Month: November 2018

The China Council plumbing the depths

Michael Reddell China, NZ politics

Last night I went to a function organised by the Wellington branch of the Fabian Society, to hear Tony Browne speak on “China’s place in the world and New Zealand’s relationship with it”.   Browne, as readers may be aware, was New Zealand’s Ambassador to the People’s Republic of China some years ago (2004 to 2009), when the regime was a bit less awful than usual.

Browne chose to make his speech off-the-record, so I can’t tell you what he said.  That is a shame, and not because I would otherwise choose to make any “gotcha” points from what he said.  It was an interesting address, and perhaps 100 people heard it, but for such a timely and important issue his perspective is probably one that more people should hear.  There was nuance to some of his views and arguments –  and perhaps more sign of perspective and some decency than, say, one gets from the New Zealand China Council (or our politicians).

Browne is no longer a public servant, and in that sense is free to keep his views private.  But he is hardly just a retired public servant doing his garden in Waikanae.  Since leaving MFAT he has taken on several roles that keep him close to the centre of things, even if just outside the official boundaries.  On the PRC side, he is the chair of the PRC-funded Confucius Institute at Victoria University and (rather more grandly) sits on the international advisory body to the PRC authorities on the worldwide Confucius Institute progamme.  Closer to home, he is Executive Chair of the Contemporary China Research Centre –  the multi-university body, itself closely tied in to MFAT/NZTE interests, based at Victoria and which shares offices and support staff with the Confucius Institute.  He’s also a member of the Council of the (largely) government-funded propaganda and advocacy body, the New Zealand China Council.   And he is joint programme director for the ANZSOG training programme in New Zealand and Australia for rising Chinese Communist Party officials, itself organised in a contractural arrangement with the Chinese Communist Party.  ANZSOG itself, as I’ve noted here previously, isn’t just some obscure academic body –  this trans-Tasman arrangement is chaired by our own State Services Commissioner Peter Hughes.

I suppose that had Browne been speaking on-the-record he’d have spoken less openly.  Which, in itself, tells us something, when it comes to issues like the PRC relationship, and interests.

You’ll have noted that the local Confucius Institutes – in addition to channelling Chinese foreign aid into the schools of an advanced country –  run seminars to champion the perspectives of the PRC, in conjunction with various other PRC front bodies.  No one, of course, supposes that the PRC runs the programmes out of the goodness of its heart.

And that the Contemporary China Research Centre –  chair, board members, and director and deputy directors –  have been totally silent on, for example, issues such as those raised by Anne-Marie Brady and more recently when various other academics stood up and called on the government to take more seriously the apparent efforts to intimidate Professor Brady.    Go to the CCRC website and you’ll see prominently displayed next week’s conference on the (jointly promoted by NZ and the PRC) Year of the Chinese Tourist.  Couldn’t queer that pitch I suppose.  More generally, there is nothing there this year that might be seen to represent a serious contribution to the emerging debate around the PRC, its activities in New Zealand, and New Zealand’s relationship with that evil regime.  And, of course, the CCRC is a content-provider to MFAT  –  an arrangement they wouldn’t want to jeopardise –  no doubt training new generations of public servants to minimise the evil and maximise the deference.

And ANZSOG –  seemingly more interested in the mechanism of government than the purposes (moral or otherwise) of such activity –  no doubt wouldn’t like any flies in the ointment of its special relationship with the Organisation Department of the Communist Party.   Perhaps the frameworks of the State Sector Act or the Public Finance Act come in handy in managing the abuses –  in Xinjiang, Tibet, or China more generally?

But if we can’t talk specifically about Tony Browne’s views, as distinct from his interests, we can talk about one of his bodies, the New Zealand China Council.   Recall that this body is largely taxpayer-funded, has the heads of MFAT and NZTE on the Board ex officio, as well as various other “worthies” mostly, it appears, with business interests in China.  They also have an Advisory Council, with people like Jian Yang, Raymond Huo, the head of (Beijing-front) New Zealand China Friendship Society (and others).  They are funded to promote the relationship with the PRC, which seems to involve (a) never ever saying anything critical (unlike the way real mutual relationships work), (b) trying to keep the populace quiet and on-board with the government and business project (“deals and donations; never mind the nature of the regime at home or abroad”).   There never seems to be much rigour or analytical depth to their material –  but perhaps one doesn’t expect that from propagandists.

Anyway, it appears that the China Council held its annual meeting last week.   We are told that they “raised the bar” at the AGM, although it isn’t clear what that means, assuming it isn’t just a reference to the drinks afterwards.   We are also told that the Chairman’s report was approved unanimously –  which seems an odd thing to emphasise in a press release, at least outside places like the PRC.  And what was in Don McKinnon’s report?  We are told about their work championing (New Zealand’s involvement in) Belt and Road.  We are told about how much propaganda is still needed (emphasis added)

The Council’s survey, undertaken in February 2018 and released later in the year, is the first to benchmark New Zealanders’ attitudes towards the relationship with China specifically, including the relationship as a whole, trade, investment and culture. The survey revealed a pleasing level of support for the relationship but showed there is more work for the Council to do to ensure it is understood properly

The way these taxpayer-funded “worthies” see it presumably?

But probably the key, and most telling, paragraph was this one

An, at times, unedifying debate about the extent of foreign influence in New Zealand risks unfairly targeting New Zealanders of Chinese descent but has not detracted from the value which the relationship with China delivers in terms of cultural diversity, wealth creation and jobs.

Feel the lofty condescension.  Perish the thought that academics, commentators, citizens, residents –  native and ethnic Chinese –  might actually want to debate the relationship, and challenge the deferential narrative that Sir Don and his “worthies” want to reinforce.  No specifics, no evidence, no reference to (for example) the many ethnic Chinese here who want nothing to do with the regime or what it represents, some of whom are courageous enough to speak out.  No sense that there are any issues, choices, or tradeoffs, just the great unwashed getting in the way of making money and collecting party donations.    Perhaps it isn’t really surprising, but you’d sort of hope that such an eminent Board  –  top tier public servants, senior academics, senior business people etc – would pride itself on being able to tackle substantive isses substantively.  But clearly not this lot.

The Council plumbed new depths of obsequiousness (to Beijing that is) this morning, when they released a statement on the Spark/Huawei 5G situation.  The words are those of Executive Director –  former MFAT official –  Stephen Jacobi, but it appears to speak for the Council, so we must assume that the chief executives of MFAT and NZTE are party to this position.  The statement opens

The New Zealand China Council is disappointed to learn plans for Huawei’s involvement in the development of Spark’s 5G network have been put on hold.

Not, note, disappointed to learn from the New Zealand government’s own GCSB that their assessment is that Huawei 5G equipment raises national security issues/threats. It is as if they are spokespeople for Huawei and for the PRC.

Executive Director Stephen Jacobi says the Council would not wish to see the decision complicate efforts to expand the trade and investment relationship with China.

One would like to think that observation was directed at the PRC.  After all, they (PRC) assure people that Huawei operates quite separately from the Party/state –  despite those new laws, and the presence of CCP cells in all significant PRC companies.  But it doesn’t seem likely that was the intended emphasis.

“We are not privy to the GCSB report and therefore cannot comment on its substance.  We note the Government’s reassurance that this decision is about the security of a certain technology rather than about China.  Even so, we are concerned that the decision may have repercussions.

Pretty clearly aimed at our government and the GCSB, despite –  as they concede –  having no information on the substance of the security issues.

They go on

“We hope the relationship is resilient enough to withstand occasional differences of view.  We understand Huawei is committed to finding a way forward, and we hope a resolution can be reached that is acceptable to all parties.

Wouldn’t you hope that, first and foremost, any issues are resolved in ways the safeguard New Zealand’s national security, present and future?  Most people would, but I guess not those committed to deference to Beijing.

They conclude

“Meantime, we need to continue to focus on building a relationship with China which reflects our respective values and interests and delivers value to both parties,” Mr Jacobi says.

Power, aggression, and self-assertion regardless of borders and citizenship on the one hand, and deference –  to the point of kowtow – on the other.

Reasonable people might take different views on the Huawei provisional decision.  Few if any of us have any basis for reaching a technical view. But this statement –  including from two of our most senior public servants –  seems aimed at deliberately undercutting the GCSB stance (a New Zealand government agency), queering the pitch for ministers, and seems concerned more about the interests and attitudes of Beijing –  and the ongoing sales (and party donations) of its members –  than it is about the national interests, national security, and values of ordinary New Zealanders.    But then they have Jian Yang and Raymond Huo inside their tent, so why should we be surprised.

 

Inflation-indexed bonds: are they telling us anything?

Michael Reddell indexed bonds, inflation

Data from New Zealand’s inflation-indexed bond market has been a bit of a mystery for some time.

If one looks at US data, the gap between conventional and indexed government bond yields –  the “breakeven” or implied inflation expectation – makes sense.  Here is the data for the last five years or so.

US IIBs

The US inflation target is around 2 per cent and for the last couple of years the breakevens have been pretty close to that.  There was a period of real weakness in 2015/16 but it didn’t last that long, and even then the breakevens were only averaging around 1.5 per cent.   If you were inclined to focus on the severe limitations US monetary policy will face in the next serious recession, you might even think 2 per cent breakevens for the average of the next 10 years is a bit high –  after all, the Fed has struggled to get inflation to average 2 per cent in the last decade –  but that would be a non-consensus perspective, and I’ll leave it to one side for now.

The New Zealand indexed bond market was, for a long time, rather patchy to say the least.  Indexed bonds were tried for a while in the 1980s, and then one more-modern-style long-term indexed bond was issued in the mid-late 1990s (about the time I and a colleague wrote this article).  But The Treasury was never very keen, and there was a diminishing volume of public debt anyway.     If there is any upside to the higher volume of public debt this decade (in general I’m not convinced) it is the advent of a range of government inflation-indexed bonds.  There are four on issue now, with maturity dates out to 2040.

Unlike the situation in the US, no one makes readily available here constant-maturity data for either indexed or conventional bond yields.  When the “10 year bond yield” is quoted here, it is rarely actually 10 years.  But the Reserve Bank does publish a yield series for each of the indexed bonds.  If one time-weights the (September) 2025 and 2030 indexed bond yields, one gets this approximation to a 10 year indexed yield since September 2015. (I’ve also show the yield for the 2025 bond from the end of 2013 to September 2016, when it was at least moderately close to 10 years).

indexed bond yield NZ

The fall in long-term real interest rates is certainly striking –  consistent with the fact that five years ago the Reserve Bank and most of the market thought short-term interest rates would be more like 4 or 5 per cent looking ahead. In fact, of course, the OCR has been 1.75 per cent for the last couple of years, and is currently expected to remain low pretty indefinitely.

And what if we then take the Reserve Bank’s “10 year bond yield” series for conventional bonds, and subtract the indicative indexed bond series in the previous chart?

NZ IIBs

This is the chart that parallels the US one at the start of the post.  As you can see, the two charts (one daily, one monthly) look quite similar at the start.  Breakevens here were also around 2 per cent, the target set for the Reserve Bank.  But then they diverge –  the short term cycles are similar, but the levels are very different.  On this measure, it has been three years since the New Zealand breakeven rate got even to 1.5 per cent.  As of yesterday’s data, the gap was 1.34 per cent.

Meanwhile, of course, at every opportunity the Reserve Bank assures us that inflation expectations –  survey measures, which involve respondents staking no money, and rarely any reputation (since responses are published mostly in aggregated form) –  are “securely anchored” at 2 per cent.   And, rather than address the indicators from the indexed bond market, the Bank simply passes by in silence.

Over the years, there have been various stories put forward for why information from the indexed bond market should be discounted.  For a long time, there was only one maturity, and there really wasn’t all that much of that bond on issue (just over $1 billion).   Then there were stories about illiquidity –  not much trading in indexed bonds and few or no price-makers.   Glancing through the historical data for turnover in the Feb 2016 bond, there were lots of weeks when the outright trades totalled less than $5 million, and quite a few when there were no trades at all.

But these days there are four bonds on issue, totalling about $16 billion.  Talking to a funds manager recently, I learned that another bank has just become a pricemaker in indexed bonds, such that there are now three local and three offshore institutions offering two-way prices in these instruments.  And the Reserve Bank turnover data suggests that if these markets aren’t exactly awash with trade, there is now a respectable volume of secondary market turnover in at least the 2025 and 2030 maturities (and there isn’t much turnover in conventional bonds beyond 2030 either).

I queried the fund manager as to his view on why the New Zealand breakevens are so low.  He argued that it wasn’t now a market liquidity issue (although you have to think that if you wanted to dump a $200 million position it would still be a great deal easier in the conventional market than the indexed market).   His argument was the market was still new and that there limited interest still from the buy side, including the offshore market in particular.    I was a bit surprised by that, as I recalled (long ago) when the indexed bonds were being issued in the 1990s that a lot of demand initially came from offshore (it surprised us at the time, and New Zealand inflation indexation seemed like something more naturally appealing to local pension funds than to offshore funds).   But I looked up the data, and this is what I found.

Per cent of bonds in market held by non-residents, Oct 2018
Conventional
Apr-23 67.7
Apr-25 52.2
Apr-27 67.1
Apr-29 75
Apr-33 46
Indexed
Sep-25 50.7
Sep-30 37.6
Sep-35 21.3

And, sure enough, a materially smaller proportion of the indexed bonds is owned offshore than of the conventional bonds.   The offshore proportion isn’t trivial by any means, but it is smaller (and, if anything, looks to have been shrinking a bit over the last few years).

I don’t have a good story for why that might be.  After all, New Zealand indexed bonds offer some of the highest yields in the advanced world (our longest maturity yields 50 basis points more than the US 20 year indexed bond, and the US is now a high yielding advanced economy), and much of the story of the last few years has been of a search for yield.  Search for yields often involves sacrificing liquidity.  And (critical as I am of New Zealand economic performance) the creditworthiness of our bonds, indexed and nominal, looks better than ever in relative terms, as being among the handful of advanced countries with budget surpluses and low debt.

I did hear a story a while ago suggesting that the government has simply glutted the market by issuing too many inflation indexed bonds too quickly.  At one level it is an argument that looks a bit hard to refute (the resulting yields are high relative to equivalent maturity and credit risk conventional bonds), but standing back a bit I’m not sure how persuasive a story it is.  The world markets are big, New Zealand is small (and fairly sound), and the appetite for yield has been strong.

Which is partly why I don’t think it is safe for the Reserve Bank to simply ignore that New Zealand inflation breakevens.  They may well be telling us something about medium-term expectations of inflation (implicit expectations as much as explicit ones).  After all, core inflation this decade has averaged around 1.5 per cent, the Bank has (twice) proved too quick to tighten, and if inflation has picked up a little recently, it would be reasonable to think that there will be a downturn along again before too long.

sec factor model nov 2018

Perhaps there is a more compelling story that “exonerates” the Reserve Bank.  But it would be good to see them make it, and to be able to test the quality of their analysis and research.  Simply ignoring a pattern that has now persisted for three years –  breakevens averaging less than 1.5 per cent when the inflation target as 2 per cent –  seems not particularly responsible, not particularly transparent, not particularly accountable.

 

Economic failure CCP-style

Michael Reddell China, Uncategorized

I’ve touched on this point in earlier posts, but since at present there are lots of new readers, it is worth revisiting, and re-illustrating, the point: the People’s Republic of China (and more specifically, the Chinese Communist Party, that our leaders are so keen to cosy up to) has overseen a really poor economic performance.  It is, more or less, what one might have expected knowing that the rule of law would be absent, markets wouldn’t be allowed to function effectively, state subsidies (of all sorts) would be rampant, and so on.  It could have been worse, of course –  there was the utter chaos, misery, and (for a time) mass starvation from the late 1950s to the mid 1970s.  The handful of other remaining Communist-ruled countries are worse.   But even having stopped doing so much active destruction, the PRC results are unimpressive.    Any other conclusion surely invites that American line about the soft bigotry of low expectations.

Of course, it isn’t the line the PRC would have one believe.  And it suits too many politicians in the West to talk up China as a stunning economic success story.  But it isn’t.  Development economists, left and right, will talk up the hundreds of millions of people who’ve moved above the poverty line.  And that is great, except that (a) it was the CCP that did its utmost (perhaps unintentionally) to put them back below the poverty line in the first place, and (b) getting above the poverty line is a pretty feeble standard against which to judge the economic performance of a country that for centuries matched or exceeded the best material living standards anywhere.

Angus Maddison’s great collection of historical GDP per capita estimates is a typical starting point for such comparisons.    He reports estimates for some countries every few hundred years from year 1 AD, and then more frequent (increasingly annual) estimates for more countries in more recent centuries.  In 1 AD the estimates he reports had Italy with the highest material living standards, followed by Greece.  China was about the level –  or a bit ahead –  of most other places in Europe.   In 1000 AD, China was top of the rankings –  not by much, but it was number 1.  That shouldn’t be any great surprise to anyone who recalls the various Chinese inventions ahead of the discoveries of such things (printing presses, paper money, even very big ships) in the West.   By 1500, China was a bit behind Italy and Belgium, but not much different to most of the rest of western Europe (all well ahead of what is now the United States).

Scholars spill a lot of ink debating why China went into such severe relative decline (Japan also fell well behind and I presume –  though Maddison doesn’t have estimates –  other east Asian places did too).    Whatever the precise mix of explanatory factors that slippage happened.   In 1850, Maddison’s estimates have Chinese GDP per capita at about a quarter of that in the UK and the Netherlands, and less than 40 per cent of his “Western European 12 countries” average.  By 1900, estimated per capita GDP was only about 15 per cent of that in the highest income countries.

But perhaps as importantly, in 1900 China’s GDP per capita is estimated to have been about half that in Japan, and just a bit behind that in Taiwan (by then a Japanese possession).   As late as 1870, China had been not far from the GDP per capita in a range of Asian countries/territories for which Maddison now has estimates –  about on par with Korea, Taiwan, and Thailand, and a bit behind Japan, Hong Kong and Singapore.

And this is what they’d been further reduced to by 1976, the year Mao died.  I’m using the Conference Board’s PPP estimates, and have shown a mix of countries –  mostly east Asian and European, but with a few other interesting cases (eg Israel –  brand new in 1948) thrown in.

china 1

Such utter self-destruction and failure.  It wasn’t done by outsiders.  It wasn’t as if the PRC had faced uniquely bad external threats.  It was like economic suttee, with the depraved indifference of mass starvation thrown into the mix.

And how does the picture look today, with the Conference Board’s 2017 estimates.

china 2

The PRC has rocketed past the Philippines and Sri Lanka, and still trails the rest of this pack rather badly.   And this isn’t Tanzania or Rwanda, but a country that was once –  for centuries –  among the highest living standards anywhere in the world.  A country in a region where South Korea, Japan, Taiwan, and Singapore now manage advanced country living standards –  one of those a country that struggles to get international recognition and under constant threat from the PRC.

From the Maddison estimates, in 1980 the Soviet Union –  a region never at the forefront of material living standards –  had GDP per capita about the same ratio to that in the western European countries that China has today.  In fact, about where China was –  in relative terms –  in 1850 (see above).  It is a simply dismal economic failure in a country –  by a Party –  that would have so much potential were its people ever to be free, to ever be properly governed with the rule of law rather than the rule of Xi.

For the same countries, here are the real GDP per hour worked estimates.

china 3

It really is an astonishingly poor performance.  Or at least it would be unless you’d been told in advance that Japan, Singapore, Taiwan, and South Korea would establish market economies with the rule of law, sound governance etc etc (and none of it perfect) and that the PRC would remain a land where the (Communist) Party actively rules.  Then, the outcomes are probably much as one might expect –  China lags very badly behind, to the disadvantage of its people, even if to the enrichment (power, money) of its rulers.

On the IMF’s full list of countries, the PRC now ranks 79th (out of 187) in the GDP per capita (PPP) stakes.  Average real GDP per capita is a touch behind that in Iraq (yes, I was surprised) and the Dominican Republic, and a little ahead of Brazil and Macedonia.  Perhaps China’s growth rates are faster than those places, at least if one (a) believes the official data for the Xi period, and (b) discounts the massive distortions and misallocations associated with one of the largest credit booms in history.      But there is no sign of Chinese per capita incomes catching those of the leading countries any decade soon (if things unwind nastily, the gaps would even widen a bit for some years).

Taiwan, Korea, Japan, and Singapore are genuine economic success stories –  catch-up and convergence more or less as the textbooks suggested was possible.  Cause for celebration in fact.   The PRC?  Anything but.  Being big doesn’t change that –  even if it gives geopolitical clout to a lagging middle income country –  it just means more people are failed by their rulers (and by those in countries such as ours who give the rulers aid and comfort, pander to them, or simply cower in a corner).

Known by the company they keep

Michael Reddell China, NZ politics, Uncategorized

Where might one turn if writing today about the New Zealand/ People’s Republic of China issues?

One could start with yesterday’s extraordinary interview our Foreign Minister gave yesterday on Radio Live where, on the one hand, he laid into Jian Yang, and on the other seemed to suggest that anyone who questioned the activities of the PRC here or abroad was somehow motivated by racism.    Quite extraordinary.  And while we are on the subject of Jian Yang, perhaps Mr Peters could have a chat to the Prime Minister (who seems totally unbothered by Jian Yang), or to the MP from his own party who is Minister of Internal Affairs, responsible for citizenship law (Jian Yang having acknowledged a year ago that he misrepresented his past to get into the country in the first place, apparently under “guidance” fron Beijing).

And the Herald this morning was awash with material.  There was a rather wishy-washy editorial, which ended with the suggestion that if the delay in the Prime Minister’s visit to Beijing was “a rebuke it is not warranted”.   Well, of course not, both the Prime Minister and (successive) leaders of the National Party do their utmost to cover for Beijing, and never ever give offence.

There was the flippant cartoon, suggesting that all the PRC would be interested in here was the recipe for slow-cooked lamb, which one might just pass over without note if the issues weren’t so serious, the abuses undertaken by the regime –  at home and abroad – so grave.

There was another article in which the Prime Minister and Simon Bridges seemed to compete for who could grovel before the PRC regime –  tossing overboard any sense of decency or right – the most.    You’ll recall that Simon Bridges had a head-start, having been the minister responsible last year for signing New Zealand up to the rather warped aspiration of a “fusion of civilisations” –  with the PRC of all people.   According to Bridges

He said New Zealand’s default position should not be to question the legitimacy of China’s actions in the Pacific and around the world.

But, being independent and all that, and with the PRC’s track record, it actually doesn’t seem a bad starting point.  Perhaps his predecessors suggested our default shouldn’t be to question the legitimacy of Germany actions in the Europe in the 1930s, ….but I doubt it.  It is hard to see that Bridges is guided by anything resembling the word “principle”.

As for PM,

Ardern would offer no definite view when asked which country, United States or China, was more important to New Zealand.

“Some of the discussion around choosing lanes in which we swim does not fit with our independent foreign policy,” she told reporters.

“New Zealand has a range of important relationships, some for different reasons, some with different histories. But for me, the most important thing is maintaining the independence of that foreign policy basing it around New Zealand values, upholding those values and continuing to strengthen them when it is in New Zealand’s interests.”

No sign of anything resembling “principle” there either.  For her, it seems, “independence” is the primary virtue, not standing up for what is right, and standing up for the freedoms and interests of New Zealanders, including those in the ethnic Chinese community.   From both her and Bridges, it seems that visceral anti-Trumpism is being allowed to provide cover for simply sacrificing the integrity of our domestic political system, and a climate in which New Zealanders can go about their business in New Zealand –  including call out the abuses by the PRC –  free of fear.

And then there was the frankly pretty scurrilous column by Fran O’Sullivan, “Academic draws a long bow on China”.  I thought it was pretty bad on two counts.  First, she accused Anne-Marie Brady of “China derangement syndrome”, and yet when one gets to the end of the column all O’Sullivan has to say in disagreement with Brady’s paper –  which, as published was only in working paper form –  was that it included Ruth Richardson among the former politicians now involved in the boards of Chinese (PRC controlled) companies.  Whatever the ins and outs of the Synlait situation, former Minister of Finance, Ruth Richardson sits on the board of one Chinese bank here, Don Brash chairs another, Jenny Shipley is on one of the boards, and former National minister Chris Tremain is on another.   In all cases, with the possible exception of Don Brash, no one supposes these appointments were about banking expertise.  It is about connections, and such appointments also have the side benefit of putting such senior former politicians in a position where they can’t really criticise anything the PRC does.   But, in a way, the second count bothers me more.  O’Sullivan is the “Head of Business, NZME”, but she is also co-chair of the China Business Summit, and sits on the Advisory Board of the taxpayer-funded advocacy and propaganda outfit, the New Zealand China Council.  Neither of those involvements was noted in the article.  General readers can’t just be assumed to know such things, and should be able to assume that staff writers and columnists have no personal interests in the causes they are championing.

(Oh, and there was also the de haut en bas tone –  O’Sullivan being a favourite of the establishment these day –  of  this comment on Brady’s paper

It highlights issues that the higher echelons of the NZ Government are currently grappling with: whether foreign-sourced political donations carry a tag; an alleged Mainland influence on Chinese nationals and local ethnic media and unanswered questions that remain over National MP Jian Yang.

Except that there is no sign of the Prime Minister or the Leader of the Opposition taking a stand on either issue.  Perhaps some officials are indeed troubled, but politicians call the shots.  We know there are problems – answered questions in the case of Jian Yang.  Bridges and Ardern simply refuse to face what they – and their predecessors –  have reduced our politicaL system to.)

But actually what I really wanted to write about today was an article not in the New Zealand media at all, but in the Chinese media (a Xinhua story to be exact –  thanks to a reader for sending through the link).

Both main party presidents –  Peter Goodfellow for National and Nigel Haworth for Labour –  have form when it comes to gushing over the PRC regime and its leader, Xi Jinping.  It keeps the donations flowing I suppose, and Goodfellow was the source of reported line that Chinese donors were less trouble than others.  Goodfellow is also reported as having business links with Jian Yang, including in the promotion of the Belt and Road Initiative, and –  as reported only relatively recently –  is closely involved in one of PRC-favourite Yikun Zhang’s promotional activities in New Zealand.

This story is about Goodfellow, who was apparently up in China last week, one of the

….attendees of a meeting held in Hangzhou, east China’s Zhejiang Province, on Friday.  The meeting to showcase Zhejiang’s achievements in high-quality development invited leaders and representatives of more than 80 political parties from over 30 countries.

The Chinese Communist Party was singing its own praises

Che Jun, secretary of Zhejiang Provincial Committee of the Communist Party of China (CPC), introduced the coastal province’s experiences in improving governance capacity to better serve economic growth, promoting innovation-driven development, nurturing new growth drivers while upgrading old ones, and building an ecological civilization.

and so was Peter Goodfellow

Noting China’s national rejuvenation is a good thing rather than a threat for the world, President of the National Party of New Zealand Peter Goodfellow expressed his willingness to strengthen friendly exchanges with the CPC and to actively participate in construction under the Belt and Road Initiative.

I’m sure we can all welcome China’s economic development, even as we note how badly the PRC lags behind Taiwan, Hong Kong, Singapore, as well as Japan and South Korea.  But there was a time, not that many decades ago, when hobnobbing with the Chinese Communist Party was looked on rather suspiciously in New Zealand (I’ve just been reading James Bertram’s  slightly sickening account of his party’s trip to China in the mid-1950s, meeting with Mao and Chou En Lai just before the dreadful Great Leap Forward ), but now the president of our largest political party is wanting to work together with Communist Party, source of so much evil for the PRC citizens in the subsequent decades.  And no serious observer any longer pretends that the Belt and Road Initiative is anything much other than a geopolitical play.  Peter Goodfellow seems keen on pretending otherwise.

Probably from his perspective, so far so routine.  He – and his Labour peers –  probably do this sort of stuff all the time, long since detached from the sort of values their respective parties were founded on.  But it shouldn’t be normalised. It should be about as shocking as their counterparts in the late 1930s praising the Nazi Party and pledging to work together in its geopolitical initiatives.  Bad as the appeasers were, that would have been unthinkable then.  It should be again today.

But in a way what really struck me was the company Peter Goodfellow was keeping in this article.    There was Arshad Dad, Secretary-General of  (ruling) Pakistan Tehreek-e-Insaf party.  There was Alsayed Mahmoud Al-Sharif, the first deputy speaker of Egypt’s House of Representatives, who was clearly very taken with the regime

….[he] said the experience of the CPC is worthy of deeper exploration.

“China, represented by Zhejiang, pays attention to the quality behind the speed in its development, continuously enhances its innovation and competitiveness, accelerates industrial transformation and upgrading, and opens up a unique, high-quality development path,” said Al-Sharif.

And Pavle Budakov, a Bureau member of the Socialist Party of Serbia.

But here’s the thing.  Pakistan is widely-recognised as something close to a Chinese client state, now deeply indebted to Beijing.    Egypt seems to be heading in somewhat the same direction, sucking in PRC money and labour (and “craving allies at a time when much of the world has recoiled from its brutal crackdown on dissent”) to build a new capital, and as for Serbia…..well, for a start the Socialist Party of Serbia was formerly the party of Slobodan Milosevic, and in an ongoing New York Times series on China (from whence the Egypt quote is taken), the Prime Minister of Serbia outdoes even Li Keqiang

Mr Li seeks to allay European worries that China poses a challenge to its rules. He promises that Chinese-financed projects will be awarded on the basis of competitive bidding.   “There needs to be open and transparent tendering”, the Chinese premier declares.

But the Serbia prime minister, Ana Brnabic, has just undercut that aseertion.  Asked moments earlier about the [highly-contetious, almost certainly uneconomic] high-speed rail from Belgrade to Budapest, she says Chinese companies have been promised construction work.  “China is a strategic partner”, she says.  “We are not putting out tenders”

Not even the deference that vice pays to virtue in pretending to a proper process.

Whether it is Beijing and the CCP, or these other regimes, our politics –  our political parties –  really should be better than that.  We had a long and honourable tradition, which our political parties seem only interested in trashing, along with the sort of values that underpinned this democracy, this society.

In closing, just two brief things.  The first is to encourage readers to view this short clip, sent to me by a reader.  It is the story of a (now) New Zealand Chinese family –  father and daughter.  The mother died in a PRC political detention facility, three months pregnant.  The regime wanted the father and daughter back (they’d got to Bangkok) but fortunately the then New Zealand government offered them refuge here.  They are still harassed by Beijing and its agents, formal or informal here, and threats made about family back in China.  Bravely, they are still willing to speak up and speak out, about their own awful experience.   I commented to the person who sent me the link

Powerful, sad, and yet a little hopeful too – that people aren’t willing to just give up and be quiet

Perhaps Todd McClay –  who repeats PRC propaganda about the Xinjiang internment –  could watch it, or Simon Bridges, or Jacinda Ardern.  These are New Zealanders.  And that is the regime to which you –  who purport to be “leaders” – give cover.  Surely they can’t really believe the regime is morally worthy at all, but perhaps it might be less shameful if that were their excuse, rather than “another deal, another donation”.  As Scott Morrison put it recently, in an Australian context, we have to be more than the sum of our deals.

Anastasia Lim isn’t a New Zealander. She is a Chinese-born Canadian actress who a few years ago won the Canadian competition to qualify for the Miss World finals.  She hasn’t been afraid to speak out about China’s human rights abuses –  including the forced organ transplants – and was thus banned from China (and thus the competition finals) in 2015.  If the PRC hoped to silence here, the ban only seemed to draw attention to her and her cause.  She pays a price –  her family back in China is scared to talk to her – but seems undeterred.  She is visiting New Zealand briefly next week.  Auckland readers might be interested in this  Monday evening screening of an award-winning film based around real-life PRC events,  at which she will host a question and answer session.  Perhaps Winston Peters could drop in, and listen to another courageous ethnic Chinese voice speak up about the regime in Beijing.

 

Implicit admissions and bids for resources

Michael Reddell Financial stabilty, Uncategorized

The Reserve Bank’s Financial Stability Report was released earlier this morning.  The headline, of course, was the easing in the loan to value restrictions on mortgage lending, although perhaps what should get more attention was the Governor’s suggestion that the avowedly “temporary” restrictions” will be in place for at least “the next few years”.     There was no good case for them –  putting a bureaucrat between willing borrowers and willing lenders – in the first place, and there is no good case for having them in place now.  Other than, of course, the interest that isn’t the public interest at all –  more discretionary power for an unelected unaccountable public official.

(Given the Bank’s repeated unease about dairy debt, it has also never been clear to me why LVR limits were appropriate for people buying houses but not for people buying farms. I used to raise the point while I was still at the Bank, and have never heard a satisfactory or persuasive response.)

Two other small things in the press release warrant just brief mention for now:

The first was this

Our preliminary view is that higher capital requirements are necessary, so that the banking system can be sufficiently resilient whilst remaining efficient. We will release a final consultation paper on bank capital requirements in December.

Time will tell how persuasive their case is, but given the robustness of the banking system in the face of previous demanding stress tests, the marginal benefits (in terms of crisis probability reduction) for an additional dollar of required capital must now be pretty small.

And the second was this

Aside from CBL, the insurance sector as a whole is meeting its minimum capital requirements. However, capital strength has declined and a number of insurers are operating with small buffers. The insurance industry must ensure it has sufficient capital to maintain solvency in all business conditions.

That is quite a shot across the bows of the sector, but it is worth remembering that when the solvency standards were set up the Reserve Bank consciously chose not to require insurers to hold sufficient capital to remain solvent in all circumstances. I vividly recall the day I asked, at the internal Financial System Oversight Committee, whether the solvency standards were demanding enough that they would have prevented the AMI collapse, and was told no.

But two other things caught my eye in the full document.

The first was that the Bank no longer seems to be claiming that LVR controls –  coming between borrowers and lenders for five years now –  have done anything to improve the soundness of the financial system (while they have inevitably impaired the efficiency of the system).  Those are the statutory goals the Bank is required to use its powers towards, and yet in the document today we find this (in the cartoon summary at the front):

The restrictions have reduced the number of borrowers who would be forced to sell their houses or significantly reduce spending if they ran into financial problems.

But, even if true, that is not the same –  at all – as improving the soundness of the financial system. It is about “nanny knows best” customer protection, which is no part of the Bank’s mandate.   You can’t be forced to sell your house if the Bank’s action prevented you from getting into one in the first place.

And here is the claim from the body of the document

The Reserve Bank’s LVR restrictions have leaned against the build-up in risks from high household debt by increasing the amount of equity borrowers have in their homes. The restrictions have seen the proportion of outstanding mortgage debt to households with loans larger than 80 percent of the value of their houses fall from over 20 percent in 2013 to under 7 percent. This extra equity provides households with more room to avoid cutting consumption or defaulting on their loans if economic conditions deteriorate or if interest rates rise.

Nannying again, not (apparently) focused on the soundness of the financial system.  As a reminder, the two diverge because (a) even if LVR controls modestly reduced housing lending risks, we never get a good sense of what other risks banks have taken on to maintain profits, and (b) because less risky lending means banks need to hold less capital.  Capital relative to (properly assessed) risk-weighted assets is the key issue when it comes to solvency.

From the text there is no way of telling whether the Bank’s focus has really changed or just the marketing. But marketing –  from a powerful public agency – should be aligned with, and disciplined by, mandate.

And then there is climate change.  In the Governor’s press release there was this

In the medium-term, an industry response to a variety of climate change-related challenges appears likely, requiring investment.

Which is pretty cryptic, perhaps even empty.

But in the full document there is a two page spread on “The impact of climate change on New Zealand’s financial system”.   There is lots of text, and very little substance.  It smacks of the Governor bidding for relevance – signalling to his buddies on the (political and business) left –  and involvement in the wider whole of government programme, and perhaps worse, it looks like a bid for more budgetary resources (a case we know the Bank has been making) or amended legislation to do things like

The Reserve Bank is developing its own climate change strategy. The strategy focuses on ensuring that climate risks are appropriately incorporated within the Reserve Bank’s mandate. The Reserve Bank also stands ready to collaborate with industry and government to help position New Zealand for the challenges ahead.

This for a body with two city offices, and a balance sheet full mostly of exposures to New Zealand government debt and overseas government debt.

The text burbles on about possible risks, but it all adds up to very little.     There are numerous risks banks and borrowers face every decade, every century.  Relative prices change, trade protection changes, external markets change, exchange rates change, technology changes, economies cycle, land use law changes.  Oh, and the climate changes.

If one looks at the structure of New Zealand bank (or insurer balance sheets) it just isn’t credible that climate change poses a significant risk to the soundness of the New Zealand financial system (that pesky law again).   Some individuals are likely to face losses from actual and prospective sea-level rises, but banks (and insurers) typically have diversified national portfolios.   People can’t have mortgage debt without insurance, and so the insurers are likely to be constraining people first.   Much the same surely goes for the rural sector?   Sure, adding agriculture into the ETS at the sort of carbon price some zealots have called for would be pretty detrimental to the economics of a dairy debt portfolio, but then freeing up the urban land market probably wouldn’t be great for residential mortgage portfolios, and we don’t see double-page spreads from the Reserve Bank on that issue, or the Governor trying to play himself into some more central role in that area.     It smacks of politics –  signalling the Governor’s green credentials –  more than anything legitimately tied to financial system soundness.

But then we probably should not be surprised. The Governor sells himself as head of a tree god (fortunately there was none of that stuff in today’s document), and gives speeches on climate change, but eight months into his term still hasn’t managed to give a speech on either of his main areas of statutory responsibility (monetary policy or financial supervision/regulation/stability).

 

Squirming and hoping the issue goes away

Michael Reddell China, NZ politics, Uncategorized

The Prime Minister was briefly put under the spotlight on Radio New Zealand this morning on the narrow issue of her reaction to the open letter regarding the Anne-Marie Brady/PRC situation.   The Radio New Zealand story reports that

The prime minister said at her weekly post-Cabinet press conference on Monday that she would not be making any moves to condemn China, despite rising concern from academics about the country’s attempts to suppress talk of its interference in domestic politics.

And in her interview this morning she was at pains to minimise and play down the issue, on the defensive, and playing red herrings

“As much as I support academic freedom, I also have to be careful how much I’m seen to interfere in the police as well…

Had anyone suggested she interfere in the Police?

If you took her responses line by line, each line might have seemed reasonable on its own.  But what it added up to was the sound of someone who (a) desperately wanted the issue to go away, and (b) was not interested at all in providing a clarion call for freedom from fear, whether for Professor Brady and her family, or those members of ethnic Chinese community in New Zealand who report harrassment and threats (including to family in China) from Beijing’s agents if they dare to exercise rights –  to speak up and speak out –  in New Zealand.  She seemed totally unbothered that an investigation, which she tried to imply was being conducted solely by something like the Riccarton suburban police station, was still going on after nine months.  Maybe it really is, but as Professor Brady notes

But Prof Brady said she had been told her case was closed.

“The discussions I’ve had with police make it clear that they’ve done everything they can, and I think that they would be ready to make a report to the government.”

She said this was a case for the national security teams at the highest levels, and not just a police matter because it was “not an ordinary burglary”.

The Prime Minister gives every sense that she wishes the whole situation would go away. Perhaps she doesn’t.  Perhaps she really cares about the freedom of New Zealanders. But it wasn’t the impression she was giving.  It came across as it might if the Prime Minister were more concerned about the interests of a few big businesses (public and private) selling to China, and perhaps the flow of political donations (presumably greater now she is in office).   Only she can really allay that impression, if in fact it is false.

From my perspective, one of the sad aspects of this affair is that people sticking up for Professor Brady seem to have been almost entirely from the left (I don’t know most of the people on the open letter list, but I’m guessing there aren’t many people not of the left on the faculty of the AUT school of social sciences and public policy (from whence many of the signatories come)).  But what is interesting is that much of the pushback also seems to come from the left. I’ve seen some particularly nasty comments in the comments sections of, for example, the left-wing The Standard blog.

And this morning one of the more respected figures of the left, Chris Trotter, is out with a full-blown attack, (“The Case of the Problematic Professor), having a go at Professor Brady and suggesting that all that should guide government policy on these matters is some narrow economic perspective –  what is good for Fonterra, or Red Stag, or Auckland University is good for New Zealand.  It almost deserves a post of its own, but just (relatively) briefly some comments.

He writes that annoying “China, on the other hand, can be extremely injurious to this nation’s economic health”.    Well, no, actually not.  Should the government of the People’s Republic ever decide to attempt to “punish” New Zealand they could create some short-term damage, and perhaps even some serious damage in individual sectors, but our total exports to China are about 5 per cent of GDP, and we have tools like monetary and fiscal policy to stabilise the economy in face of shocks.  China doesn’t make us rich (or, actually, as underperforming as we are), we do.  And do we have any self-respect or not?

Weirdly, for someone who is part of the Free Speech Coalition, Trotter seems to suggest universities should be pretty hesistant about criticising China.

Prattling on about being the “critic and conscience” of society is all very well, but when New Zealand’s universities are so dependent on the continuing inflow of international students, is it really all that wise to antagonise one of the largest contributors to this country’s educational export trade? It would be interesting to see how the nation’s vice-chancellors would react if equivalents of Anne-Marie Brady started popping up on their own campuses. Each academic activist launching equally uncompromising attacks against the Peoples Republic. How would all that criticising and conscientising affect their bottom-line I wonder?

Well, indeed, and the absence of the vice-chancellors from yesterday’s statement (or any other) was notable, but Trotter’s point argues for managing our universities differently, in a way that reduces our short-term vulnerability to thugs, not just pushing deeper into the market, and becoming more afraid of our own shadow, indifferent to those actually being intimidated.

Then Trotter repeats one of Murray McCully’s old lines –  no more true for being repeated from the left.

New Zealand lives by its agricultural exports – which is why the New Zealand-China Free Trade Agreement was so important when the Global Financial Crisis struck. Without it, this country would have had significantly less to come and go on. Chinese consumers saved us from the sort of vicious austerity measures that afflicted the people of the United Kingdom and Greece. The nature of the Chinese system has not changed since 2008.

The economics is simply wrong (I’ve pointed out in previous posts the similarities between the path of our economy and that of the US over the last decade) and what about that last sentence? Most observers will say China has changed markedly, and for the worse, under Xi Jinping, and at very least that the hopeful trajectory many in the West envisaged certainly hasn’t come to pass.

Then Trotter has a go at Brady herself

The good professor is not, however, above advancing a little soft power on her own account. Is it no more than a coincidence that she has been called upon to present her ideas to the Australian parliament during the “China Panic”? Or that her academic articles and speeches are followed closely, and receive considerable approbation, in Washington DC? That the name of Anne-Marie Brady started appearing in our news media at exactly the same moment as the rivalry between the USA and China ratcheted-up several notches – was that nothing more than serendipity?

Might not her appearance before the Australian parliamentary committee have something to do with (a) her expertise, and (b) a bipartisan Australian commitment to taking PRC influence activities seriously?  And as I understand it, her name became prominent here after she released her Magic Weapons conference paper –  not intended for publication until a later book came out –  after the FT/Newsroom (hardly agents of Trump) published the astonishing story last year on Jian Yang’s background.

Trotter writes in praise of the crass Donald Trump approach to Saudi Arabia, reflected in the appalling statement last week.  In Trotter’s description – which he appears to endorse – if that involved “turning a blind eye to cold-blooded, state-sanctioned murder, then so be it”.   If the Prime Minister really wants to line up with Donald Trump’s approach to foreign policy, perhaps she could at least come out and say so.  But, as a reminder, evil as the Khashoggi murder was, he wasn’t a US citizen.  Anne-Marie Brady and many of the intimidated in the ethnic Chinese community are New Zealand citizens.

Trotter concludes urging that the Prime Minister should stay silent, and that in so doing she will “earn the respect of Beijing and Washington alike”.  More likely, both would despise her, if for slightly different reasons.  More importantly, it would be the sort of stance –  prioritising a few big businesses over the interests and values of New Zealanders –  that eats away at any residual respect people have for the political process and our “leaders”.   Far better the words from Scott Morrison’s recent speech (as aspiration, if not always observed)

I fear foreign policy these days is too often being assessed through a narrow transactional lens.   Taking an overly transactional approach to foreign policy and how we define our national interests sells us short.

If we allow such an approach to compromise our beliefs, we let ourselves down, and we stop speaking with an Australian voice.

We are more than the sum of our deals. We are better than that.

As a reminder of just how compromised our university hierarchies are I found this graphic on the Auckland University website.

au students

Not only is the dependency on foreign students rising, but the foreign student numbers are totally dominated by PRC students.    I’m usually very keen on free and open trade, but when you find yourself dealing with thugs, the sensible response (in almost any business or area of life) is to pull back and reduce your exposure to thugs, not to simply do the kowtow –  perhaps especially when you are a university, residue of some of greatest bits of the Western tradition.    We can’t allow our values, and the safety of our people, to be simply played around with to protect the interests of a few big (public and private) corporate businesses.   In Australia, a former Secretary of Foreign Affairs and Trade recently called for Australian universities to not act as if the revenue will always be there

“While demand remains high, it makes little sense for Australian universities to turn their back on the revenue stream offered by students from China and elsewhere,” he said. “But it would be wise to invest the profit margin for the longer term, not use it for current expenditure. Put it into a future fund or endowment, which would give universities a measure of resilience in the event that the market abruptly shifts for reasons beyond the control of universities.”

That would seem prudent here too, but of course it might force governments to look harder at the long-term financial structuring of our tertiary sector.

Finally, there was a story on some of these issues on Newsroom this morning, the key line in which is best captured in this tweet.

As Geremie Barme notes further (perhaps rather generously on the government’s intentions)

“China’s challenge to everybody in this region … is it requires governments are much smarter in dealing with a rising superpower that is aggressive, totalitarian, bullish and nasty in many ways, but also is varied and complex and interesting and engaging.”

Standing up to China, while still maintaining a working relationship, was difficult.

“It’s hard work and it’s constant work. This Government wants to do good but can’t quite manage to do so,” Barmé said.

“This is the real deal, and New Zealand’s never had to face this … You have to sit down and you have to work out, what is a consistent long-term policy, at least for the life of this Government. And how do you articulate that.

“And I get the sense they haven’t done that; Jacinda Ardern just runs for cover.”

She can’t even bring herself to talk, concernedly, about the astonishing situation in which a former PRC intelligence official, Chinese Communist Party member, sits in our Parliament –  close to the Embassy, never criticising the regime for anything –  having acknowledged that he misrepresented his past to get into the country in the first place.

I guess it suits the handful of big corporates and university bosses that she simply keeps quiet.  It should shame the rest of us.

Services exports and economic performance

Michael Reddell Exports, New Zealand economic performance

A couple of pieces I saw yesterday got me thinking again about New Zealand’s services exports and our economic performance.

On the one hand, there was an interesting ANZ report on tourism, which included this chart.

Chart of the week

Spending by international visitors has seen impressive growth in recent years.

International visitor spend by country

tourism

Source: MBIE

And then there was speech on the MFAT website by Catherine Graham, their Economic Divisional Manager.  MFAT doesn’t publish many speeches, so it was interesting to see a bit of an economics angle, even if  it was infected with the government of the day’s propaganda.  Perhaps that was inevitable to some degree in a speech by a public servant, but gratuitous endorsement of the Provincial Growth Fund didn’t seem strictly required in a speech notionally on “small state diplomacy”.

There was a certain breathlessness to the speech

All countries and regions face technological mega trends that are consequential to businesses and governments and affect decisions. Digitalisation, artificial intelligence and automation will increasingly affect wage and employment levels, in developing as well as developed countries. The key difference from the past is that the change – driven by computing power – will occur at an exponential, rather than linear, rate. 

Maybe, although the best guess remains that people who want to work will continue to be able to do so.  Markets adjust like that.  And global productivity growth shows no sign of such a dramatic transformation (for the better).

Also from the breathless side was this

Non-state actors such as the major e-commerce platforms (think Amazon and Alibaba) and the social media giants (think Facebook, Instagram and Google) are each on their own much bigger economically than New Zealand (and many other countries’ economies). How do we navigate our relationships with them as a nation state?

This seems mostly (a) meaningless or (b) wrong.  For example, on checking I learned that the market capitalisation of Facebook was US$390 billion, and its annual revenues were less than US$50 billion.  On no meaningful metric is it bigger than New Zealand, but even if it was there is a fundamental difference between a company and a nation state.  For better or worse, Facebook could be regulated out of existence almost overnight.

But the line that caught my eye, and prompted this post, was a couple of paragraphs later

Continuing to create and leverage smart ideas will be essential for New Zealand’s agricultural sector to keep delivering value to the economy and address broader societal and environmental challenges. Elsewhere in the economy, New Zealand’s success in weightless exports – such as software development, services embedded and embodied in physical products, and the creative arts – are growing apace. It is likely that this trend will be supported by ongoing technological advances.

You’d have thought that a senior economics person in our foreign affairs and trade ministry might have thought it worth mentioning that exports as a share of GDP peaked (in modern times) 18 years ago, or that there has been no growth in the real per capita output of the tradables sector in the same period.

But what about those “weightless exports” specifically?  Here is the time series of New Zealand’s services exports for the last 30 years.

services x nov 18

The 1990s looked quite good, indeed the peak wasn’t even until as late as 2003, but since then it has mostly been downhill.   There was a bit of a pick-up a couple of years ago, but even that doesn’t look to be going anywhere in particular.  The services export share of GDP is currently at a level first reached in 1996.  This is success?

That ANZ chart I started the post with looked quite impressive.  Nominal series over long periods of time often do.  But MBIE now has a nice tourism data dashboard (there is a migration data one coming), with some useful summary charts.  Here are a few of them

tourism mbie3

tourism MBIE 2

and, as a share of GDP –  direct and (estimated) indirect contributions

tourism MBIE 1

(UPDATE: A careful reader points out that these charts, which I directly downloaded from the dashboard, have not translated correctly.  Anyone wanting the correct pictures should go to dashboard itself (link above) and click on the “Overview” menu and then “Economic Contribution”.   As represented above the charts don’t capture the pick-up in tourism in the last couple of years.)

And tourism is by far the largest component of our “weightless exports”.    We all know there are specific services firms doing well, either selling abroad directly or (as Ms Graham notes) with their services embedded in other goods exports, and on the other hand we have the film industry (kept alive on massive direct public subsidies) and the export education industry (aided by substantial implicit subsidies, bundling immigration and work access provisions to the sale of educational services).  The bits that are doing very well, standing on their own feet, just have to be very small relative to the size of the economy, and to the scale of the New Zealand economic challenge (closing those huge productivity gaps).

How do we do by international comparison?

Here are exports of services as a share of GDP for the small OECD countries (I’ve left Ireland and Luxembourg off the chart, but –  for various reasons –  their services export shares are “off the charts” high).  Small countries is the relevant comparator here, as countries with large populations naturally tend to have rather lower foreign trade shares.

services x nov 18 2

Services exports from New Zealand have been shrinking as a share of GDP, and our services export share of GDP was low to start with.   This century to date, only three of these small OECD countries have had more of a fall in the services exports share of GDP than New Zealand has.   And all three of them –  Czech Republic, Slovakia and Estonia –  have in any case managed much faster productivity growth than New Zealand over that period.

Our economy isn’t doing well, no matter how much bureaucrats and politicians like to pretend otherwise, and regardless of whether one focuses on the “weightless” bit of the economy or the rest of it.  We do quite well at employing our people, but then wage rates and productivity are now so modest by advanced country standards –  gaps that simply aren’t closing –  that more people feel the need to work.

And strangely, it seems that MFAT’s Economic Divisional Manager has some inkling of this as she ends this particular part of her speech thus

I strongly believe that earth will never be “flat”, as Thomas Friedman claimed, and that geography remains, to a greater or lesser extent, destiny. Digitalisation is not causing the end of geography as a key determinant of prosperity. Industry clusters, international connections and trade, knowledge exchange and IP transfer are all positively correlated with geographical proximity as well as prosperity – in other words, they are much easier for large countries and countries with land borders to achieve. The catch-22 for small, isolated countries is that they are also the very conditions essential to overcoming the disadvantage of geographical distance. This is a huge challenge for New Zealand, both in terms of international policy but also domestically – currently we see the government tackling this challenge through regional policies such as the Provincial Growth Fund.  

Except that it isn’t some sort of “catch-22”.  It is a constraint that New Zealand officials and politicians need to finally get real about.   If – natural resource based opportunities aside – the best opportunities in the world arise from being in close proximity to lots of other people (as markets, skills networks or whatever), then trying to grow New Zealand’s population as a matter of policy –  lots more people in an unpropitious location –  looks crazy.  Many of the people who come would have been better off to have gone somewhere else (if they could).  And the challenge facing the typical longstanding citizen (native or otherwise) –  to manage top-tier global incomes and living standards – is simply made tougher with each new person our governments bring in.  That is not because of access to jobs (that is a straw man non-argument –  you observe full employment in poor, rich and middling countries) but precisely for the sorts of reasons that Ms Graham of MFAT identifies (even if she apparently has not thought fully through the implications of her observation).

Thoughts prompted by the open letter

Michael Reddell China, NZ politics

There was an open letter to the Prime Minister, cc’ed to the Deputy Prime Minister and Foreign Minister, released this morning and signed by 29 people (mostly academics), prompted by

….the reports of intimidation and harassment suffered by Professor Anne-Marie Brady of Canterbury University. According to news reports, she has been repeatedly burgled and her car tampered with, starting from December 2017. Reports have suggested that these events are related to her high-profile academic work on overseas influence campaigns by the government of the People’s Republic of China.

The letter calls for two things

…we echo the recent calls by Professors of Chinese history and literature Geremie Barmé and John Minford for the New Zealand authorities to take the threats against Professor Brady more seriously, in consideration of their implications for all New Zealanders.

(I ran the Barmé/Minford letter here last week.)

We also urge Prime Minister Jacinda Ardern to make a clear statement in defence of academic freedom in New Zealand in light of the Brady case, and to be very clear that any intimidation and threats aimed at silencing academic voices in this country will not be tolerated.

It should be hard for decent people to dissent from the broad thrust of the letter (which even appears to have briefly united ACT and the Green Party –  at least the bits out of office.)  One might quibble about the details –  for my own tastes it seems a bit too focused on “academic freedom” (which is mostly about the relations between universities and their staff), as distinct from the more general freedoms of New Zealand citizens and residents, including those of the ethnic Chinese community, whether or not they happen to be associated with a specific government tertiary institution –  but the thrust of the case really shouldn’t have needed saying, and yet apparently did need to be said.

But I found two things about the statement interesting.  First, who did and didn’t sign.  And, second, the (reported) reaction of the Prime Minister.

By my count, 21 New Zealand-based academics signed (plus a couple of PhD students, and one New Zealander working at a US university).  Of those 21, only one appears to specialise in international relations, and none appear to be specialists in matters to do with China (politics, society, economics, international relations or whatever).

One of the signatories was (former academic and now) consultant Paul Buchanan.  In  an exchange of comments here on Saturday, and in reference to this letter he noted

It appears many academics are reluctant to sign on because a) they fear retribution of one sort or another (say, loss of funding); and b) they personally dislike Ms. Brady and/or claim that her research is flawed etc. The fact that people cannot separate personal animus and/or concern about funding from a defence against criminal harassment is telling. As for her research, her “Magic Weapons” essay is an example of applied research and was not meant to be a theoretical or conceptual path-breaker, so sniping about its quality is pedantic.

Perhaps some of our media might like to ask, for example, those involved in the Contemporary China Research Centre about why not one of them signed this statement (or, so far as I’ve seen, have issued their own statements supporting Professor Brady).   As a reminder

The New Zealand Contemporary China Research Centre is New Zealand’s national research centre on China. We are based at Victoria University of Wellington with New Zealand’s other seven universities all being University Members of the Centre, University of Auckland, Auckland University of Technology, the University of Canterbury, the University of Otago, the University of Waikato, Lincoln University and Massey University, and with each University providing a Deputy Director.

Here is a list of the senior people at CCRC, including the Executive Chairman, Tony Browne (who also happens to chair Victoria’s Confucius Institute, and to sit on the board that advises the PRC government agency on the Confucius programme worldwide).   As the excerpt says, there is a director and then deputy directors in each university, and there are research/senior fellows.

But then here is the Advisory Board to the CCRC.   It includes representatives of MFAT, NZTE, MBIE, and Treasury, as well as the Director of the Asia New Zealand Foundation, the chair of Education New Zealand and the former chair of the New Zealand China Trade Foundation.

The CCRC helps run courses for MFAT.  And it hosts various visiting delegations from PRC government agencies.  Just next week, it is hosting a conference on next year’s Year of Chinese Tourism which event, no doubt, the PRC Embassy smiles benignly on.

Wouldn’t do then for anyone to speak up or speak out.  I don’t suppose there was anything quite as crass as a directive to all to keep quiet, but all those involved surely know which side their bread is buttered on (perhaps they wouldn’t have got appointed if not).  Much as I care about the intimidation and threats to Professor Brady, if there is a narrow issue of academic freedom, it is probably more about the utter silence of the rest of the China-focused New Zealand academic community.  It was perhaps also telling that no university vice-chancellors signed the open letter.  Perhaps they are all sympathetic –  and there have been no reports of Canterbury trying to close Professor Brady down –  but they have enrolments to sell, and the PRC is a big and threatening market.    But, again, perhaps some journalist could ask them about their attitude to attempts to intimidate a prominent New Zealand academic?

I guess the Prime Minister will probably get some direct questions on this issue at her post-Cabinet press conference, or in her weekly media rounds tomorrow, but I was interested in her initial response, as Radio New Zealand reported it.    It was terse and largely empty, apparently attempting to avoid the issue, with brief comments along the line that she “supports” and “defends” academic freedom, but that she couldn’t say anything more substantive until the Police investigation had concluded. She couldn’t even manage –  wasn’t willing to –  make a statement that was (in the words of the signatories)

“very clear that any intimidation and threats aimed at silencing academic voices [or others] in this country will not be tolerated.”

And, again as Radio New Zealand reported it, Professor Brady understands that the Police investigation has already concluded, and the question now is whether the government will show any backbone.     Whose values is the Prime Minister actually sticking up for?

Of course, if anything the Leader of the Opposition, interviewed on Radio New Zealand a few minutes later, was worse.  He managed some quick passing comments vaguely in support of the letter –  I guess he could hardly say he opposed “academic freedom” –  before moving on to run his own (in effect) defence-of-Beijing line.    Rather rashly he declared the US and China to be in a “virtual war”, was more or less defending Huawei (there was “no smoking gun” –  it might be a bit late when there is, surely?), and criticising the government for being a little hesitant about the Belt and Road Initiative (recall that Bridges was the minister who signed us up for a “fusion of civilisations”) and for upsetting China by buying the P8s and stating a few honest words –  never echoed by the PM –  in a defence policy statement.

“We’ve got a situation of inflamed language, particularly from the Foreign Minister whether it’s been on defence strategy, whether it’s been Belt and Road. These things will be of concern to the Chinese and they will be sending a [subtle] signal.”

As if he belonged to the youth wing of the Labour Party, he was reciting lightweight lines about how “we shouldn’t take sides”.   Not in opposing evil?  Not in resisting aggression?   That wasn’t New Zealand’s historical approach –  National or Labour. Then again, his stance seems to be avoiding even taking New Zealand’s own side, given the continued presence of Jian Yang in his caucus, and Yikun Zhang in arranging large donations for his party.

To return, finally for now, to the Prime Minister, TVNZ ran a story/article on Friday night about the decision – no doubt from Beijing –  to deny the Prime Minister a trip to Beijing this year.   With the website version there was a little video clip from the opening moments of her meeting with Chinese premier Li Keqiang in Singapore a couple of weeks ago.  I very rarely listen to such clips, but for some reason did this time.   The clip captures the Prime Minister opening the meeting stating that she was encouraged by “the significant common ground between your vision for China and the policies of my government”.  She went on to observe that “just as you are focused on a balanced development model and the wellbeing of the Chinese government, my government is focused on sustainable economic development and a fair society”.

It is, frankly, sickening and shameful.  Our Prime Minister, elected leader of a free, open and democratic society, governed by the rule of law etc suggests that there is “significant common ground” between her government’s policies and those of one of the most brutal un-free regimes on the planet, that has spent at least the last six years going backwards not forwards on the sorts of values and practices that most New Zealanders cherish,

Sure, Prime Ministers and like need to mutter pleasantries at the start of meetings, but surely “did you travel well, and get a good sleep?” beats this sort of stuff?    And why is she giving recognition and apparent approbation to the desire of the Chinese Communist Party to extend its brutal rule (“the wellbeing of the Chinese government”).

Is there any decent moral core there at all?  No wonder she hasn’t managed a robust defence of free and open debate, of the sort the academic signatories called for.

(I’d been going to write a bit about former NSW premier, former Australian foreign minster, current head of a somewhat Beijing-sympathising think-tank, Bob Carr’s interview on China-related issues on TVNZ’s Q&A last night.   There were plenty of bits to disagree with, but actually compared to either Simon Bridges or Jacinda Ardern he came across as fluent and somewhat reasonable.  Perhaps it helps being out of office, but he was willing to welcome Mike Pence’s efforts to highlight China’s human rights abuses, and was explicit that he would not have signed Australia up to the Belt and Road Initiative.    By his standards, New Zealand’s “leaders” seem very far gone.)

Central bank minutes released: a small victory for transparency

Michael Reddell OIA, Reserve Bank, Transparency

Regular readers will recall that the Reserve Bank has long been deeply resistant to releasing any information relating to OCR decisions or Monetary Policy Statements, other than what they themselves chose to release, whether in the published documents or in subsequent interviews.  That has never been very satisfactory, but the Bank has attempted to carve out for itself a special place, more or less above the provisions of the Official Information Act.

One of the things they’ve consistently refused to release is minutes of the Governing Committee, the body set up by the previous Governor, in which the Governor takes his final OCR decision (and other major decisions, including ones around LVRs).  They had long taken the same stance to the minutes of the predecessor Official Cash Rate Advisory Group, even when the requests related to decisions some time in the past. Often enough, it seemed that there were no written minutes at all (which was probably in breach of the Public Records Act).

I had largely given up on making any progress on this issue (and, anyway, the new statutory Monetary Policy Committee, which will have its own charter on such matters, is coming next year). But for some reason, which I now forget, I had lodged one more request six months ago seeking

1. the minutes of any meetings of the Governing Committee relating to the May MPS,
including minutes of the meeting where the OCR decision was taken;

When the Bank refused to release anything (not even date of meeting, list of attendees, headings –  even if all the substantive content was redacted) I complained to the Ombudsman, noting that (among other things) the Bank quite often released minutes of Board meetings (even with some content withheld).

The Bank regularly releases minutes of the meetings of its own Board (in response to OIA requests), with individual deletions as appropriate.  It seems inconceivable, for example, that the date, time, place of the meeting, the list of attendees, the confirmation of past minutes, and the final decisions of any meetings (themselves reflected in a later published document) could pass a “free and frank”: withholding test, even if (again) it is plausible that if there is any substantial account of the nature of contentious discussion at the meeting that specific element of the material might.

And then I forgot all about the request until a short time ago when an email from the Reserve Bank turned up.

We refer to your complaint to the Office of the Ombudsman (ref: 480453) relating to your request for: “minutes of any meetings of the Governing Committee relating to the May MPS, including minutes of the meeting where the OCR decision was taken.”

The Reserve Bank has reconsidered its initial position and is now releasing with redactions, a copy of the only document within the scope of your request – the Governing Committee minutes in May. The document is attached to this correspondence.

And it has only take six months, which is progress.  Credit to the Ombudsman.

For anyone interested, the minutes themselves are here

Governing Cttee minutes May 2018 OCR

One day perhaps we might even have released –  with a suitable lag – the background papers the Governor (and his new MPC) receive, and upon which they base their decision

I’m not sure there is any new information in the particular minutes released, but having released Governing Committee minutes in this form –  against a request made almost immediately after the relevant OCR decision was released – a small but helpful precedent has been established.   Some material is still withheld on the highly questionable ground of avoiding damage to the substantial economic interests of New Zealand.  One day, the Ombudsman is going to have to provide some substantive guidance on that provision, but for now both he and the Bank seem keen to avoid the Ombudsman having to draw the appropriate line between national economic interests and those of a particular public agency.

 

 

LVR restrictions: towards the FSR

Michael Reddell Financial stabilty, Housing

The Reserve Bank’s latest Financial Stability Report is due out on Wednesday.  Perhaps we will see some further articulation of the Governor’s strange vision of the Bank as a tree god, but I guess the main interest will be in what, if anything, the Governor does with the loan to value controls rushed into place, and then frequently amended, by his predecessor a few years ago.  It is as well to recall that although legislation is going through Parliament at present that will, at least on paper, modestly weaken the Governor’s personal power over monetary policy, in respect of banking regulation his statutory powers remain untrammelled, and unchannelled.  There are few legal constraints on what he  –  an unelected official whose appointment was controlled by unelected and unaccountable academics and company directors –  can do.

Market economists are, understandably enough, focused on the narrow question of whether there will be any changes to the rules announced this week. You can read a summary of their views here.   I remain less interested in that (forecasting) issue than in the cases for and against having such controls in the first place.   They are a new thing: we never had some legal restrictions in the bad old days of a heavily regulated financial system prior to 1984.  But, like weeds or wilding pines, once regulatory controls get in place people come to treat them as normal, the only debate tends to occur around the edges, and it takes huge effort to do something serious about fixing the problem.  Years ago, when the LVR restrictions were first introduced, we were assured they would be temporary (I was still inside the Bank at the time, and as far as I could see senior people genuinely believed it) but now the very idea that willing lenders and willing borrowers should be free to contract on mutually agreeable terms seems to be becoming lost.

The Herald’s economics columnist Brian Fallow used his column last Friday to argue to “Keep the brakes on houses”.  I can’t see the column on line, but the gist of his article is that house prices are high and household debt is high and that unless that combination changes the Reserve Bank shouldn’t think of lifting the LVR controls.  It doesn’t matter that stress tests repeatedly show that banks can cope with big falls in house prices and even big rises in the unemployment rate.  It doesn’t matter that our banks came through the last serious recession –  when household debt to GDP was about as high as it is now –  unscathed. It doesn’t matter that high house and land prices are mostly a phenomenon of the artificial scarcity created by land use restrictions (with high construction costs into the mix).  It doesn’t even seem to matter than there is no evidence that the LVR controls have made banks safer (banks with fewer individual risky loans also need to hold less capital) or the economy more stable.  It doesn’t seem to matter that the LVR controls have acted to favour established (cashed-up) buyers over new entrants to the housing market.  No, even though there is no threat to financial stability, and everyone recognises that LVR limits impede the efficient functioning of financial markets  (and those are the only two criteria the law allows the Bank to act under), the call is simply to leave the controls in place.

It was a bit like people in earlier decades who opposed removing import licenses or exchange controls because of the “foreign exchange constraint” (imports might increase if we took the controls off): papering over symptoms rather than tackling causes is rarely a sensible approach to policy.  Sadly, this government, like its predecessor, seems to be doing almost nothing to fix the underlying problem (and when I heard the UDA announcement over the weekend cited as something that had “worked well” in the UK and Australia one was reminded a new of just how obscene house prices in the UK and Australia remain).  But if the government isn’t doing anything serious, they will no doubt be grateful for the cover the Reserve Bank provides, claiming that somehow it is “doing its bit”, when it has no responsibility (there is “our bit”) for the fundamental problem.

But, of course, with no evidence whatever, the Governor is convinced that he knows best, the banks and markets are too “short-sighted” and so no doubt the controls will remain.  If the Governor is really so convinced he should at least really go to the effort of persuading the Minister of Finance to agree to extend the restrictions to other non-bank lenders.  The LVR controls only apply to banks because they are the only lenders the Reserve Bank Governor himself can order round in this way –  restrictions on other non-bank deposit-takers require the agreement of the Minister of Finance.  We have been fortunate in the last few years that there has been less disintermediation of mortgage business to non-bank lenders than most (including Reserve Bank staff doing the evaluation) had expected.   But if we learned anything from the decades of heavy controls prior to 1984, over time risk-taking will gravitate to institutions where it can occur.  Putting in place a competitively-neutral regulatory framework (treating banks and non-banks similarly) was a huge step forward in the 1980s, and it is unfortunate that the Reserve Bank now treats the same risks differently depending on whether an institution wears a “bank” or “non-bank” label.

At the press conference a few weeks ago for the Monetary Policy Statement, the Governor and his deputy (once a fairly market-oriented economist) indicated that in the forthcoming Financial Stability Review the Bank was planning to outline a more disciplined framework or road-map for assessing when, and whether, adjustments should be made to the LVR controls.  In principle, that sounds sensible and welcome. In principle, it should involve the Bank setting out some markers against which they can be held to account when the next decisions/reviews come round.  Whether it is so in practice only time will tell, but I was disconcerted when I heard them talking of this new framework as something similar to what they have for OCR decisions.

While we have a Reserve Bank there have to be regular monetary policy decisions.  That isn’t so for LVR restrictions, and it would be unfortunate if the initiative the Bank has foreshadowed was also about entrenching LVR controls as a permanent feature of New Zealand’s financial system.  Capital and liquidity requirements, backed by regular and robust stress tests, should remain the heart of our banking regulatory framework, rather than having bureaucrats reach into private businesses –  well-run over decades –  and tell them who they can and can’t lend to, or who they can and can’t employ.  But bureaucrats have incentives to build up their bureau and are typically reluctant to give up powers they’ve once got their hands on.  They are just human, and in their shoes you and I might face similar temptations.  We need banking regulation and supervision –  mostly, in my view, because politicians will bail out large banks in crises and everyone knowing that efforts need to be made to limit the risks –  but its appropriate place is distinctly limited, accountable, and kept in fully in check.   Instead, those paid to hold the Bank to account –  ministers, the Board, FEC –  mostly just accommodate the regulators, at times even egging them on.

On a totally different matter, for anyone interested in a some snippets of New Zealand economic history, you might want to try the latest Newsroom/Radio New Zealand Two Cents’ Worth podcast, which was built around the odd coincidence that –  if you look at the data a bit loosely and from the right angle – for several decades in a row, years ending in 8 had also seen a New Zealand recession.  I did an interview with Bernard Hickey for the podcast, in which he had me run quickly through aspects of the New Zealand economy in each “8” year since 1918.   As I noted to Bernard, there is now a rather large hole in the market for a up-to-date economic history of New Zealand (the last full one appeared in about 1985 and much has been done, much has happened, since then).  Brian Easton’s long-awaited history of New Zealand from an economics perspective – his framing –  is still awaited.