The China Council plumbing the depths

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?

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.