Please Mr Orr, could we have some better analysis

In yesterday’s post, I was a bit critical of the relatively superficial analysis in much of the Reserve Bank’s Financial Stability Report.

Here is one example

fsr chart 1

A snippet which seems to contain three problems in just a few lines.  First, the Bank runs their asset price charts from the bottom of the international financial crisis and recession in 2009.  Of course, equity prices have risen strongly since then.  Second,  all these series are shown in nominal terms: in the case of OECD house prices (red line in the second panel) there will have been hardly any increase at all in real prices over the nine years.    And thirdly, they are attempting to argue that low interest rates have been a major causal influence on debt levels and asset prices without (a) looking back at whether trends are more pronounced this decade than they were in the previous –  higher interest rate –  decade (hint: they aren’t) and (b) without giving any apparent consideration to the reasons why interest rates might have been persistently low.  For a central bank, that really is inexcusable sloppiness.

Take household debt, for example.  Here is the Reserve Bank’s chart

FSR chart 2

It is interesting to see the breakdown between households with a mortgage and the all-households number.   Perhaps even more interesting is the snippet they include in the text that “only 8 per cent of households own investment properties, but they account for 40 per cent of housing debt” (although it would be interesting, in turn, to know how that share has changed over, say, the last decade).

But what I’ve always found striking about charts like Figure 2.1 is how small the increase in household debt ratios has been over the last decade or so.   In the previous house price boom, household debt to income ratios rose much more sharply than they have in the most recent boom.  Among households with mortgages, the ratio rose by 90 percentage points of income from the cyclical low in real prices in mid 2001 to the peak, but that same ratio has risen by less since 30 percentage points from the previous peak to now.  On the more familiar metric –  total household debt to total household income –  the comparable numbers are 47 and 10 percentage points respectively.

Another way of looking at the data –  which I prefer, for various reasons including that all national income ultimately belongs to households –  is to look at the ratio of household debt to GDP.  Here is the chart of that series.

chart 3

Household debt as a share of GDP is lower now than it was a decade ago.   Even if you make allowance for the fact that the previous peak itself was during the recession (when GDP had dipped), the current ratio of household debt to GDP has barely changed since the previous peak in real house prices in mid 2007.  In many ways, this is extraordinary.

(And recall, of course, that banks’ housing loan portfolios came through the last recession –  a pretty serious recession, with a fall in nominal house prices –  unscathed.)

Here is the chart of real house prices (the QV index deflated by the CPI), expressed in log form.

chart 4

Real house prices are much higher than they were at the peak of the last cycle, and have risen by about 60 per cent from the 2011 low.

As the chart in log form illustrates, the percentage rate of increase in house prices has been less this time round than in the previous phase of the boom (2001 to 2007) when real prices rose by 87 per cent on this measure.

But that shouldn’t be any comfort.  If real house prices go from $250000 to $500000 in one period, and then from $500000 to $750000 in a subsquent period, the percentage increase is lower in the second period.  But if real incomes haven’t changed, one $250000 increase is just as burdensome as the other.

And that is pretty much what has happened with New Zealand house prices.  Relative to a base of 100 in mid-2001, real house prices increased by 84 percentage points from 2001 to mid 2007.   From mid 2011 to the present (Dec 2017 data being most recent) the increase, again relative to a base of mid-2001 prices, has been 94 percentage points.   Real incomes have increased a bit, to be sure, but actually the rate of increase (whether simple percentage increases, or relative to the 2001 base) in real GDP per capita was smaller in the more recent period.

None of that should be very surprising. In both periods we had really large, unexpected, population pressures, and in both periods we’ve had binding land use restrictions (not factors featuring in the Bank’s discussion).  Interest rates, of course, have been much lower in the second period than the first, but it doesn’t look as though one needs some exogenous interest rate story to explain another bout of house price increases of similar size to the one that happened when interest rates were a lot higher.

But it all leaves the debt to income (household income or GDP) charts a little puzzling.  As I’ve illustrated before –  and is pretty obvious with a moment’s reflection –  debt increases occur over a much longer period of time than house price increases do.  If house prices double today, the only people who will have been taking on more debt right now will have been the small minority of people transacting in houses in this particular short period. But now that house prices are higher, even if they rise no further, every new purchaser will be needing to finance the new higher prices.  Since the housing stock can take decades to turnover fully, the increase in the debt to income (or GDP) ratios can be expected to lag quite a bit behind house prices.

Here is a very simple stylised example of what I mean.  In this scenario, house prices have been unchanged for a long time, and debt stock is steady.  The aggregate debt to income ratio is about .5 (roughly what it was in New Zealand 30 years ago).  Now assume that some exogenous factor (call it “new land use regulation”) doubles house prices today.  Even if new entrants to the market borrow the same proportion of the purchase prices that their predecessors did when prices were low (on the same 25 year mortgages), it will take decades for the associated lift in the aggregate debt to income ratio to occur (35 years for even two-thirds of the adjustment to occur).

chart 5.png

And yet, in real world New Zealand, despite an equally big house price increase since 2011 as we saw from 2001 to 2007, there has been little or no increase in household debt ratios in the last decade (even though the aggregate ratios should still have been adjusting to the earlier price shock).

I’m not sure quite what the explanation is.  One explanation might be that (real) house prices have risen to such levels that a larger share of the houses are being purchased by more cashed-up buyers.  That would be consistent with the decline in the owner-occupation rate.  Perhaps regulatory financial repression is also playing a part –  successive waves of unprecedented LVR restrictions (grounded in gubernatorial whim rather than robust analysis) may have made some difference, not necessarily in a good way.   But it seems like an issue that we might have expected the Reserve Bank to explore in a document like an FSR.

Similarly, when the Reserve Bank talks up risk

The high level and concentration of household sector debt in New Zealand is the largest single vulnerability of the financial system. …..This risk has not changed materially since the last Report. Growth in household debt has slowed and house price inflation has stabilised, but significant vulnerabilities remain.

you might expect them to discuss:

  • the way rather similar levels of household debt performed in the last severe recession,
  • the Bank’s successive stress tests which suggest bank housing lending is not a systemic threat even under very severe (often unrealistically severe –  around unemployment) scenarios, and
  • their own capital requirements on banks, which are –  we are told –  calibrated to take account of the relative riskiness of different types of loans (even within an overall framework that has further increased capital requirements per unit of risk weighted assets).

But, as far as I could see, there was none of that in the document itself, and nothing of it in the Governor’s remarks at his press conference.    In the meantime, we have distortionary LVR controls kept in place –  on one man’s whim –  when, if anything, there appears to be less credit outstanding than one might reasonably have expected given the way other regulatory distortions have lifted house prices.

In a similar vein, I noted a story on Newsroom this morning, reporting the Governor’s appearance at the Finance and Expenditure Committee yesterday.  He was reported thus

But he told the select committee he would much rather the Reserve Bank, as banking regulator, could trust banks and borrowers to be prudent.

“I would love to not have to be active in that space. If banks had true long-term horizons, if the consumers were fully aware and myopia didn’t exist across borrowers, all the different foibles that people have, then you wouldn’t need the regulatory imposts.”

Talk about “nanny state” –  the Governor wishes he could trust us.  I wish we could trust him and his colleagues.

But, more specifically, the Governor here asserts again that banks are too short-term in their operations, that borrowers are myopic, and we need Reserve Bank intervention (he was talking of LVR and DTI restrictions) to save us from ourselves.  Par for the course, the Governor offered no evidence for his proposition (and there was none advanced in the FSR), it just seems to be some sort of new gubernatorial whim (as Graeme Wheeler came with the scarring experience of living through the US crisis, in this case Orr comes with an NZSF perspective –  neither grounded in specific  analysis of the New Zealand banking system).  I’ve lodged an OIA request this morning for any Reserve Bank analysis in support of these propositions.

I could have added, but overlooked doing so, a request for any evidence that – the private sector being inevitably flawed (by nature of being human) – that government regulators (also being human) can consistently improve on the outcomes of the market.  In a banking system (New Zealand, but Australia as well) where the only financial crisis in more than 100 years arose in the transition as heavy controls were being removed –  and neither the private sector nor the regulators really knew what they were doing –  you might suppose some presumption of responsibility and capability might be accorded to the private sector.  But not, it appears, by this Governor, or this Reserve Bank.  When a big ego and extensive statutory powers combine in a single person, the lack of serious supporting  analysis itself becomes a threat, including to the efficiency of the financial system.

Financial Stability Report and a lack of accountability

When Parliament legislated to require the Reserve Bank to publish six-monthly Financial Stability Reports this is what they said in the two relevant clauses

162AA Purpose of accountability documents

The purpose of the 3 accountability documents required under this Part is as follows:…..

 (c)financial stability report: to—

(i) report on matters relating to the soundness and efficiency of the financial system and other matters associated with the Bank’s statutory prudential purposes; and

(ii) allow assessments to be made of the effectiveness of the Bank’s use of its powers to achieve its statutory prudential purposes. 

165A Financial stability reports

……(2) A financial stability report must—

(a) report on the soundness and efficiency of the financial system and other matters associated with the Bank’s statutory prudential purposes; and

(b) contain the information necessary to allow an assessment to be made of the activities undertaken by the Bank to achieve its statutory prudential purposes under this Act and any other enactment.

Financial Stability Reports over the years seem to do a passable job of reportage –  a collection of sometimes-interesting charts and some text recounting (although only rarely analysing, or putting in context) what has been going on on the financing side of the New Zealand economy.   There are usually some fairly perfunctory updates on policy issues the Bank is considering.

But what is very rarely there is the sort of information that would enable us to really assess the Bank’s use of its powers and the conduct of policy under the various relevant acts.  There is never any critical self-scrutiny; it is as if the Bank thought itself beyond error.

Of course, supply tends to respond to demand.  There is little searching scrutiny of the Reserve Bank at the Finance and Expenditure Committee, and not much more from the media (the level of questioning at the Governor’s press conference this morning seemed weaker than usual).

What do I have in mind about weaknesses in today’s document?

Remarkably, there is no substantive discussion in today’s Financial Stability Report of CBL, the insurance company, regulated by the Reserve Bank, that the Bank petitioned to have put into interim liquidation earlier in the year.   I’m not aware of any reason to think the Reserve Bank acted inappropriately in this matter, but it is a fairly significant institutional failure (on the Bank’s watch), and a fairly significant set of regulatory actions, including the (at least somewhat questionable) use of gagging orders to prevent the company telling its own shareholders and customers about regulatory interventions.  Then again, remarkably no journalist asked a single question on this topic.

Readers will also recall the scathing feedback on the Bank’s prudential regulatory side in the recent New Zealand Initiative report, and survey of regulated entities.  There was, for example, this chart, comparing Reserve Bank and FMA results for the KPIs where the Reserve Bank scores worst in the survey.

partridge 1

This report had come out since the last FSR.  In a newspaper interview a while ago, the Governor had appeared to indicate that he was going to take it seriously, with comments like these

“This place is a diamond, but it needs significant polishing in places,” Orr said in an interview in the Reserve Bank headquarters.

“We need to think much harder about how we behave, how we roll, how we explain, how we do things. That’s a cultural challenge for the bank.”

and

As well as posting the comments of the report on the Reserve Bank’s internal intranet, Orr had written to bank bosses with the message that: “Hey, this doesn’t print well. We hear you. We need to do something about it.”

Interestingly, he actually talked then of problems in the Bank’s own culture.  But in his main accountability document for the financial regulatory functions, there was no reference to the survey, no comment on cultural issues at the Bank (all while continuing to bash banks), no comment on improving the Bank’s own performance, no nothing.

And, remarkably, the Governor faced no questions on the matter, even though the survey had almost handed them the data with which to grill the Governor.  Perhaps the journalists have forgotten, but the counterpart to the delegation of extensive powers to unelected officials has to be serious scrutiny and accountability.  There appears to be almost none here.

Similarly –  and somewhat remarkably –  the Governor managed to avoid any questions about his “culture war” by noting that he and the FMA would be appearing before a select committee this afternoon, and suggesting deferrring questions.  But I don’t suppose he will be holding a press conference after that appearance, and questions from MPs are likely to be as weak as ever, more interested in associating with the Governor than in holding him to account.

And this failure to ask questions was perhaps more remarkable given that the press release the Governor put out with the FSR  bears the heading “Banking culture in the spotlight”.   Reading that headline one might have expected a substantive treatment, but in the press release there was just the unsubstantiated claim that “an ongoing driver of financial soundness is the conduct and culture of banks”.  To which one can only respond, well yes loans that turn bad tend, in sufficient volume, to be what brings down banks, but misjudgements about big picture credit quality, and the overoptimism that takes hold (of bankers and regulators) in boomtimes, aren’t the sort of stuff the Australian Royal Commission –  which the Governor always tries to associate with –  is about.  Here is what he had to say about that (cutesy picture and all)

conduct

Quite how evidence in an inquiry which has not yet reported can really illustrate anything conclusive –  let alone the connection to the soundness of the financial system –  is a bit beyond me.  The Governor seems more keen on his populism, and on associating himself with a highly political Australian inquiry, than on actually identifying specific reasons for concern here.   Perhaps he will explain himself this afternoon?

Reverting to other stuff, there was this extraordinary line in the Governor’s press release

The high dairy-farm indebtedness, and the fact that LVRs were necessary, reflects that banks’ allocative efficiency – eg deciding how much to lend to whom – can be impaired due to the pursuit of short-term, rather than longer-term, profits.

It is an almost incoherent sentence.  For a start, New Zealand bank loan losses have remained consistently low for several decades now –  even the farm losses in the last recession were pretty modest in the scheme of things.  Secondly, you can’t argue –  as a regulator –  that the fact you acted (in this case imposing LVRs) is evidence of a problem.  There might –  as I would argue –  have been no need for LVR controls in the first place –  after all, the Bank’s stress test results have consistently highlighted the resilience of New Zealand banks, and of the system as a whole.  And thirdly, if even there were to be a large stock of troubled lending that would not, of itself, suggest some systematic flaw n the way banks were allocating credit.  None of us –  not banks, not central banks –  operate in a full information world.  Sometimes, events will turn out differently than either lenders or borrowers expected.  That isn’t an indication of any sort of structural failing.   We might reasonably expect rather more substantive analysis before the Governor starts impugning the business decisions of private companies. but……there was nothing else in the report to back up his claims.  (And no cognisance of regulator failure either.)

Somewhat related to this was the pretty unsatisfactory discussion of the housing market, both in the document and the press conference.   The Bank consistently fails to recognise that land use regulation is the key factor explaining the high level of house and urban land prices: against that backdrop, bank lending practices are likely to be of little more than marginal importance.  Thus, they talk like this

housing fsr

But they never once recognise that if the mix of regulatory and population pressures keeps making land artificially scarce, high levels of bank credit are just necessary to accommodate people getting into the increasingly high-priced market.  In that case, credit is at worst a lubricant, a facilitator, but not either the cause or the real problem.  (The Bank might want to argue differently, but if so surely they owe us rather better and deeper analysis.)

There were a couple of interesting snippets in the report.  The smaller one was this comment on the next stage of the review of the Reserve Bank Act

Both the Reserve Bank and the Treasury have provided advice to the Minister of Finance on the scope for Phase 2. The terms of reference for Phase 2 will be published by the Government in June. Phase 2 will be a significant undertaking and could take a number of years to complete.

That suggests the untrammelled rule of the Governor alone –   in the financial stability area –  could continue for some considerable time.  That is unfortunate, especially as there is less effective accountability for the Governor around these functions than around monetary policy (where accountability is weak enough).  Nonetheless, I will look forward to seeing the announcement in June.

The other interesting snippet was Box C, a report on a benchmarking exercise undertaken in respect of a sample portfolio of dairy loans.

The exercise required the banks to measure the risk of the same portfolio of loans to 20 hypothetical dairy farms. These farms represented a range of characteristics and varying degrees of risk. Banks were then provided with financial data and descriptive information for each farm, as well as the details of the hypothetical loans.

The preliminary results of the exercise indicate significant differences in estimates across banks. The highest and lowest average risk weight for the whole hypothetical portfolio differed by 40 percentage points, leading to differences in the hypothetical capital requirement.

Variation in both PD [probability of default] and LGD [loss given default] was was significant. Figure C1 shows the range of average PD estimates across five groups, each containing four loans, ranging from the group of loans with the lowest estimated PDs to the group with the highest estimated PDs. Each line represents the estimates of one bank, before overrides. Absolute variation was largest at the mid- to high-risk end of the spectrum, but proportionate variation was large across all levels of risk. The model overrides applied by banks tended to reduce the variation across banks, but it remained significant.

dairy PD

These are big differences.  The Bank reports that

The provisional results show significant variation in model outcomes, even for the same level of underlying risk. The Reserve Bank is conducting further analysis of banks’ farm lending portfolios to see if patterns in actual risk estimates are consistent with the results of the hypothetical exercise. This work will help inform the Reserve Bank’s review of bank capital requirements.

There are at least two quite different ways of looking at such results.   One could treat them as evidence that “banks can’t be trusted” to get these things right, and that the Reserve Bank should just be setting all the key parameters that feed into calculations of capital requirements.  But one could also see them as a reminder of the uncertainty of the world in which we live, and that equally intelligent people can at times assess the risks of a particular type of loan quite differently.  There is –  or should be –  information in that difference.  That information would be lost if the Reserve Bank  was simply imposing its estimates, the more so as there is no particular reason to suppose that Reserve Bank staff are better able to assess risk than employees of an institution that has its own money on the line.

Without consistent evidence that one bank has been better than the others at assessing risks on particular types of loans, the Bank should be hesitant about what it does with the results of such benchmarking exercises.  As I’ve argued previously for stress tests, perhaps transparency is the best way forward.  Our Reserve Bank  – unlike say the Bank of England –  doesn’t publish stress test results for individual banks.   As the chart above illustrates, it also doesn’t publish information from benchmarking exercises by bank.  Perhaps they should.

Overall, it was another Financial Stability Report that –  for all the cutesy pictures –  fell well short of the level of self-scrutiny and openness that citizens should expect from such a powerful agency (and individual).   And the way the Bank completely passed over the very negative detailed feedback it had received only recently on its own performance, suggests that the cultural failures that dogged the Bank during the Wheeler years might be less likely to be seriously addressed under the new Governor than I’d hoped.

For example, if culture and conduct issues really worry the Governor, perhaps he should start closer to home, and demonstrate consistent excellence, transparency, and accountability as a regulator.  There is plenty of scope to clean up his own house. Physician heal thyself, and all that  (here and here).

 

 

 

Banking conduct and culture – the Governor again

It can be hard to keep up with the twists and turns of the new Governor of the Reserve Bank (a living argument for the need to entrench committee-based decisionmaking –  and, at that, committees that are not under the thumb of the Governor).  Take conduct issues and the Australian Royal Commission as a prime example.

Not many weeks ago –  he has only been in the job for two months –  Orr was apparently content that there were no significant conduct problems here.   That was a bit of a surprise, given the common ownership of many of the financial institutions operating here and the fact –  not to put too fine a point on it –  that only a decade ago we’d been sending people to prison for the way they’d run finance companies.  But, according to the Governor, things were different  –  the culture here was “infinitely better”.    We certainly didn’t need a Royal Commission.

It wasn’t clear what these conduct issues had to do with the Governor anyway –  the Reserve Bank is a prudential regulator (soundness and stability) not a conduct one.  And the Governor did move on to acknowledge that any decision on Royal Commissions or the like wasn’t a matter for him –  the establishment of the Australian one was a highly political call.

But then, before we knew where we were, the Governor had done a volte faceperhaps uneasy that the Financial Markets Authority –  which is a conduct regulator –  was going to get the limelight, and any kudos that came from putting pressure on the banks.  And so we had a joint demarche from the Governor and the chief executive of the FMA, summoning banks to a meeting and demanding –  like some populist political figures, rather than officials in a country governed by the rule of law –  that banks prove their innocence.

There wasn’t much doubt as to the sort of stuff the Governor (and the FMA head) were talking about  –  their letter explicitly referenced the Australian Royal Commission, and the FMA’s own conduct guide.

Last week, the Governor and his FMA counterpart moved on to life insurance companies, sending them a very similarly worded set of demands.

And then a document appeared on the Reserve Bank’s website late last week, under the heading

Banking conduct and culture – The Reserve Bank’s role and efforts ahead

Release date
24 May 2018
An article by Reserve Bank Governor Adrian Orr.

One could only assume it was going to be more of the same.  But as I read it, it became clear that the Governor had changed horses again.   This time we got a very defensive three page essay on banking and banking regulation, apparently in the leadup to the release of the Financial Stability Report tomorrow morning –  the new Governor’s first.

It opens with lots of bluster about various public concerns about banks since the 2008/09 crisis

Globally, and especially following the mid-2009 financial crisis, there has been significant, vocal, public concern about the drivers and cultures of bank behaviour. Are banks too profitable, too short-term, incentivised to over-lend, insufficiently sound, too large to be managed, too global to be regulated, and too open to operational and security risks?

without ever once stopping to note that New Zealand and Australian banks came through that episode in fine shape, and that most of the questions the Governor is referring to relate to places where there were systemic banking failures, and government bailouts of major institutions.

Then we get some references to the Australian environment

The plethora of recent Australian-led banking inquiries is unprecedented, the most significant being the ongoing Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.  The concerns that gave rise to these inquiries should be heeded, not just by Australian-owned banks, but by all financial service providers in New Zealand, including our own domestically-owned banks and insurers.

never once noting the febrile Australian political environment, and casting aspersions by association (using taxpayer resources to do so) without offering a shred of evidence.  It is what populists do.

And then we get this odd claim

The general public hear plenty of noise from these institutions and local commentators as to whether we are doing too much, or too little, too often. The noise is confusing to the non-expert.  We get that.  The topic is technical, we deal with institutions in confidence at times, and many New Zealanders have not experienced first-hand a financial crisis. 

Actually, we hear very little from the banks.  By all accounts, they are scared of crossing the Reserve Bank in public (recall the previous Governor’s attempt to shut down Stephen Toplis).  And the Reserve Bank itself is highly secretive –  note its refusal to offer any open accounting for its conduct around the Westpac capital models or Kiwibank capital instrument cases.  If the Governor is foreshadowing a new openness from the Reserve Bank on such regulatory issues that would be welcome, but the past has been his Bank’s failure not that of the banks, local commentators, or the public (to whom he seems to be trying to talk down).  Acknowledging that the Reserve Bank can, and has, made mistakes would be a helpful start, a signal of being in earnest.

The Governor moves on to set out three sets of expectations for banks.

First, operating in New Zealand.

This means they must abide by the laws of the land, and these are often different to where they came from. For example, we need the locally incorporated banks to have local directors, who are bound by domestic law and must attest to the bank being sound. These directors should be closest to the bank decision making, and are liable for these decisions.

and so on.  So far, so banal.  The Governor outlines no specific concerns, and appears to be trying to operate by slur – the “evil Australian banks who think they can come here and act as if this is Australia”.    That is no way for a central bank Governor to operate.

The second is a lengthy statement of the point that foreign banks operating here have both home and host regulators.  That’s true, but it isn’t clear that the Governor has a point, and certainly not one related to that “Banking conduct and culture” heading.

Weirdly, he repeats a line he ran in an interview a few weeks ago

No foreign government can commit their current or future taxpayers to bailing out foreign country depositors or shareholders. It is untenable politically.

As I noted then, this is simply irrelevant

For a start, the question of how we manage the failure of a bank in New Zealand has nothing whatever to do with the idea of foreign taxpayers bailing out New Zealand depositors.  I’m not aware that anyone supposed that was very likely.  Indeed, all our planning –  including the requirement for most deposit-taking banks to incorporate locally –  has been based on the idea that New Zealand is on its own (although for the Australian banking groups, whatever happens in the event of failure is likely to be negotiated by politicians from the two countries).   Instead the general issue here is

  • should a large bank simply be allowed to close if it fails, and handled through normal liquidation procedures (few would say yes to that).
  • if not, how best can the bank be kept open,
  • it could be bailed out by the government (benefiting all creditors, including foreign wholesale ones),
  • or the OBR tool could be used, in which all creditors’ claims would be immediately “haircut”, so that the losses fall on shareholders and creditors not on taxpayers but  the bank’s doors remain open.

But the Governor concludes this particular section by asserting that OBR is the failure management resolution tool, when as he knows that isn’t his call –  it is a decision for the Minister of Finance at the time, probably after extended haggling with the Australian government.

The Governor’s third point is

Third, and finally, when we regulate any licensed entity we need to do so in a manner that is both sound (safe) and efficient (dynamic and competitive).

Which is more or less fine (actually, the requirement is around the system as a whole not the individual institution), but a propos of nothing that is apparent in the Governor’s statement.

All of this seems to have rather little (ie nothing) to do with “conduct and culture” but with banks’ gripes about the Reserve Bank’s handling of its responsibilities.

Recent bankers’ complaints about our activities tend to focus on three issues: NZ-specific capital, the role of attestation requirements, and the need to prove their ability to resolve a bank failure inside the legal and fiscal bounds of New Zealand.

to which the Governor’s response is a single sentence dismissal

These are all part of doing business here in New Zealand. It is profitable business, and our goal is for consumers to be well served, taxpayers’ money preserved, and our financial systems sound and efficient.

That isn’t serious policymaking or serious accountability, it is just a set of rhetorical assertions, trying to take cover under the Governor’s joint efforts with the FMA to suggest there is something amiss in the way banks are running themselves in dealing with individual customers.

The Governor goes on

Our aspiration is to have the best ‘regulator-regulated’ relationship in the world built on mutual respect.  This doesn’t mean we will always agree with regulated entities. What it does mean is we will be clear and consistent on our position, engage with regulated entities in open and responsive manner, and balance soundness and efficiency considerations.   This is our service promise to regulated entities. 

I’m not sure it is in the public interest for the “regulator-regulated relationship” to be “best in the world” –  regulatory capture is a really significant risk, and perhaps especially when the regulator has recently done as poorly, and had such atrocious feedback, as the Reserve Bank’s regulatory function.   Not many weeks ago the Governor was pledging to take that feedback seriously and bring about change –  I praised him for it –  but that sentiment all appears lost now.

And so the Governor attempts to bring all this back under the heading of “conduct and culture”.  He claims

All said and done, the effectiveness of all of our efforts rests very much on the conduct and culture of the banks that operate in New Zealand. Culture determines ‘how they do things’.

Actually, that is nonsense.  The Reserve Bank is a prudential regulator, not a conduct one, and the perceived failure of the Reserve Bank in this area over recent years (all that feedback captured in the New Zealand Initiative report) is much more about the conduct and culture of the Reserve Bank of New Zealand than about anything to do with the banks operating here.   A defensive mentality, that doesn’t welcome criticism or scrutiny,  policy measures put out in a rush without decent supporting analysis, and so on.  Those are Reserve Bank failures.  They weren’t the fault of the current Governor, but it is his responsibility to fix that culture.

But then the Governor closes his statement with an attempt to articulate what he means by culture.

  • Do banks acknowledge they are operating in New Zealand – and the responsibilities this implies?
  • Do banks acknowledge the home-host regulator relationship, giving each appropriate respect?  And,
  • Are banks willing to compete in both a sound and efficient manner for the long-term – beyond the tenure of a current CEO or Board? This means investing in the people, systems and capabilities needed for a sustainable New Zealand bank business.

For a start, none of this bears any relationship to the culture and conduct stuff he and the FMA had been demanding of banks, stemming from the Royal Commission.  It is a sign of a Governor on the defensive, trying rhetoric rather than analysis.

How, for example, are banks supposed to prove to the Governor’s satisfaction that they ‘acknowledge they are operating in New Zealand –  and the responsibilities this implies”?  Does that mean just accepting whatever the Governor says or does without challenge?  If the Governor has specific concerns –  thinks the banks have broken the law –  he should take those matters up with them individually.  Otherwise, he should get off his bully pulpit and simply do his job, including fixing up his own institution.

As for his second point, what is “appropriate respect”.  I want banks that obey the law, and challenge it and the Bank when they seem to be doing a poor job.  Respect, Governor, is earned by a track record of consistent competent performance, not demanded as some sort of right.

And as for the final point, it is really very little to do with the Reserve Bank.  If an individual bank were, say, to take a view that prospects in New Zealand were poor, and it was looking to wind down its business here over time, that is matter for the shareholders, not for the New Zealand prudential regulator.   Banks themselves might reasonably ask whether the Reserve Bank is regulating beyond the term of the existing Governor.   But again, if the Governor has specific concerns –  within his statutory mandate –  he should raise them with the banks concerned, and outline them in the FSR.

It was a strange statement, and attracted little media attention (perhaps the Governor is already talking so often that his words have become cheap talk).  It should probably have attracted more, given the rather desperate attempt to cloak a pushback against the banks, around prudential regulatory policy, with his populist “culture and conduct” cause.  It was all a bit empty.

By the time the FSR comes out tomorrow it will have been six days since this recent statement was issued. Who knows what tack the Governor will be taking by then.  It really isn’t good enough –  we should be able to expect a stable and predictable regulatory voice, engaging in substantive issues (if there are such) in substantive ways.  I hope some journalists or MPs take the opportunity tomorrow to call him out on the way in which he has been operating.

 

Why are we gifting so much to farmers?

Despite announcing yesterday a plan that aims to eradicate mycoplasma bovis from New Zealand, there was no sign of the pro-active release of any background papers or analysis.   We don’t have copies of the relevant Cabinet papers, or the relevant advice from The Treasury or MPI.    Not that long ago, the incoming government talked of its commitment to open government, and now it plans to spend hundreds of millions of dollars of taxpayers’ money –  without, it appears, any additional legislation – without giving us, up front, any of the relevant papers.

Here is the extract from the Minister’s statement yesterday

The full cost of phased eradication over 10 years is projected at $886 million. Of this, $16 million is loss of production and is borne by farmers and $870 million is the cost of the response (including compensation to farmers). We expect to do most of the eradication work in 1-2 years.

Government will meet 68 per cent of this cost and DairyNZ and Beef+Lamb New Zealand will meet 32 per cent.

The alternative option was for long-term management. This was projected at $1.2 billion. Of this, $698 million is the loss of production borne by farmers and $520 million of response costs.

To not act at all is estimated to cost the industry $1.3 billion in lost production over 10 years, with ongoing productivity losses across our farming sector.

We don’t know how any of these numbers is calculated.  I’m not sure what the average price of cattle is, but even if it is $1500, compensation for the cull of 150000 cattle is a long way short of $870 million.  We also don’t know what reasonable probability to assign to the success of the eradication strategy.    That matters, a lot.

But what we can deduce is that given the choice between long-term management and eradication (or doing the nothing), the costs of which would be borne by the industry (farmers), while two-thirds of the cost of the eradication strategy is to be borne by taxpayers generally.    As there appear to be no foreign trade issues (and even if they were, they would be costs to the industry) or food safety issues, it isn’t clear why taxpayers should be expected to meet any material proportion of the costs, when all the benefits will accrue to industry themselves.  It has the feel of the classic line about people being keen, when they can, to socialise losses and capitalise gains.

I’m not unsympathetic to individual farmers (there are quite a few past or present dairy and beef farmers in my wider family) but why isn’t this just an industry issue, in which if the industry regard eradication as the appropriate option that strategy is funded by an appropriate levy collected, say, per head of cattle?   Most of the cattle aren’t any longer in small scale operations (even the average dairy herd size in now 400).  Between the stock and the land ($40000 a hectare, median farm perhaps 100 hectares) and the milking equipment, a typical dairy farm isn’t a small business and the typical owner isn’t poor by any means.  An increasing share of the cattle is in very large business operations.

$600 million here, $600 million there, and pretty soon you are talking serious money.   If there is public money to spend so liberally on health, I’d rather it was spent on human health.  I’m sure there are other pressing needs within the natural ambit of government.  And, of course, there is always the option of returning our own money to taxpayers in the form of lower taxes.

I also don’t purport to understand the politics of this.  Perhaps the government is dead keen not to alienate further the business community and “regional New Zealand”, but this appears to be almost wholly an industry issue, and I’m not sure that mending party political fences with elements of the business community is really a legitimate use of public money.

Perhaps there is a stronger wider public policy case to be made for this intervention?  But if so, it hasn’t been made to the public so far.  Instead, they are just taking our money and giving it to the farmers, to directly benefit the bottom lines of firms in that industry.

New Zealand’s establishment and the PRC

Two interviews on Radio New Zealand’s Morning Report this morning followed on from the news, reported in the local media on Saturday, of a US Congressional commission having held hearings on PRC influence in New Zealand politics (and that of various other countries).

I wrote about the testimony and related issues here.   As I noted in that post, it was pretty clear that the testimony, by a couple think-tank staffers (one former US Defense Department, one former CIA), was secondhand, reporting (sometimes in slightly garbled form) the work of Anne-Marie Brady in particular, and people like Australian journalist John Garnaut.  Of itself, that isn’t a criticism – in any inquiry of this sort, looking into a number of different countries and not in great depth, it makes a lot of sense to draw on the work of others closer to the specific country.   What was interesting about the US inquiry was that it was happening at all, and that the New Zealand situation was getting this degree of visibility, and that is was before a longstanding commission with representatives from both sides of politics.

On Morning Report, one of the think tank staffers, Peter Mattis was interviewed.    I’m not going to suggest it was an impressive performance, because it wasn’t.    He didn’t have a good command of the sources he was drawing on, and seemed unable to cite specific examples of the sorts of behaviours and developments here that concern him.  Painting with a broad brush risks getting dismissed with a broad brush, and that is more or less what happened –  Mattis’s weak answers (unfortunately) spoke for themselves, and the tone was also evident in the voice of the interviewer, Guyon Espiner.

But let’s have a look at what Mattis said in his testimony (from p114) to the Congressional commission, and see what (if any) of it is wrong, or has been satisfactorily refuted.

First point is that Australia and New Zealand both face substantial problems with interference by the Chinese Communist Party. In both cases, the CCP has gotten very close to or inside the political core, if you will, of both countries. The primary difference between the two has simply been their reaction.

The problems that are there include the narrowing of Chinese voices, the CCP’s essential monopolization of the media outlets, the takeover of community organizations, and in a sense denying the rights of Chinese Australians and Chinese New Zealanders to exercise the rights of freedom of association and freedom of speech in public forums. And this relates to the political systems of these countries primarily because if these are the–if CCP backed people are the heads of these Chinese community organizations in those two countries, and politicians use them as their sort of advisors or their guide to what the Chinese community is thinking, it means that they really essentially have a CCP firewall, if you will, between the political class in both countries and the Chinese communities that live within them.

Of the “political core”, well no one now disputes that National MP Jian Yang was (and probably is –  since in CCP terms, no one leaves without being expelled) a member of the Chinese Communist Party, which controls the PRC.  Jian Yang served for some years on Parliament’s foreign affairs committee, and accompanied the Prime Minister and trade minister on official visits to the PRC.   This was the same Jian Yang who now openly acknowledges that he misrepresented his past as part of the Chinese military intelligence system (and who has now gone to ground, not accepting any interview requests from the English language media for many months now).

And on the other side of politics is Raymond Huo, currently chair of Parliament’s Justice committee (dealing, for example, with electoral law).  Huo may not have the same questionable background as Jian Yang, but was –  so it is reported, and hasn’t been denied –  responsible for taking a slogan of Xi Jinping’s and using it as a centrepiece in Labour’s election campaign among ethnic Chinese voters last year.

Of both Jian Yang and Raymond Huo, former senior diplomat, and now trade consultant and lobbyist, Charles Finny was interviewed on TVNZ’s Q&A show last year. As I recounted it

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.

As for community organisations, Chinese language media, and so on, no one has attempted to refute the claims made about the situation both here and in Australia.  From everything I’ve read and heard, it would be pointless to attempt to do so. It is just the way things now are.

Mattis went on

There’s also the issue of what you might call a three-way transaction where retired officials or politicians take on consulting jobs, if you will, and when a company tries to open their business in China and open sort of different avenues where they need political support, the CCP side simply says, well, you need to pay so-and-so to open the doors for you and to arrange the meetings, and that way there is never a direct, direct CCP payoff to a Western consultant or person, but rather it’s done through the companies themselves so it’s a bit of a proof to the pudding of Lenin’s apocryphal comment that only a capitalist will pay for the rope that’s used to hang him.

To the extent he is referrring specifically to New Zealand, some of this seems a little overwrought (although there is the egregious case in Australia of Andrew Robb, the former Trade Minister who went straight from Parliament to a (NZ)$1m a year part-time job working for business interests with close connections to the Chinese state).  But even here, we have former senior politicians on the boards of PRC (government-controlled) banks, and a former Prime Minister serving on a PRC forum, focused on extending the Belt and Road Initiative, all while also serving on the board of the New Zealand government funded New Zealand China Council.

Mattis again

With respect to the reactions, in New Zealand, both the last prime minister, Bill English, and Jacinda Ardern, have denied that there’s a problem at all, and although the current prime minister has said that the attempts to intimidate and to steal materials from scholar AnneMarie Brady will be investigated, that’s a far cry from any sort of productive action when you have people who have lied on immigration forms that are now sitting as members of parliament.

That’s pretty much a statement of fact.   No party leader seems bothered by the presence in Parliament of a former member of the Chinese military foreign intelligence system (who has never once been heard to criticise the PRC), or even by the acknowledged fact that he misrepresented his past to get into New Zealand.

And from the subsequent interchange with members of the Commission

MR. MATTIS: The answer is yes, that’s precisely what I was implying, that it should be considered on an ongoing basis, and the way some of what was described to me is that, yes, some of these individuals had not, don’t have direct access to the product of NZSIS or the Ministry of Defense, but because they were close to the prime minister, in the case of Bill English, that anything on China that was briefed to Bill English was briefed to Mr. Yang Jian, and therefore it may not be sort of official day-to-day access, but in terms of the conversations, the briefings, it was entirely present within the system.

And I think because it has gotten very close to the political core, one of the major, one of the major fundraisers for Jacinda Ardern’s party has United Front links, that you have to say this is close enough to the central political core of the New Zealand system that we have to think about whether or not they take action and what kinds of action, what do they do to reduce the risk, because especially once, once it involves members of parliament, it requires the prime minister to make a decision themselves of whether or not there’s an investigation of them. If the prime minister is not going to make that decision, then nothing can happen below that.

I presume here that Mattis is relating (in somewhat garbled fashion) the claim that Jian Yang, when travelling with official delegations to the PRC, is likely to have had access to highly classified briefing material prepared for senior ministers –  material for which, were he not a member of Parliament, he would never have been granted access to (as, given his background, he would never have been granted a high level SIS security clearance recommendation).   I’m not sure if this claim  –  regarded Jian Yang’s past access –  has been confirmed, but I’m confident that no effort has been made to refute it.  And recall Charles Finny’s observation –  confirmed in numerous bits of photographic evidence, including on Jian Yang’s own website –  of how close Jian Yang is known to have been to the PRC embassy.

Here is Brady

Yang accompanied New Zealand PM John Key and his successor PM Bill English on trips to China and in meetings with senior Chinese leaders when they visited New Zealand. This role would have given him privileged access to New Zealand’s China policy briefing notes and positions. Under normal circumstances someone with Dr Yang’s military intelligence background in China would not have been given a New Zealand security clearance to work on foreign affairs. Elected MPs are not required to apply for security clearance.

And what of the fundraising aspects?  Note that Mattis did not –  contra the Herald headline –  suggest that the Chinese Communist Party was funding Labour.  His specific suggestion, channelling Brady, was

one of the major fundraisers for Jacinda Ardern’s party has United Front links

The Labour Party General Secretary and President claim no knowledge of what this refers to (Nigel Haworth went so far as to say Labour had no one working for them that fitted the description.   Anyone who has read Brady’s paper will recognise the reference to Labour MP (ie paid by the taxpayer) Raymond Huo.    Here is Brady

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”)

and

During his successful campaign for the Auckland mayoralty, in 2016, former Labour leader and MP, Phil Goff received $366,115 from a charity auction and dinner for the Chinese community. The event was organized by Labour MP Raymond Huo. Tables sold for $1680 each. Because it was a charity auction Goff was not required to state who had given him donations, but one item hit the headlines. A signed copy of the Selected Works of Xi Jinping was sold to a bidder from China for $150,000.

I’m not aware that any of this has been refuted, even if Andrew Kirton and Nigel Haworth wish to attempt to plead ignorance.

(And to be clear, there is no suggestion that Labour operates much differently in this regard than National. I presume Mattis referred to Labour because they happen to be in office now.)

There is no suggestion in any of this that New Zealand electoral laws have been broken –  charity donations like that to the Goff campaign are not illegal.  But the suggestion Mattis made –  of close ties near the top of the political establishment –  appears to be on pretty safe ground.

Following the Mattis interview this morning, Morning Report also had on Labour Party President Nigel Haworth, who wasn’t exactly pushed very hard.      But why focus just on MPs raising funds for the party, when we could look at the role of party presidents, National and Labour, themselves.  From a post late last year.

A month or two ago, at the time of the 19th Communist Party Congress, it came to light through the Chinese media that the presidents of both the National and Labour parties had been sending warm greetings and congratulations.   This last weekend, the Labour Party went one step worse.

The Chinese Communist Party held a congress in Beijing for representatives of such political parties from around the world (300 from 120 countries) as it could gather to its embrace.    Most of them were from developing countries.  Nigel Haworth, the President of the New Zealand Labour Party, attended.   Here is how one Chinese media outlet reported the event.

The CPC in Dialogue with World Political Parties High Level Meeting was the first major multilateral diplomacy event hosted by China after the recently concluded 19th CPC National Congress.

It was also the first time the CPC held a high-level meeting with such a wide range of political parties from around the world…..

During the closing ceremony, Chinese State Councilor Yang Jiechi stressed that the meeting was a complete success with a broad consensus reached. He also said CPC leaders elaborated on the new guiding theory introduced by the 19th CPC National Congress.

“The innovative theoretical and practical outcomes of the 19th CPC National Congress not only have milestone significance for the development of China, but also provide good examples for the development of other countries, especially developing countries,” Yang said.

The Beijing Initiative issued after the meeting states that over the past five years, China has achieved historic transformations and the country is making new and greater contributions to the world.

It also highlighted that lasting peace, universal security, and common prosperity have increasingly become the aspiration of people worldwide, and it’s the unshakable responsibility and mission of political parties to steer the world in this direction.

“The most important thing between the 18th and 19th CPC party congress was the belt and road initiative,” according to the Russian Communist Party’s Dmitry Novikov. “And the most important thing about the initiative is the economic cooperation among various countries. Such cooperation leads to the promotion of relations in culture and politics.”

And the President of the New Zealand Labour Party was party to all of this.    In fact, not just a party to it, but someone who was willing to come out openly in praise of Xi Jinping.

Here he is, talking of Xi Jinping’s opening speech  (here and here)

“I think it is a very good speech. I think it is a very challenging speech. I think he is taking a very brave step, trying to lead the world and to think about the global challenges in a cooperative manner.  Historically we have wars and we have crisis, but he is posing a possibility of a different way of moving forward, a way based on collaboration and cooperation.  Making cooperation work is difficult, but he think that’s a better way for mankind. I think we all share that view.”

It is shameful.     Probably not even Peter Goodfellow would have gone quite that far –  if only because there might have been some (understandable) rebellion in the ranks if he had gone that public.

To which one could add that it appears that Peter Goodfellow and Jian Yang actually share business interests (and here) in promoting the PRC government’s Belt and Road Initiative.

To repeat, no one –  not Brady, not Mattis –  is suggesting that anything illegal is going on (except perhaps for the acknowledged and documented failure of Jian Yang to disclose his PRC intelligence past, apparently on PRC instructions, when entering the country). But they are suggesting a willed indifference to the nature of the PRC regime, and its activities threatening its own citizens (perhaps the least important issue for outsiders), threatening the interests of other countries that share our historic commitment to democracy and the rule of law, and its activities in New Zealand, at a political level and among New Zealand ethnic Chinese communities.    This isn’t just any other foreign government.  The United Front approach isn’t, for example, that of the British Council – the shameful sort of parallel that Guyon Espiner seemed to attempt to introduce in his interview with Nigel Haworth.

The (Beijing affiliated) New Zealand China Friendship Society also entered the fray.  Morning Report reported a text or tweet from their president suggesting that it was past time for a critical examination and review of Professor Brady’s paper.  I’m sure Professor Brady would welcome that –  it is how academe works –  and it has been nine months now since her paper was released, and I’ve not seen any serious attempt to refute or disprove any significant element of her paper.   Surely if she had just got the wrong end of the stick it would be easy to disprove? Perhaps the NZCFS would have asked someone to do so?  I had a look at their website, and found that their annual conference was being held this last weekend.  There was nothing on the conference programme suggesting any serious engagement with the issues.   Perhaps that would have been awkward for the sponsors.  Brady again:

The Xi administration’s strategy of working more with local governments for economic projects has now revitalized the CPAFFC, as well as the local equivalents they work with such as in New Zealand, the New Zealand-China Friendship Society (NZCFS). NZCFS, like their parent organization, went into decline from the 1980s on, and struggled to attract membership. Now thanks to significant support from both the PRC and the New Zealand government, a re-invigorated NZCFA is again promoting China’s interests, but this time it is an economic agenda—One Belt, One Road.

The Herald’s article on Saturday had some political reaction to the story.  Perhaps unsurprisingly, it was just another round of “nothing to see here” from both the Prime Minister and the Leader of Opposition.    In their never-ending pursuit of yet another trade deal –  serving the specific interests of a few influential business groups (including the universities) –  they sell New Zealanders, and our values, short, unbothered apparently  by the corruption of our own system. or the activities of the PRC regime.     And their craven stance –  never ever critical of anything the PRC do –  appears to have been ably represented this weekend by our Minister of Foreign Affairs.

When asked whether he would raise issues regarding the South China Sea, after China landed a bomber on one of the islands in the disputed territory, he said he expected the issue to come up, but said he would not do Chinese politicians and officials the “discourtesy” of airing New Zealand’s specific position on the matter via the media.

“The Chinese would not have any respect for me if I did that, and I do want them to respect me.”

(I wonder if he will ever tell us  –  citizens, voters, taxpayers – “New Zealand’s specific position on the matter”?)

One can only imagine that the PRC regime has about as much respect for Winston Peters (or Simon Bridges –  who wanted to sign us up for a “fusion of civilisations –  or Jacinda Ardern) as Hitler had for Neville Chamberlain.

New Zealand and the PRC: some US testimony

For almost 20 years now, the United States has had

The United States-China Economic and Security Review Commission is a congressional commission of the United States government. Created through a congressional mandate in October 2000, it is responsible for monitoring and investigating national security and trade issues between the United States and People’s Republic of China. The Commission holds regular hearings and roundtables, produces an annual report on its findings, and provides recommendations to Congress on legislative actions related to China.

The twelve commissioners are appointed to two-year terms by the majority and minority leaders of the U.S. Senate, and by the minority leader and speaker of the U.S. House of Representatives.

Not long ago, the Commission was hearing testimony about PRC activities in both Europe and in east Asia and Australasia. I only noticed this in a story this morning running under (what turns out to be) a somewhat exaggerated headline of

NZ should be kicked out of Five Eyes – ex-CIA analyst

As it happens, all the relevant testimony –  written and oral – is online, in a document  – the report of the Commission to leaders of the House and Senate – published a few weeks ago.

I’m not sure how often New Zealand comes up in testimony before Congress, or congressional committees.  One hopes that when we do, it is generally more favourable than what the Commission heard a few weeks ago.

The key relevant witnesses were a couple of people from US think-tanks, specialists in PRC-related issues.   In respect of New Zealand, there wasn’t much very new, mostly drawing on the work of Anne-Marie Brady (and John Garnaut in primarily an Australian context).   And yet it is sobering to see your own country described in these terms, and to reflect on the extent to which our political leaders have allowed themselves to be compromised in ways that serve the ends of the PRC.

Here was how the co-chair of the Commission, former senator Jim Talent, opened the session

The activities of the United Front Work Department, which coordinates the CCP’s overseas influence operations, deserve more scrutiny–and a careful response. Australia and New Zealand, members of the “Five Eyes” intelligence-sharing network, have seen a sharp rise in political donations and media investment from United Front Work Department-affiliated entities, and even individuals affiliated with the United Front Work Department and People’s Liberation Army holding office. Beijing also incentivizes political figures in Australia and New Zealand to parrot its line on issues it deems important.

And comments from Amy Searight of the Centre for Strategic and International Studies, whose testimony related primarily to South East Asia.  These were from her oral testimony.

Recent studies on Australia and New Zealand have demonstrated the extensive and centrally coordinated efforts through CCP-led mechanisms to influence public debates and policy outcomes in these countries. John Garnaut and Anne-Marie Brady have both described their respective countries as “canaries in the coal mine” of Chinese political influence efforts. If countries with strong democratic institutions like Australia and New Zealand are vulnerable to Chinese influence and domestic political interference, one can imagine that countries in Southeast Asia, which have weaker governance, less transparency, and in some cases higher levels of corruption, would be even more susceptible.

She asserted that

Ultimately, China seeks to build a new order in Asia on its own terms where countries in the region will enjoy the benefits of economic linkages for the price of paying political deference to China’s interests and prerogatives.

In terms of the instruments of influence that China deploys, it primarily uses traditional tools of statecraft–aid, investment, commercial linkages and active diplomacy. The Belt and Road Initiative, along with the Asia Infrastructure Investment Bank, have become the primary tools for China’s economic diplomacy…..

It’s also important to note that China resorts to economic coercion, both to directly punish countries that act in defiance of its interests and to demonstrate to others the cost of defiance, and the most notable example here is in the case of the Philippines. When the Philippines challenged Chinese seizure of Scarborough Shoal in the South China Sea in 2012, Beijing sought to punish Manila by cutting off imports of bananas and other farm goods.

and

Recent examinations of Chinese political influence activities in Australia and New Zealand have revealed a number of mechanisms through which the CCP seeks to influence domestic debate in these countries. At the heart of most influence activities is the United Front Work Department, UFWD. UFWD efforts have focused heavily on overseas Chinese populations in Australia and New Zealand, including businessmen, community leaders, and students, but their efforts are not limited to ethnic Chinese and increasingly target the non-ethnic Chinese people in these countries. And we’ve seen allegations that have caused some real concern and public debate over a number of incidents, which include things like Beijing-linked political donors buying access and influence with party politicians; universities being coopted by generous donors for research institutions that have dubious neutrality in their academic pursuits; and voices that are coerced and silenced by networks on college campuses and elsewhere that are mobilized to silence criticism of Beijing. So these cases, the recent revelations in Australia and New Zealand, I think point the way for questions that should be investigated in the cases of U.S. allies and partners in Southeast Asia.

And these comments were from her written submission

Recent examinations of China’s political influence activities in Australia and New Zealand have revealed a number of mechanisms through which the CCP seeks to influence domestic debate in these countries. At the heart of most influence activities is the United Front Work Department (UFWD). UFWD efforts have focused heavily on overseas Chinese populations in Australia and New Zealand, including businessmen, community leaders and students. But their efforts are not limited to ethnic Chinese, and increasingly target non-ethnic Chinese people in these countries. Influence activities are broad and varied in these countries, but the allegations that have sparked the most concern include Beijing-linked political donors buying access and influence with party politicians; universities being coopted by financial largesse for research institutions that have dubious neutrality in their academic pursuits; and voices that are coerced and silenced by networks on college campuses and elsewhere that are mobilized to silence criticism of Beijing.

The second expert to testify was Peter Mattis, apparently a former CIA analyst but now Fellow in the China Program at the Jamestown Foundation.

First point is that Australia and New Zealand both face substantial problems with interference by the Chinese Communist Party. In both cases, the CCP has gotten very close to or inside the political core, if you will, of both countries. The primary difference between the two has simply been their reaction. The problems that are there include the narrowing of Chinese voices, the CCP’s essential monopolization of the media outlets, the takeover of community organizations, and in a sense denying the rights of Chinese Australians and Chinese New Zealanders to exercise the rights of freedom of association and freedom of speech in public forums. And this relates to the political systems of these countries primarily because if these are the–if CCP backed people are the heads of these Chinese community organizations in those two countries, and politicians use them as their sort of advisors or their guide to what the Chinese community is thinking, it means that they really essentially have a CCP firewall, if you will, between the political class in both countries and the Chinese communities that live within them.

There is the supporting of those voices that speak productively, in Beijing’s terms, about China, and there is the issue of suppressing voices that don’t through denial of visas, through pressure placed on institutions, and in some cases sort of calls directly to those individuals. There’s also the issue of what you might call a three-way transaction where retired officials or politicians take on consulting jobs, if you will, ….. it’s a bit of a proof to the pudding of Lenin’s apocryphal comment that only a capitalist will pay for the rope that’s used to hang him.

With respect to the reactions, in New Zealand, both the last prime minister, Bill English, and Jacinda Ardern, have denied that there’s a problem at all, and although the current prime minister has said that the attempts to intimidate and to steal materials from scholar AnneMarie Brady will be investigated, that’s a far cry from any sort of productive action when you have people who have lied on immigration forms that are now sitting as members of parliament.

And to quickly move to a recommendation, I think that at some level the Five Eyes or the Four Eyes need to have a discussion about whether or not New Zealand can remain given this problem with the political core, and it needs to be put in those terms so that New Zealand’s government understands that the consequences are substantial for not thinking through and addressing some of the problems that they face.

The Commission also reproduces the interchange between witnesses and Commission members.  Some excerpts

HEARING CO-CHAIR TALENT: Mr. Mattis, two questions. Mr. Mattis, you said that you noted that New Zealand is part of the Five Eyes arrangement, and you, I think you said in your oral testimony that the United States should consider that on an ongoing basis, and I think the suggestion here is that there is some risk that they may have been compromised to the point that perhaps we shouldn’t continue that arrangement. Am I reading you correctly that that’s an option we ought to take into account, and how high would you assess the risk? …

MR. MATTIS: The answer is yes, that’s precisely what I was implying, that it should be considered on an ongoing basis, and the way some of what was described to me is that, yes, some of these individuals had not, don’t have direct access to the product of NZSIS or the Ministry of Defense, but because they were close to the prime minister, in the case of Bill English, that anything on China that was briefed to Bill English was briefed to Mr. Yang Jian, and therefore it may not be sort of official day-to-day access, but in terms of the conversations, the briefings, it was entirely present within the system. And I think because it has gotten very close to the political core, one of the major, one of the major fundraisers for Jacinda Ardern’s party has United Front links, that you have to say this is close enough to the central political core of the New Zealand system that we have to think about whether or not they take action and what kinds of action, what do they do to reduce the risk

and

DR. SEARIGHT: Can I just add something on the New Zealand point? You know Peter raises some really important concerns, and he’s more knowledgeable about some of the specifics than I am, so I don’t discount his concerns, but I would say that the Five Eyes relationship with New Zealand is extremely important to New Zealand, and it’s one of the few pillars we have in our relationship.

We don’t have a free trade agreement with New Zealand. Obviously we walked away from TPP. We haven’t exempted them inthe steel and aluminum tariffs. I heard an earful about this when I was just in New Zealand two weeks ago. But I think there may be a disconnect between the political level and the bureaucratic level, I mean the government. The bureaucratic level is really turning on China and sees its connection with the United States and Australia as really significant in that sharpening of their policies, their thinking about China, and we heard a lot of thinking that was encouraging. And so I would just say I would be very cautious about cutting off a Five Eyes relationship because I think that really could have some tremendous negative blowback and push New Zealand in a direction that we would not be happy about.

MR. MATTIS: Two other points. I didn’t say cut it off. I said consider it because we–and you just highlighted a number of carrots that are on the table. There are sticks and carrots that we have with New Zealand, and I think on this issue we need to consider how to apply them and sort of encourage New Zealand to find the political will if they can find it because it does, especially in their system, given what has to come from the prime minister’s office, it is a question of politics, not a question of knowledge at the bureaucratic level.

Pretty sobering stuff, to have affairs in your own country described thus.

What was, perhaps, new was Dr Searight’s comments from her recent visit to New Zealand, in which she noted

The bureaucratic level is really turning on China and sees its connection with the United States and Australia as really significant in that sharpening of their policies, their thinking about China, and we heard a lot of thinking that was encouraging

It would be interesting to know who, and what, she meant by that (perhaps the intelligence agencies or Defence, rather than MFAT?).  To the public, there is no sign of any unease, or any change of course.  And of course our political leaders –  of all parties –  keep blithely on, preferring (for example) to avoid awkward issues like Jian Yang or Raymond Huo (the latter now chairing a major parliamentary committee) and to pretend that there are no issues.

I was reading yesterday the New Zealand China Council’s report on options for New Zealand to participate in the Belt and Road Initiative (the one in which the previous government agreed to work with the PRC towards a “fusion of civilisations”).  This report was paid for by the Ministry of Foreign Affairs and Trade, and the Secretary of Foreign Affairs and Trade and the head of NZTE sit on the board of the China Council.

It was quite as obsequious, and deferential, as ever.  In the preface, Council chair (and former Deputy Prime Minister) Don McKinnon gave a single mention to the need for New Zealand’s involvement to be considered in the light of New Zealand’s “deeply held values”.  That sounded briefly encouraging, but throughout the rest of the 40 page report there was no further mention of, or identification of, values.  One was left assuming that for the China Council, and perhaps their sponsors, the only “value” that mattered was the dollar one – as much trade as possible, never upsetting the interests of the Council’s corporate membership.

I’ve also been reading over the last few days, Clive Hamilton’s book on PRC influence activities in Australia (although with some references to New Zealand), Silent Invasion.  This was the book that the author’s long-time publisher pulled out of publishing at the last minute worried about the threat of (PRC-related) legal action.  Based on where I’ve got to so far, the book does have its weaknesses, but it also gathers a wide range of well-documented information on PRC activities in this part of the world, and we’d be foolish to think that things here are materially different than they are in Australia.  But as I read, it occurred to me that I hadn’t seen a single review of the book –  or article about its substance –  in any New Zealand outlet (although the Beijing-aligned New Zealand China Friendship Society did link to a negative review from an Australia paper).  It is as if the willed-blindness to the nature of the PRC regime, and its interests in keeping New Zealand and Australia quiescent by whatever means, and its attempts to use ethnic Chinese abroad in its interests (whether they really want to or not) extends not just to our political and business leaders but to all or most of our media as well.

I can’t see how kicking us out of Five Eyes helps anyone, except perhaps the PRC.  And in the current climate, the US Administration certainly doesn’t help the case of those interested in a serious sustained pushback against PRC influence activities, and aggression in and around the South and East China Seas, and in countries like Pakistan, the Maldives, Cambodia etc.  But the flakey and inconstant nature of the US at present doesn’t change the character of the issue, and shouldn’t distract us from the nature of the reprehensible regime our politicians and business leaders constantly want to make nice to.  Our Foreign Minister is in Beijing this weekend, but presumably will be as deferential as ever, seeking new deals with the regime, and keeping very quiet about what it seems to be doing here and abroad.

As I noted a week or two back, this government seems more like Neville Chamberlain than Michael Joseph Savage (whose government took a strong stand in the late 1930s).  The previous government was, of course, just as bad (and remain so now in Opposition), but I don’t suppose comparisons with Savage mean much to them.

UPDATE: A Herald story on this material, including some reactions from politicians  –  “nothing to see here”   – and academics.

 

 

 

Lifting productivity (and fixing housing, etc): what I’d do

When, a week or so ago, I wrote about how our political (and bureaucratic) leaders appeared to have given up hope, and to have lost any serious interest in turning around New Zealand’s dismal long-term productivity performance (and even worse short-term performance), and linked to my recent speech on such themes, a few commenters asked what policies I would implement, given the option.  One was specific enough to invite a “top 10 policies” list.

In what follows, I’m not suggesting that all these proposals are equally important.  It is also worth recogising that some are designed to directly improve economic performance, at least one is primarily about compensating some potential losers who might otherwise be a roadblock in the way of overdue reform, and some at improving confidence in our political system and associated institutions.   Part of what needs to accompany any significant reform package is a strong accepted sense that the politicians making the changes are working first and foremost in the interests of New Zealanders and their families, people of all ages, stages, and levels on the socioeconomic scale.  Change is, almost inevitably, costly and disruptive to some –  one reason why it doesn’t happen –  but people can be ready to accept disruptive change if they recognise it as something we do together, rather than something being done to them.

Some of these policies were included in a call to embrace radical reform I outlined (and elaborated on more than I can do in this longer list) shortly after Jacinda Ardern became Labour Party leader.

  1. Cut the residence approvals target from the current 45000 per annum to a range of 10000 to 15000 per annum (in per capita terms, something similar to policy in the United States
    • within the residence policy, eliminate the preferential Pacific and Samoan quotas, to focus solely on skills, refugees (and foreign spouses of NZers)
    • make temporary work visas (maximum three years) generally available, subject to the employer paying an annual fee to the Crown of $20000 per annum per worker, or 10 per cent of salary whichever is larger,
    • eliminate most work rights for foreign students (other than Master/Phd)
    • remove the substantial subsidy for foreign PhD students
  2. Move to a Nordic system of taxing income, in which income from capital (profits, interest etc) is taxed at a considerably lower rate than income from labour (and considerably lower than at present –  say 15 per cent).
    • a progressive consumption tax would also have considerable appeal but (a) hasn’t been tried anywhere, and (b) a shift to such a system has major distributional implications.
    • eliminate R&D grants and/or tax credits.
  3. Legislate to allow two-storey houses to be built, at the owner’s discretion, on any land (subject only to narrow exclusions around, say, flood plains or serious land instability).
  4. (To the extent not inconsistent with 3 above) legislate to entrench existing planning restrictions at a neighbourhood level, while allowing neighbourhoods to vary such restrictions on a 75 per cent favourable vote of affected land owners.  (As a reminder, such provisions would parallel to a considerable extent the covenants that are voluntarily established on-market for many private residential developments.)
  5. Because I would expect 1 and 3 above together to result in a sharp sustained reduction in house and urban land prices, establish a compensation scheme under which, say, owner-occupiers selling within 10 years of purchase at less than, say, 75 per cent of what they paid for a house, could claim half of any additional losses back from the government (up to a maximum of say $100000).  It would be expensive but (a) the costs would spread over multiple years, and (b) who wants to pretend that the current disastrous housing market isn’t costly in all sorts of fiscal (accommodation supplements) and non-fiscal ways.
  6. Establish a Commerce Commission inquiry (or a Royal Commission if necessary) to get to the bottom of why building product prices appear so high in New Zealand, not ruling out direct government intervention in the market if the issue is found to be primarily one of lack of sufficient competition.
  7. Lift the age of eligibility for NZS to 68 (increasing by, say, four months a year, so that it would take nine years to get to that age) and beyond that index the age to future improvements in life expectancy.
    • tighten the residency requirements, so that receipt of full NZS would require 30 years of residence in New Zealand itself (and not treating, as at present, residence in Australia as counting as residence in New Zealand for these purposes).
  8. Institute a congestion-pricing regime for Auckland and Wellington.
  9. Reinstitute interest on student loans, perhaps at a government bond rate (still in effect concessional), while lifting amounts that can be borrowed
    • replace fee-free policy, with a somewhat more generous robustly means-tested student allowance for high-achieving students.
  10. Consider instituting a universal child allowance (radical as this may sound, it was an option covered in the 2025 Taskforce report)
  11. Replace the Secretary to the Treasury, appointing someone with a mandate to build an excellent institution, providing robust advice on lifting economic performance.  The Prime Minister or Minister of Finance can’t do it alone, and the current Treasury doesn’t appear to be up to, or that interested in, the job.
  12. Wind-up the New Zealand Superannuation Fund, using the proceeds to repay public debt
    • consider shifting ACC to a pay-as-you-go basis (public money-pots are corrosive of good government and a wise allocation of resources)
  13. End industry assistance (such as film subsidies), except when the government is purely a vehicle for collecting and enforcing industry levies to fund themselves).
  14. Since this package would be likely to be net fiscal negative (at least in the short-term), adopt as a medium-term target an operating deficit of 1 per cent of GDP, and be willing to allow net debt (currently around 7 per cent of GDP) to rise to 25 per cent of GDP.  (A modest deficit of that size will be consistent with stable debt to GDP ratios over time.)
  15. Prioritise a substantial improvement in water quality in streams and rivers.
  16. Require postal ballots of residents for all major new items of local authority spending (some size threshold to be determined, perhaps relative to annual rates revenue), and establish provision for recall petitions for members of local authorities.
    • prohibit local councils from undertaking investments in individual commercial operations.
  17. Overhaul the Official Information Act, to provide for pro-active release of major documents (notably Cabinet papers) as the default standard, and to amend existing provisions frequently used to delay or prevent release of official information (with parallel changes to the LGOIMA for local government).
  18. Mandate the (all but real-time) disclosure of all political donations in excess of $200, and ensure that the political donations law is written in such a way that it encompasses (for example) donations through charity auctions.
  19. Prohibit former politicians and senior government officials taking paid roles in organisations controlled, directly or indirectly, by foreign governments, and impose a three-year stand-down period on any former minister taking a position in an enterprise s/he was involved in regulating (directly or indirectly) as a minister.

There are all sorts of other policy changes I’d no doubt be happy with, and whole areas I haven’t even touched on.  One is infrastructure finance. I have no particular problem with the interesting ideas that are around on innovative vehicles (used in the United States) allowing infrastructure debt to be tied to the specific landowners where the development is occurring, rather than as a general charge on local councils).  But on my set of policies, expected population growth for the country as a whole would drop to something less than half a per cent a year, reaching zero before too long (as the total fertility rate is now well below replacement) so that action on that issue is much less pressing than if we continue with the deeply flawed “big New Zealand” policy of successive governments.

I haven’t mentioned emissions targets either, but such targets would be hugely easier, and less costly and disruptive, to meet under this set of policies, than under the set we are actually operating.  I haven’t mentioned capital gains taxes: I don’t really believe the case for them has been made, but equally a well-designed CGT probably won’t do much harm.  But with the land market fixed, there wouldn’t be much revenue, at least from the housing side (which attracts so much attention).  Having fixed the land market, one could even follow the US example and include owner-occupied houses in a CGT net (with rollover relief): again it would raise very little revenue, but it might better meet some people’s sense of fairness.

The macroeconomic bottom line of this set of policies I would expect would include:

  • affordable houses,
  • materially lower real interest rates (relative to the rest of the world),
  • a substantially lower real exchange rate,
  • materially more business investment (including foreign investment), especially in the tradables sector, and in time
  • higher exports and imports as a share of GDP,
  • higher productivity, and
  • higher wages.

And a New Zealand that was really working for New Zealanders.

Thoughts/comments/reactions welcome.