compel or coerce willing borrowers and willing lenders to undertake the transactions that ended badly.

It is interesting to see that the “too big to fail beliefs” item is ranked a fair way down the scale (the specific question is about the beliefs of bankers that their own bank was too big to fail).     That sounds about right.  In boom times, most participants are focused on maximising the upside, with little focus on the possibility of things going very badly.  And for the management and Boards of banks, even if their own bank does prove “too big to fail” it is probably little solace to the people involved –  they will still be ousted (RBS, for example, still trades but Fred Godwin –  knighthood and over-generous pension too –  is long gone).

I’m not quite sure what two or three factors I would rate most important.  But one that would rank fairly highly isn’t even directly on the IGM panel’s list: the creation of the euro and the inclusion of so many peripheral states in it.  That choice –  giving German interest rates to Ireland, Greece, Spain, and associated flows of capital –  greatly accentuated imbalances that might already have been there.   Again, it caused no bad loans directly, but fostered an environment in which they became more likely.

And I still find quite persuasive –  more so than the panels clearly –  the story around the importance in a US context (and the US crisis contributed greatly to crises in the UK, Germany and several other European countries)  of government efforts to promote easier access to housing credit.  As I summarised the story former US official Peter Wallinson told

It is that without repeated, sustained and frighteningly successful US government efforts – under both Clinton and Bush administrations – to promote easier access to housing credit, particularly through the agencies (Freddie Mac and Fannie Mae), there would most likely have been no serious US financial crisis.  Wallinson documents how government mandates compelled the agencies to drive down their lending standards, and how because of the dominant role of the agencies in the market, this contributed to a sustained deterioration in the quality of new housing loans being made across the United States.  As late as 2004, new mandates were imposed, forcing the agencies to meet higher low income lending targets with loans for new purchases, excluding any refinancing or equity withdrawal loans.

Finally, it is interesting to note that household debt (specifically “Elevated levels of US household debt as of 2007”) also doesn’t rank that highly as an explanation.  That has long seemed right to me –  apart from anything else, debt to income ratios at the time were higher in New Zealand and Australia (which had no crisis at all) and in the UK (which had no domestic housing finance crisis) than in the US.   But the Reserve Bank has tended to put (in my view) too much weight on the debt stock.

I noticed this week that credit growth in New Zealand (household or total) has now again dropped a little below the rate of growth of nominal GDP.  I don’t supppose it portends anything very much, but if our debt levels in 2007 didn’t cause a local crisis, the current debt levels don’t seem likely to either.

(with an estimate of Dec quarter 2017 GDP)debt to GDP NZ

It is striking just how little has changed in aggregate.   Debt stocks that, as a per cent of GDP, have barely changed over a decade, are very rarely the stuff of which crises are made.  Big increases in those ratios can sometimes be associated with subsequent crises –  that was what New Zealand had in the 00s, and thus we were worried in 2007 – but very bad banking seems to be what really matters, and in a well-disciplined market economy, “very bad banking” and “more debt” aren’t synonymous.