Day: December 4, 2018

Promoting constructive vigilance

Michael Reddell China, NZ politics, Uncategorized

That was the sub-title to the substantial (200 pages or so) new report released last week by the Hoover Institution at Stanford University on Chinese (PRC) influence activities in the United States (but with eight case studies on the situation in other countries, including one on New Zealand which draws largely on the work of Anne-Marie Brady).

The report is the product of a working group of 33 academics, think-tankers, and journalists specialising in PRC-related issues.  Around half those involved are academics.  Of the 33, 10 are ‘international associates’ –  again, about half academics –  bringing perspectives to bear on PRC activities in other countries, including three Australians and Anne-Marie Brady.

I read the report over the weekend.  I’m not sure there is a great deal new in it, but it is easy to read, and extensively documented, and the accumulation of material helps build the picture.     And even on New Zealand, there are striking lines from the Magic Weapons paper that one forgets

The Chinese government considers New Zealand an “exemplar of how it would like its relations to be with other states.” One unnamed Chinese diplomat even characterized relations between the two countries as similar to China’s close ties with totalitarian Albania in the early 1960s.

Or bits I’d never noticed previously

Individuals with strong ties to United Front organizations have donated several million dollars, primarily to the National Party. One such individual, who donated $112,000 to the National Party in 2017, is listed as an officer of no fewer than seven United Front organizations.

Then again, it was Labour bestowing the QSM on Yikun Zhang.

But the focus of the report is on the United States.  In many areas one is struck by the similarity of the story to the work done on these issues for New Zealand.

The Chinese Communist party-state leverages a broad range of party, state, and non-state actors to advance its influence-seeking objectives, and in recent years it has significantly accelerated both its investment and the intensity of these efforts. While many of the activities described in this report are state-directed, there is no single institution in China’s party-state that is wholly responsible…..   Because of the pervasiveness of the party-state, many nominally independent actors— including Chinese civil society, academia, corporations, and even religious institutions— are also ultimately beholden to the government and are frequently pressured into service to advance state interests.

or

China’s influence activities have moved beyond their traditional United Front focus on diaspora communities to target a far broader range of sectors in Western societies, ranging from think tanks, universities, and media to state, local, and national government institutions. China seeks to promote views sympathetic to the Chinese Government, policies, society, and culture; suppress alternative views; and co-opt key American players to support China’s foreign policy goals and economic interests.

or (more remarkably in the much larger US market)

In the American media, China has all but eliminated the plethora of independent Chinese-language media outlets that once served Chinese American communities. It has co-opted existing Chinese-language outlets and established its own new outlets.

The report builds to a set of policy principles and recommendations.  They group the principles and recommendations under three headings: Transparency, Integrity, and Reciprocity.   Under the first two headings, most of what they suggest seems (a) sensible, and (b) relevant to other countries where these issues arise, including New Zealand.

Here are the Transparency principles (there are more detailed recommendations below many of these).

Transparency is a fundamental tenet and asset of democracy, and the best protection against the manipulation of American entities by outside actors.

• American NGOs should play an important role in investigating and monitoring illicit activities by China and other foreign actors. They should as well seek to inform themselves about the full range of Chinese influence activities and the distinctions between legitimate and illegitimate influence efforts.

• Congress should perform its constitutional role by continuing to investigate, report on, and recommend appropriate action concerning Chinese influence activities in the United States. It should update relevant laws and regulations regarding foreign influence, and adopt new ones, to strengthen transparency in foreign efforts to exert influence.

• Executive branch agencies should similarly investigate and publicize, when appropriate, findings concerning these activities, with a view to promoting healthy and responsible vigilance among American governmental and nongovernmental actors.

• The US media should undertake careful, fact-based investigative reporting of Chinese influence activities, and it should enhance its knowledge base for undertaking responsible reporting.

• Faculty governance is the key to preserving academic freedom in American universities. All gifts, grants, endowments, and cooperative programs, including Confucius Institutes, should be subjected to the usual procedures of faculty oversight.

• US governmental and nongovernmental sectors should disclose financial and other relationships that may be subject to foreign influence.

And yet, to reflect on this list of items is to realise how much more serious the issue is here.   There are few relevant NGOs, the media is struggling and thinly-resourced, and instead of Parliament taking any sort of lead we have the former PLA intelligence official sitting in Parliament, not apparently bothering either National or Labour, and Raymond Huo –  with various United Front connections, and openly championing PRC perspectives –  chairs our Parliament’s Justice committee, dealing with electoral law.    The Opposition leader is soliciting large donations through people with close connections to Beijing, and Jian Yang is reputed to be the biggest National Party fundraiser.  (Again, in this regard US campaign finance laws, including disclosure provisions, are well ahead of our own.) The National Party’s president praises the Beijing regime and its leader, and if Labour’s president hasn’t been heard from for a while, he has form in that area too.   Our system is already corrupted, whereas (from the report) on this particular dimension the threat to the US system is still nascent.

As for the executive (political and official), they remain keen to say quite as little as possible – on any dimension of the issue (donations, cyber-security, Chinese language media, threats –  whether to Professor Brady or people in the ethnic Chinese community), and direct money to propaganda outfits like the New Zealand China Council to help keep the populace in line.  Winston Peters this morning refused to even accept an interviewer’s description of the PRC as becoming “increasingly authoritarian” (although, as he implied, there has not been a time since 1949 when it been anything other than highly authoritarian and repressive).

What of disclosure?  I linked the other day to a comment from consultant and former academic Paul Buchanan about PRC funding of parts of our universities.  If true, these contributions (and those of any other foreign government) should be fully and routinely disclosed.   And what about travel?   In the flurry of stories about Yikun Zhang it emerged that the Mayor of Southland had been travelling to the PRC, working closely with (and travelling at the expense of) Beijing-affiliated Zhang.   I was struck reading the Hoover report by the observation that US members of Congress can’t accept gifts of travel, and the same day I read that a reader sent me a link to a story about Clutha Southland National MP Hamish Walker (and other local body officials) on (PRC) paid trips to China.   Shouldn’t any such (paid for) trips simply be prohibited?  I’m sure MPs do their jobs better for some travel, but either they personally or the New Zealand taxpayer should be paying.  Not vested interests –  corporate or other governments.

What about integrity?  These were the high-level principles

Foreign funding can undermine the independence of American institutions, and various types of coercive and covert activities by China (and other countries) directly contradict core democratic values and freedoms, which must be protected by institutional vigilance and effective governance.

• Openness and freedom are fundamental elements of American democracy and intrinsic strengths of the United States and its way of life. These values must be protected against corrosive actions by China and other countries.

• Various institutions—but notably universities and think tanks—need to enhance sharing and pooling of information concerning Chinese activities, and they should promote more closely coordinated collective action to counter China’s inappropriate activities and pressures. This report recommends that American institutions within each of the above two sectors (and possibly others) formulate and agree to a “Code of Conduct” to guide their exchanges with Chinese counterparts.

• When they believe that efforts to exert influence have violated US laws or the rights of American citizens and foreign residents in the United States, US institutions should refer such activities to the appropriate law enforcement authorities.

• Rigorous efforts should be undertaken to inform the Chinese American community about potentially inappropriate activities carried out by China. At the same time, utmost efforts must be taken to protect the rights of the Chinese American community, as well as protecting the rights of Chinese citizens living or studying in the United States.

• Consideration should be given to establishing a federal government office that American state and local governments and nongovernmental institutions could approach—on a strictly voluntary basis—for advice on how best to manage Chinese requests for engagement and partnership. This office could also provide confidential background on the affiliations of Chinese individuals and organizations to party and state institutions.

That last suggestion seemed like one that should be considered here, as local government figures seem all to keen on accepting PRC approaches for relationships, oblivious to (or unconcerned by) the wider political context.  I’m not sure what Yikun Zhang’s interest in the Mayor of Southland specifically is, but I’m pretty sure it isn’t just that they got on well over a beer.  As the  report notes

….it is important for local officials to understand that local American “exchange” companies that bring Chinese delegations to the United States and promote professional interactions between the United States and China all depend on official PRC sanction and have received approval to receive Chinese delegations. The business model of such companies is, of necessity, as much political as financial. Even if they conduct high-quality programs, they should not be viewed as disinterested actors. They, too, are subject to rules made by the Chinese Communist Party, its united front bureaucracy, and united front strategic imperatives.

Where I was a bit more sceptical –  and where there seems to be some ongoing debate –  was around the idea of Reciprocity.    As academics, think-tankers and journalists, they are  –  as group – frustrated over how difficult it is for many to get visa access to the PRC, research in the PRC, use PRC government archives etc.  They contrast this to the fairly open access PRC researchers and employees of PRC media outlets have in the United States, and propose that the US should tighten up to try to gain greater access for outside researchers and journalists to China.  One can understand their grievance, but are these people really suggesting that open societies (the US or places like New Zealand) should adopt a PRC approach to things?    When it comes to foreign trade, “retaliatory” tariffs mostly end up hurting consumers in the country imposing them. Perhaps things are different when it comes to idea, research etc, but surely one of the great strengths – not vulnerabilities –  of our sort of system is our openness?

Early in the report I was struck by the observation that the working group did not “generally oppose” Confucius Institutes  (three in New Zealand, very many in the US –  although some have since been closed by the host universities).  But as I read on I found the specific recommendations

Confucius Institutes We do not endorse calls for Confucius Institutes to be closed, as long as several conditions are met.

US institutions should make their CI agreements public to facilitate oversight by members of the university community and other concerned parties. Those agreements, in turn, must grant full managerial authority to the host institution (not on a shared basis with the Hanban), so the university has full control over what a CI teaches, the activities it undertakes, the research grants it makes, and whom it employs. The clause in all Hanban contracts that CIs must operate “according to China’s laws” must be deleted.   If these standards cannot be attained, then the CI agreements should be terminated.

Furthermore, universities should prevent any intervention by CIs in curricular requirements and course content in their overall Chinese studies curricula or other areas of study by maintaining a clear administrative separation between academic centers and departments on the one hand, and CIs on the other. Finally, universities must ensure that all public programming offered by their CIs conform to academic standards of balance and diversity and do not cross the line to become a platform for PRC propaganda, or even a circumscribed view of a controversial issue. In fact, this report would suggest that universities not permit Confucius Institutes to become involved in public programming that goes beyond the CI core mission of education about Chinese language and culture. To go beyond these two categories invites opportunities for politicized propaganda.

As I understand it, few of those tests would be met in respect of the New Zealand Confucius Institutes (the one that is, as I understand it, is that the Confucius Institutes are not involved in the host university’s own courses or curriculum).   And, in addition, there is the unstated dimension as to whether our governments and universities should be facilitating the presence of PRC-appointed and paid staff in our schools –  the PRC being one of the most heinous regimes on the planet (as well as ruling a relatively poor country, which means we allow the taxes of poor foreigners to help pay for the education of our kids.)  If the PRC wants to subsidise Chinese-language learning then good luck to them, but let them set up downtown and market for clients in the way other countries’ language-teaching operations (Alliance Francaise, Goethe Institute) do.

Reprising a theme in my post on Saturday, there was this line about the compromised nature of universities.

The message from China to US universities is clear: Do not transgress the political no-go zones of the Chinese Communist Party or government, or you will pay a price. Sometimes the pressure is overt; other times it is more subtle and indirect, but no less alarming. Some American faculty members report troubling conversations with university administrators who continue to view Chinese students as such a lucrative revenue stream that it should not be endangered by “needlessly irritating Chinese authorities.”

There is lots more in the report, which is well-worth reading if you have the time.

Perhaps my bottom-line unease about the report was a bit of a reluctance to call a spade a spade.    For example, at least amid the discussion of the difficulties foreign academics and journalists face in the PRC, there was either a touching naivete, or a wilful refusal to face the fact, that the PRC is not a normal country, that just needs a few nudges to bring their attitudes and behaviours into line.   Why would one expect the PRC to behave differently, given the nature of the regime?   Obviously, all those involved know much about the true situation, but there was an apparent reluctance to say out loud that the party/State is  –  and for decades has been –  a malevolent force, at home, abroad, and increasingly in other countries.  Look at the tens of millions killed under the depraved indifference of the Party, the masss incarcerations, the forced organ transplant, at the near-total absence of freedom of speech, freedom of religion, the rule of law, or at the decades of the one-child policy. Look at the huge scale industrial espionage.  Look at the militarisation of the South China Sea, the constant threats to free and democratic Taiwan, or all the influence activities the report documents in the US and other countries, including attempting to subvert ethnic Chinese abroad and pressure them –  whatever there citizenship –  to advance PRC ends.  I know some people regard comparisons between the PRC and late-1930s Germany as overstated or unhelpful.  But such parallels seem increasingly valid –  not as prophecy, but as description –  and helpful in prompting those –  some perhaps individuallly decent people –  who just go along, to stop and think about the nature of the evil they accommodate or abet.  New Zealand politicians, of both stripes, as an example.

We have to be more than sum of our deals, more than the flow of political donations.

People might (as I do) distrust Trump on these issues for his typical inconstancy.  The difference here is that there is a constancy, but one that seems determined to, in effect, serve PRC interests, not the interests of New Zealanders, or the values that underpin our society (perhaps those involved try to tell themselves the two interests are much the same?).   That is why I still regard the “choose between China and the US” line as a false one.  Our governments could choose to go along with much of whatever (limited amount) the US is doing in foreign policy (or not), and still have abandoned any sense of integrity around our own system.  Personally, much as I welcomed the decision to buy the P-8 aircraft earlier in the year, I’d be more persuaded by our “leaders” if they had

  • combined to get Jian Yang and Raymond Huo out of Parliament,
  • defunded the China Council,
  • amended electoral laws to stop Phil Goff funding his mayoral campaign with anonymous mainland donations and to force comprehensive disclosure (at the level of the ultimate human donors) of all significant political donations,
  • done something to manage the exposure of the universities and the way in which that exposure risks compromising effective freedom to speak,
  • agreed together to stop issuing statements of praise for the PRC and Xi Jinping, and
  • foreswore accepting donations from anyone with significant United Front connections.

As a start.

Without steps like that, we could end up banning Huawei,  buying P-8s, being in the good graces of the US and Australia, and it just wouldn’t matter much. We’d still have severely compromised the integrity of our political system and our own longer-term interests.

 

What?

Michael Reddell Adrian Orr, Financial stabilty

In the press release for last week’s Reserve Bank Financial Stability Report, the Governor commented that

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.

In commenting briefly on that, I observed

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.

There wasn’t much more in the body of the document (and, as I gather it, there wasn’t anything much at the FEC hearing later in the day), so I was happy to wait and see the consultative document.

But the Governor apparently wasn’t.  At 12.25pm on Friday a “speech advisory” turned up telling

The Reserve Bank will release an excerpt from an address by Governor Adrian Orr on the importance of bank capital for New Zealand society.

It was to be released at 2 pm.   The decision to release this material must have been a rushed and last minute one –  not only was the formal advisory last minute, but there had been no suggestion of such a speech when the FSR was released a couple of days previously.

And, perhaps most importantly, what they did release was a pretty shoddy effort.    We still haven’t had a proper speech text from the Governor on either of his main areas of responsibility (monetary policy or financial regulation/supervision) but we do now have 700 words of unsubstantiated (without analysis or evidence) jottings on a very important forthcoming policy issue. which could have really big financial implications for some of the largest businesses in New Zealand and possibly for the economy as a whole.

The broad framework probably isn’t too objectionable.  All else equal, higher capital requirements on banks will reduce the probability of bank failures, and so it probably makes sense to think about the appropriate capital requirements relative to some norm about how (in)frequently one might be willing to see the banking system run into problems in which creditors (as distinct from shareholders) lose money.  At the extreme, require banks to lend only from equity and no deposit or bondholder will ever lose money (there won’t be any).

But what is also relevant is the tendency of politicians to bail out banks.  Not only does the possibility of them doing so create incentives for bank shareholders to run more risks than otherwise (since creditors won’t penalise higher risk to the same extent as otherwise), but there is a potential for –  at times quite large –  fiscal transfers when the failures happen.  Politicians have more of an incentive to impose high capital requirements on banks when they acknowledge their own tendencies to bail out those banks.  If, by contrast, they could resist those temptations –  or even manage them, in say a model with retail deposit insurance, but wholesale creditors left to their own devices –  it would also be more realistic to leave the question of capital structure to the market –  in just the same way that the capital structure of most other types of companies is a mattter for the market (shareholders interacting with lenders, customers, ratings agencies and so on).

But nothing like this appears in the Governor’s jottings.  Instead, we have the evil banks, the put-upon public and the courageous Reserve Bank fighting our corner.   I’d like to think the Governor’s analysis is more sophisticated than that, and one can’t say everything in 700 words, but…..it was his choice, entirely his, to give us 700 words of jottings and no supporting analysis, no testing and challenging of his assumptions etc.

There are all manner of weak claims.  For example

We know one thing for sure, the public’s risk tolerance will be less than bank owners’ risk tolerance. 

I think the point he is trying to make is about systemic banking crises –  when large chunks of the entire banking system run into trouble.  There is an arguable case –  but only arguable –  for his claim in that situation, but (a) it isn’t the case he makes, and (b) I really hope that (say) the shareholders of TSB or Heartland Bank have a lower risk tolerance around their business than I do, because I just don’t care much at all if they fail (or succeed).  Their failures  –  should such events occur –  should be, almost entirely, a matter for their shareholders and their creditors, with little or no wider public perspective.

There are other odd arguments

Banks also hold more capital than their regulatory minimums, to achieve a credit rating to do business. The ratings agencies are fallible however, given they operate with as much ‘art’ as ‘science’.

Bank failures also happen more often and can be more devastating than bank owners – and credit ratings agencies – tend to remember.

And central banks and regulators don’t operate “with as much ‘art’ as ‘science'”?   Yeah right.   And the second argument conflates too quite separate points.  Some bank failures may be “devastating” –  although not all by any means (remember Barings) –  but the impact of a bank failure isn’t an issue for ratings agencies, the probability of failure is.   And I do hope that when he gets beyond jottings the Governor will address the experience of countries like New Zealand, Australia, and Canada where –  over more than a century –  the experience of (major) bank failure is almost non-existent.

The Governor tries to explain why public and private interests can diverge (emphasis added)

First, there is cost associated with holding capital, being what the capital could earn if it was invested elsewhere. Second, bank owners can earn a greater return on their investment by using less of their own money and borrowing more – leverage. And, the most a bank owner can lose is their capital. The wider public loses a lot more (see Figure 2).

But what is Figure 2?

figure 2

Which probably looks –  as it is intended to –  a little scary, but actually (a) I was impressed by how small many of these numbers are (bearing in mind that financial crises don’t come round every year), and (b) more importantly, as the Governor surely knows, fiscal costs are not social costs.  Fiscal costs are just transfers –  mostly from one lots of citizens (public as a whole) to others.  I’m not defending bank bailouts, but they don’t make a country poorer, all they do is have the losses (which have arisen anyway) redistributed around the citizenry.  If the Governor is going to make a serious case, he needs to tackle –  seriously and analytically –  the alleged social costs of bank failures and systemic financial crises.  So far there is no sign he has done so.  But we await the consultative document.

There is a suggestion something more substantive is coming

We have been reassessing the capital level in the banking sector that minimises the cost to society of a bank failure, while ensuring the banking system remains profitable.

The stylised diagram in Figure 3 highlights where we have got to. Our assessment is that we can improve the soundness of the New Zealand banking system with additional capital with no trade-off to efficiency.

and this is Figure 3

capital chart

It is a stylised chart to be sure, but people choose their stylisation to make their rhetorical point, and in this one the Governor is trying to suggest that we can be big gains (much greater financial stability, and higher levels (discounted present values presumably) of output) by increasing capital requirements on banks.

I don’t doubt that the Bank can construct and calibrate a model that produces such results.  One can construct and calibrate models to produce almost any result the commissioning official wants.  The test will be one of how robust and plausible the particular specifications are.  We don’t know, because the Governor is sounding off but not (yet) showing us the analysis.  Frankly, I find the implied claim quite implausible.   Probably higher capital requirements could reduce the incidence of financial crises.  But the frequency of such events is already extremely low in well-governed countries where the state minimises its interventions in the financial system, so I don’t see the gains on that front as likely to be large.    And, as I’ve outlined here in various previous posts I don’t think that the evidence is that persuasive that financial crises themselves are as costly as the regulators (champing at the bit for more power) claim.  And many of the costs there are, arise from bad borrowing and lending, misallocation of investment resources, which are likely to happen from time to time no matter how well-capitalised the banks are.

There are nuanced arguments here, about which reasonable people can disagree. But not in the Governor’s world apparently.

He comes to his concluding paragraph, the first half of which is this

A word of caution. Output or GDP are glib proxies for economic wellbeing – the end goal of our economic policy purpose. When confronted with widespread unemployment, falling wages, collapsing house prices, and many other manifestations of a banking crisis, wellbeing is threatened. Much recent literature suggests a loss of confidence is one cause of societal ills such as poor mental and physical health, and a loss of social cohesion.

Oh, come on.  “Glib proxies”……..    No one has ever claimed that GDP is the be-all and end-all of everything, but it is a serious effort at measurement, which enables comparisons across time and across countries.  Which is in stark contrast to the unmeasureable, unmanageable, will-o-wisp that the Governor (and Treasury and the Minister of Finance) are so keen on today.

As for the rest, sometimes financial stresses can exacerbate unemployment and the like,  but the financial crises typically arise and deepen in the context of common events or shocks that lead to both: people default on their residential mortgages when they’ve lost their jobs and house prices have fallen, but those events don’t occur in a vacuum.  And anyone (and Governor) who wants to suggest that mental health crises and a decline in social cohesion can be substantially prevented by higher levels of bank capital is either dreaming, or just making up stuff that sounds good on a first lay read.

The Governor ends with this sentence

If we believe we can tolerate bank system failures more frequently than once-every-200 years, then this must be an explicit decision made with full understanding of the consequences.

As if his, finger in the dark, once-every-200 years is now the benchmark, and if not adopted we face serious consequences.   Let’s see the evidence and analysis first.  Including recognition that systemic banking crises don’t just happen because of larger than usual random shocks –  the isimplest scenario in which higher capital requirements “work” –  but mostly from quite rare and infrequent bursts of craziness, not caused by banks in isolation, but by some combination of banks and (widely spread) borrowers, often precipitated by some ill-judged or ill-managed policy intervention chosen by a government.   Higher capital ratios just aren’t much protection against the gross misallocations that arise in the process –  in which much of any waste/loss is already in train (masked by the boom times) before any financial institution runs into trouble (the current Chinese situation is yet another example).

Perhaps as importantly, under the current (deeply flawed) Reserve Bank Act the choice about capital is one the Governor is empowered to make.  But his deputy, responsible for financial stability functions, had some comments to make on this point in a recent speech (emphasis added)

And Phase 2 of the Government’s review is an opportunity for all New Zealanders to consider the Reserve Bank’s mandate, its powers, governance and independence. The capital review gives us all an opportunity to think again about our risk tolerance – how safe we want our banking system to be; how we balance soundness and efficiency; what gains we can make, both in terms of financial stability and output; and how we allocate private and social costs.

It may be that the legislation underpinning our mandate can be enhanced, for example, by formal guidance from government or another governance body, on the level of risk of a financial crisis that society is willing to tolerate.

These are choices that should be made by politicians, who are accountable to us, not by a single unelected and largely unaccountable (certainly to citizenry) official.  We need officials and experts to offer analysis and advice, not to be able to impose their personal ideological perspectives or pet peeves on the entire economy and society.

We must hope that the forthcoming consultative document is a serious well-considered and well-documented piece of analysis, and that having issued it the Governor will be open to serious consideration of alternative perspectives.  But what was released last Friday –  700 words of unsupported jottings –  wasn’t promising.

(I should add that I have shifted my view on bank capital somewhat over the years, partly I suspect as a result of no longer being inside the Bank. It is somewhat surprising how –  for all one knows it in theory –  things look different depending on where one happens to be sitting.  But my big concern at present is not that it would necessarily wrong to raise required bank capital, but that the standard of argumentation from a immensely powerful public official seems –  for now – so threadbare.)