By Alex Tarrant
Rising demand from Asia-Pacific central banks for New Zealand government bonds is one factor keeping the New Zealand dollar at elevated levels, while also keeping the government's borrowing costs at record lows, Finance Minister Bill English says.
And while New Zealand, lumped in with Australia, was viewed as the least ugly in a lineup of developed nations, that demand was likely to stay, he said.
But asked whether the government was worried that diversification by these central banks into New Zealand dollar assets was keeping upward pressure on the currency, English said it was the government's need for debt that was allowing that to happen.
That meant the government needed to focus on getting its books back to surplus so it could slow and then decrease the amount of debt it issued.
Speaking to a Victoria University-Peking University Conference on Contemporary China, English noted how the Chinese government was investing in New Zealand government bonds, contributing to record low borrowing rates for the government.
"New Zealand is seen as a relatively safe haven in these difficult times and Chinese authorities want to diversify their international bond holdings," English said.
Asked after his speech whether the New Zealand government had discussed the issue with the Chinese government, and whether it was aware the Chinese government had a quota for its NZ government investments, English said discussions had only been held at a higher level about the soundness of the New Zealand economy.
“They have vast reserves and we’d be a very tiny proportion of their investment programme," English told media in Wellington.
“But increasingly Reserve Banks in the Asia-Pacific area have been interested in New Zealand government debt because we are seen as a stable, developed country with moderate economic prospects," he said. See Gareth Vaughan's May 2011 article: China's giant sovereign wealth fund ready to spend NZ$6 bln on NZ assets and government bonds.
Asked whether he thought that investment in New Zealand Government bonds was helping keep the New Zealand dollar elevated, English said:
“What keeps the dollar up is actually our need for debt. As we get closer to surplus, our rate of increase [in debt] will slow down; when we get to surplus we’ll stop growing our debt. That will help with the dollar.”
“[With respect to government bonds] it’s not the investors who keep the dollar up, it’s our need for debt. They only turn up because we are going out to borrow money. One thing we can do to take a bit of pressure off the dollar is to get to surplus so we don’t need to be out there borrowing more money," he said.
Asked about his thoughts on foreign central banks increasingly diversifying their assets, which would mean more demand for New Zealand dollars, English said:
“In general, with respect to government bonds, they can only demand as much as we are supplying. We intend to get to a position where we don’t need to be issuing new debt.”
The New Zealand dollar was driven by a lot of different forces, he said.
“They change week to week: Some weeks we’re seen as a safe haven, other weeks we’re seen as a risky investment. The markets can’t quite make up their mind. But in general the government can take some pressure off the dollar by getting to a position where it doesn’t need a whole lot more debt. That would help. But it doesn’t guarantee the dollar at any particular level," English said.
The government would "prefer that the New Zealand dollar was a bit lower so that we could get the rebalancing in our economy moving with a bit more momentum," he said.
“It is a continued challenge for exporters to be able to be profitable at 80 cents in the US dollar, and they need to be profitable so they can reinvest in export growth.”
The government had advice that New Zealand government bonds were seen as an attractive destination by foreign central banks looking to diversify their holdings, and New Zealand was often bundled with Australia.
“The market takes some pretty simplistic approaches to the world," English said.
“Australia and New Zealand are seen as a pretty positive economic story: Politically stable, got some reasonable prospects of economic growth. In the developed world that’s unusual. So as long as that is the case we’re going to be the least ugly in a beauty parade of developed economies, none of which look too good," he said.
42 Comments
In my opinion English is confusing cause and effect; and ignoring the private element ot the economy.
By allowing foreign governments to distort our currency, he is largely condemning our industry to lower profitability and less productive activity. Thus a lower tax take, and higher social welfare payments, and so a higher deficit requiring more government borrowing.
And if government borrowing should reduce; all our recent history shows that foreigners will find other NZ instruments to loan to, ot buy up, also keeping the dollar artificially high. NZ's massive debt buildup swings between further private and government accumulation, or private and public asset sales, and must continue to do so if we allow net billions of foreign money to flood in every month.
Other western countries with huge government debts have decided not to sell themselves so aggressively to the Chinese and other surplus countries; and so have managed their currencies down- think the UK, and the US. The Asia Pac countries should be investing in their own economies; butalso wish to keep competitive by buying up anyone else they can.
We continue to be the suckers, and English is the chief sucker cheerleader.
I think you are getting this a bit backwards. Personally I think its a game of relativity, others are shooting themselves in the foot, we are not. Other Govns are de-basing their currencies to become "competitive" and we are not (though we are borrowing at 5+% which is quite high)...that with a world full of huge risks makes our debt fairly attractive to foreigners....
I wish there was a way to look at all the factors how they are inter-linked and have a % effect of each, maybe then we could say what if anything to do. We have wieved a very complex world, beyond our ability to understand it I think.......even if we were prepared to look without blinkers which many in here are not...
regards
@ Stephen L, Other western countries with huge government debts have decided not to sell themselves so aggressively to the Chinese and other surplus countries; and so have managed their currencies down- think the UK, and the US. The Asia Pac countries should be investing in their own economies; butalso wish to keep competitive by buying up anyone else they can.
Both China and Japan have significant US Treasury investmenrts - view partial TIC data
These two nations' corporations have in the past generated massive trade surpluses with the US and have no choice but to invest their surplus USD in US Treasuries.
Do we not find our selves in the same position? The Government deficit spends to allow Kiwis to extend their imported lifestyles beyond that which they export offshore, hence the surplus sold NZDs need a safe home - ie government borrowing to finance deficit spending.
hmmm not sure what you are trying to say...is there really a link between govn deficit and extending our lifestyles? Before the GFC us and several countires like Ireland, Spain were all considered surplus and robust economies by the right wingers, pre-GFC the debt was all private.
Clearly not.
regards
Before the GFC us and several countires like Ireland, Spain were all considered surplus and robust economies by the right wingers, pre-GFC the debt was all private.
That's right the kitchen ATM's were the source of the deficit spending here and abroad - backstop financed by the extension of credit from the exemplary credit ratings of supranationals and the so-called Northern European nations. Now it's the NZD ~43.0 bn and rising new debt borrowed by the John Key government taking it's place.
The US is an entirely different nation enjoying a militarily backed reserve currency status.
Stephen,
I'm sure China and Japan, at both government and private levels, have very significant US and sterling assets. But they are a lot less than they could have been, due to the central bank activity of the US and UK. Given printing by the Fed of $1.9 trillion; and by the B of E of 375 billion pounds, then those countries have borrowed those amounts less offshore than they otherwise would have to keep their money supply the same. By doing so, the pound has devalued by 22% against the NZD in 4 years of National governance; the USD has devalued by 25%. We are in other words those percentages less competitive than we were, through government inaction. I understand in the short term it makes us feel wealthier, but that is a short term fool's paradise.
You say the Japanese and Chinese corporations have no choice but to invest in US treasuries because of their surpluses. That is surely nonsense.
They can invest in whatever they choose that is willing to sell them the opportunity, and the world economy would be better balanced if they invested in consumption activities in their home markets. They choose to invest in the west, because culturally they like owning things, and the west is willing to sell them its assets. The West is also probably deemed safer than investing in Chinese and Japanese consumption based activities. That should be their problem and not ours; but we let it be ours. It's my contention that all the surplus countrries are actively managing down their currencies to maintain their surpluses and keep their industries competitive.
Japan and the Swiss could not be more open that that is exactly what they are doing. It is not that they accidentally have surpluses and so have to invest them somewhere. The Chinese are more opaque, because the US would create a stink if they were openly doing it.
You say the Japanese and Chinese corporations have no choice but to invest in US treasuries because of their surpluses. That is surely nonsense.
Surely not if you want repeat business - leaving the US consumer with the burden of purchasing the debt would deter further purchases of the seller' goods.
Equally, both Japan and China are aware of capturing the potential foreign buyers of domestic production with vendor financing.
China already repeatedly invests the local currency dispersed into the system when the central bank buys it's export corporation's USD export sales proceeds - despite sporadic attempts to sterilise such local currency issuance insufficient renumeration trickling down to the masses precludes them purchasing local output. - hence so many untenanted new towns.
Stephen,
I fully understand that the Chinese are loaning us money in order for us to buy goods off them; that is exactly my point. In doing so they also keep our dollar up; and their yuan down. That surely does not mean they have no choice, just as we do not only have the opposite choice- to take their money so that we advantage their production over our own; and so cannot in fact keep selling them goods, other than those where they literally cannot meet their own needs by Chinese production. I.e. milk products, where even there our current account deficit means we are selling them the farms and other assets.
This is not anti Chinese; we are letting the Japanese, Swiss, Germans et al do the same thing.
Exactly it's take it or nothing - we have little to offer other than the conversion of natural elements, all else is done better and cheaper elsewhere - what is our natural advantage that others should disadvantage themselves for? We demand more than we produce and have done so for 40 years or more. Inevitably the farms are for sale. What else is left?
Good article Steven H - not many people realise that the US is basically selling their debt to China and Japan. If these two countries want to keep exporting into the US they must keep buying more US debt.
And yes NZ is doing the same and it will be interesting to see how the Govt handles this debt situation.
Thank you notaneconomist.
And yes NZ is doing the same and it will be interesting to see how the Govt handles this debt situation.
Yes it is true and funnily enough without the military independence and reserve currency status the US enjoys - so it comes down to the NZD being a closely related derivative of the USD and New Zealand a very close ally of the underlying regime.
So the utopian demands for the RBNZ to exert FX rate control will remain just that.
Bill needs a hand in cutting Government expenses so they don't have to borrow so much.
Cutting Govt spending is simple, get rid of all non-essential services - there's hundreds of them. Start doing the right thing Bill or are you perhaps fearful of the backlash from your own employees. Or perhaps your not sure of what an essential service is in anymore.
When public servant numbers start outweighing private enterprise then not only can elections be won and lost but the whole private sector is encumbered financially.
Globally-internationally, say the G8, since Reagan and Thatcher the 1st world has been right of centre/voodoo economics . I dont really count NZ as much economically, though roger Douglas et al despite coming from labourobviously were not.
Personal experience/observation, you know ive lived in the world, been around it a few times...d
Reins...I need d a new keyboard......
regards
Actually, it matters little. I suggest a public service surgeon or teacher, can do the same job as a private one, and - all things being equal - without the on-cost of profit. If society needs the service, who cares it it's paid for via tax?
Both 'sides' miss the point that the underwrite fro real wealth is now missing. Still arguing about deckchairs.
In the case of a surgeon its usually the same one. A GP may try and send you to a private one but without insurance or $s you have to wait for the hospital.....
Who cares? well the surgeon as he doesnt get paid a shed load to do it in the public service. Really though the quantity of such ppl are on limited time as the numbers they can feed off and their ability to pay also decline.....
regards
Powerdownkiwi - maybe you should read Mist42nz who wrote a very good blog on the effects to private enterprise and while his posting only refers to GST it actually applies across all areas where the public system is taking from private enterprise. Mist42nz uses a simple bottles of beer sales to prove a significant and most relevant point.
http://www.interest.co.nz/rural-news/60416/farmers-have-turned-pessimis…
Your statement "Who cares if it is paid for via tax" tells me you have little understanding of the effects of taxes on the wider economy. Maybe it is you who has missed the point!
Anyone why glibly mentions 'the wider economy', has yet to question what underwrites all activity.
The 'public system' takes nothing - repeat nothing - from 'private enterprise'. That's horseshit. Either an activity is socially required, or it isn't. Sure, public shouldn't be in the isn't's. But it can be in the 'is's, and the ONLY difference, is the profit margin needed by private enterprise.
The activity happens regardless. Whether funded by taxes or charges, is irrelevant. Your only difference, is who profited. I suggest that is skewing your thinking; presumably you think you'll be better off, yes? At the expense of who(m)? If the activity is the activity is the activity, it's a zero-sum game.
As with the energy co sales. Zero-sum game, merely a richer-get-richer, poor get the pitcher shift. Same water same generators, same kwh.
Surely the only difference between private and public is who takes the cream off the top :-P
At the end of the day it is oil that has allowed the surplus to support people who do nothing in the economy. Or to look at it from the other angle, people who don't produce something expect someone else to produce what they need on a daily basis. Oil expanded production to take the place of 'others', but is now contracting. Simple less people able to supported doing nothing, private or public it doesn't matter as they still need food either way.
The Mist42nz gst example looks good on the face of it, but underneath the same problem exists, not enough resources to support people doing nothing(people like sudents:-P).
Where i see a problem is that amongst the people that do nothing there are many layers, like people who do nothing but manage other people doing nothing. So there is some scope to cut out a few of those. But cut as you might, they still need a share of an ever reducing pool of resources, so finding a way to make them productive in this scenario seems to be the required course of action.
Yes. Human are inventive creatures and are pretty good at finding ways to redistribute wealth, or taking a greater than even share. Where we don't have a whole lot of expertise is working with a declining pool of wealth. Historic examples usually had a pretty dark result.
Powerdownkiwi - Your toe does not work independently of your brain. To quote that "the public system takes nothing - repeat nothing - from private enterprise" would require that your toe does work independently from your brain or as is this cases the fingers are engaged over the keyboard without a brain. Yep there is horseshit and then there is HORSESHIT.
The ramifications of any Government activity have far reaching consequences that touch every area of the wider-economy and to suggest this is glibly mentioned is very presumptuous.
You state that "The activity happens regardless. Whether funded by taxes or charges, is irrelevant"..... Well I will tell you that the activity can't happen regardless because someone has to fund it and that funding comes from the taxes and charges. Unless of course you are advocating Communism and then I would advise you to travel to some of the Communist countries and see the poverty for yourself. Your postings on alternative power take on a whole new meaning.
Notane - nope, there you go again. You are an economist, or at least you learned the mantra.
"that touch every area of the wider economy".
spare me.
Scarfie put it well - there are layers and layers of folk scrabbling, charging, dealing, but at the end of the day, either something real underwrote things, or it didn't. The virtual bits are bubbles-in-waiting, although it is likely the holders of the parcel won;t be the wrappers of it.
Take an adviser charging 100/hr then spending it on a masseuse at 100/hr. I call that virtual, and I don't count it as 'the economy'. Nothing real was involved. The problem comes when the adviser wants to buy a car - wants to transform the virtual 100, into a bit of the planet. Where's the guarantee that that process can grow indefinitely?
In terms of Govt - remember that Govt is us - you and me. We own what they own (well, for now). Remember that much of what you see as going to them in taxes, actually doesn't exist (the tax on that advisers $100 charge, is still virtual; neither the charge nor the tax are indexed to anything real). On that basis, you are wrong to mourn it's loss. It didn't exist.
As to the activities, I stand by my statement; all things being equal (efficiency-wise) the publicly owned activity has to be cheaper across the board, due to no need to charge a profit. Don't get confused by the ones that have been set up to turn a profit - that was ideological horseshit in the first place (how can we make a profit out of ourselves? Can't be done - that is where economics fall flat on it's face).
oh- and you claim that someone has to 'fund' something, for it to happen. Pardon? Where did you get that from? Go do physics 1.
Powerdownkiwi - here's a link to a speech that George Soros presented. The theory of reflexivity and fallibility is very important in understanding that Economics is a Social science rather than a natural science as Soros has frequently written about.
http://advisoranalyst.com/glablog/2012/06/12/george-soros-speech-on-the…
If physics can measure human thinking and human will, maybe then physics and economics would be on the same page. Why do you think so many surveys are undertaken e.g. business confidence surveys. They are trying to predict what is likely to happen in the future. However these predictions become useless very quickly for a plethora of reasons.
You make some pretty unusual statements in regards to Govt and taxes and maybe you assume that publicly owned acitivity can be equal in efficiency to private enterprise. Given your physics background and the history of economic activity you should be able to prove without doubt whether there is equal efficiency in delivery of activity. You have assumed it is equal across the board because of no profit having to be derived from the inputs.
Slavery and servitude are two words which come to my mind. Maybe you have no interest in humankind and the rights of individuals to grow and develop to their full potential. Maybe you want robotic humans that fit your physics brain and you can then measure all their inputs and outputs.
Thanks for the comment - you give away your predilection in this bit:
"Maybe you have no interest in humankind and the rights of individuals to grow and develop to their full potential".
Au contraire.
But if it can be ascertained how many of a species can be carried, indefinitely, then no amount of 'full potential' will alter that. Too many bleat on about "the unlimited potential of the human brain", as if it can unlimitedly solve all problems.
The Titanic designer was an intelligent man, by my reckoning. Probably more intelligent than me. He, faced with the flooding issue, worked out correctly, what would happen. He also had no chance of initiating avoidance, no matter how smart.
Allowing unlimited numbers of folk to reach their full potential, on a finite planet, is horseshit. Look around - Afghanistan, Bangldesh, Rwanda, Haiti, all are examples of too many folk/too few resources. There will be Mensa-level intellects in the slums of Haiti - no chance whatever to achieve any kind of potential.
Societally, then, you have to stock the paddock, so that all the sheep can fatten. That doesn't work in Nature, but it would be nice to think we had the intelligence to anticipate the problem, and make the needed pre-emptive moves.
One of those moves is removing the growth part of our trading systems. The only way you can advocate growth, given it's ramifications, is to deny it's impacts. I judge folk accordingly, but they are just an impediment to the having of the main debate. Whether it took you 3 times your income to hire a deckchair, or not, whether you pay tax for a doctor or not, becomes slightly irrelevant after the sinking.
We choose the society.....part of that choice is we re-distribute.
Taxes really have no net effect as such. Yddou either pay the Govn to do a job/service or you pay a private company. Given the mess that is say the US health service is ie twice the cost, a poorer outcome and costs growing at 7% per annum (so its going to double every decade), its a disaster, so I choose not that one.
Try thinking about what money really is.....what does it get you on a fundimental level....dif you dont get that, everything you build is on quick sand.
regards
PS its work/energy
Steven - I note your comments are directed at me. Funny how you assume I am a "him".
Your statement "the detents threads are a bit hard to follow" so when you don't follow something, do you make the assumption that that person must be wrong? If you can't keep up or understand that is not my problem it is yours.
Maybe you don't understand what an essential service is. Personally I don't think a Govt essential service needs any explanation and if you do take time to ponder essential services maybe you would like to consider international documents and codes that NZ has committed too for example the Universal Declaration of Human Rights which identifies the social provisions of health and education etc. Essential services are not rocket science.
Maybe you should also read the link I placed above for powerdownkiwi to have a look at where Mist42nz provides a simple lesson on economics.
When Bill goes to the Japanese Banks or Chinese Banks to borrow money for the NZ Government what do we think is actually happening?
1. These banks do not have any New Zealand dollars, New Zeland dollars work in New Zealand they do not actually work anywhere else. These banks do not have any. When New Zealand comapnies and our government go out into the world to buy stuff they do not spend NZD - why would anybody want them- what would they do with them?
2. So the banks we borrow from offshore do not have any actual New Zealand Dollars to lend to us so what is it that they do?
3. They type into their keyboards that NZ Govt owes us 300 million NZD and the NZ Government types into its keyboard that it owes a bank in Japan 300m NZD and then it spends the 300m NZD into the NZ economy. That is all that happens.
If the NZ govt wanted to it could smiply cut out the middle man and deficit spend the money into the NZ economy.
The inflationary effect would be the same- there are now 300m more NZD in the NZ economy than there was before.
There would be no interest payments to a bank in Japan - that is all
1: - there are plenty of NZDs sold to buy foreign currency to purchase imports - also companies like our banks sell NZD~3.0 billion a year to repatriate profits to Aussie - I believe total annual corporate profit repatriation amounts to NZD 15.0 billion per annum. These dollars are willingly sold to those wishing to settle foreign purchases of tendered NZ Government debt and expose the investment to foreidn exchange risk.
2: Our NZ banks can be relied upon to print freshly minted NZD against the credit rating of the foreign purchaser of NZ Government debt. if the butyer wishes to make a largely hedged purchase. Local NZD credit lines are easily obtained for the right counterparty - especially one that is buying Fonterra's milk products.
Wht does National go on and on about productivity and efficiency and nver mentions Free markets and competition. Could it be that the backers of the National Party do not actually like or want competition and Free markets.
Labour should go all out in favour of Free Markets and Compitition as a counter to National- The Financialisation Party
I presume that the farmers (as exporters) are still preponderantly National voters.
Would they still vote National if they realise they receive a greatly reduced income while the NZD is artificially high?
Lower the NZD by 10%+ and most farmers with debt (almost all of them?) would more easily repay that debt quicker while the Government would receive higher tax income.
A lower NZD on the basis above is a 'no-brainer'
Maybe on the other hand BE has a devious plot to get the NZD down before the next election in order to carve out some extra farmer vote.
Ostrich - you are essentially right - but it might be a case that portfolio losses elsewhere demanded sales of profitable (mightily so) NZD Govvies to stabilise the cash demands of certain institutions.
It's pleasing to see a more market orientated approach to the commentary. Emphatic utopianism leads not so seasoned punters to ruin.
Though you have to take risk in context to the risk others are thought to have and it looks like maybe you are not doing this? If say the UK is perceived to be riskier than NZD the re-pricing movement may not occur......or might be in our favour. For me I look at the USA, UK, EU, China and Japan and they all look like basket cases....NZ shines in comparison....hard to tell...
Sure we have spent a decade doing stupid things with property....and I think its going to drop...and I dont think it will be minor. Experience is one of the best teachers I think, it strips off ppls blinkers.....and many seem to be wearing big ones....
regards
Unfortunatly NZ is still to experence the realy head winds of the financail crash. Key missed the opportunity to restructure to a balance economy that does not live beyond its means, back when first elected. He took the soft option of spend and hope. Now ith debt growing quickly, the global economy stalling, NZ has no sector of the economy that are wolrd class and positioned to take advantage of the after the crises subsides, when ever that is.
Years of private and now public sector growth rates have driven asset prices and most sectors beyond economic return, that cannot be fixed by more debt, the will be deflation of asset prices and defaults.
English should not be listerened too, he has, like many so called experts, missunderstood what is really happening and ignorantly positioned NZ right in front of a collapse that no matter how much printing by central banks, will happen anyway.
The future is rosey for those who position themselves for the future but first you need to survive the crash. http://j.mp/L32BnJ
If you look at every country that has tried austerity you can see thats going badly and getting worse. The crisis as such wont subside, so there is nothing to take addvantage of, dthis is the new normal.....power down to an energy balance.
I dont see it as the growth rates directly putting up proices but raw materials costs have eaten out the trajectory we set, it now cant be kept up.
Inflation isnt our immediate future....sure listen to Peter S....he's interesting in a kooky, wrong sort of way....
I think you'll find Steve Keen, Nicole Foss and Paul krugman far more accurate so far and with the reasoning to back it up.....they fear/see a depression and severe deflation, not least of which will be in hardd assets.
regards
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