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Opinion: How to avoid selling out to China. Have we got the will?

Posted in Opinion

By Gareth Morgan

New Zealand has run current account deficits for as long as I can remember.

Those deficits get funded either by asset sales (private or government) or by increasing our debts. This is just simple maths.

At times we economists comfort ourselves with the truism that so long as the deficit as a share of GDP isn’t greater than the growth in GDP that year, then the increment to the debt at worst will keep the debt to GDP ratio constant. That too is simple maths.

Confused? Just believe me.

Anyway NZ is one of the most indebted countries in the world with a net external debt to GDP ratio of 90%. We are still behind Ireland (130%) if that’s comforting, and a smidgen short of Greece (91%), but Australia isn’t as bad (77%) while the US (19%), UK (14%) and Canada (20%), make us look delinquent.

This has come about – along with our interminable slide down the OECD standard of living scale – because we have an abominable record on economic returns from investment of our capital and labour.

We don’t have enough winners in terms of income generation, so the GDP we generate from applying capital and labour simply is insufficient to prevent our slide in relative living standards.

Notwithstanding that deficiency we continue to live it up like we are right up there with the world’s richest. And of course you can only drink champagne on a beer budget by selling your assets or raising more debt.

We do both.

So last week’s government celebration that the Chinese are keen to extend us more debt, buy more of our assets, is akin to the relief a chronic drunkard gets when the next drink is procured. But hey, we’re about to redefine our national targets to include happiness and other touchy-feely vibes from our clean, green and oh so pure environment, so determined are we to ensure the money side of the equation will matter even less.

Oh yeah? Money isn’t everything but having no money is. Ask anyone on poor street.

That reality is only slowly descending on us New Zealanders that remain here as the number of assets we own declines, and the share of our export income we have to devote to interest payments continues to rise. Our external liabilities are mainly private sector debt so the Business Roundtable would say “no ‘wuckin furries.”

Sure.

Let’s switch for a minute from the sinking ship that Kiwis are aboard to the future for China, destined to become our largest creditor, and then the largest owner of our assets. Just what is their game?

On the surface it seems crazy that they would keep lending to indebted delinquents that use the money in large part to buy goods from China, so the Chinese export machine can keep humming. If the ability of the indebted to service their loans starts to falter doesn’t that mean that China will ultimately have to forgive debts - much like the US had to write off loans to Latin America in the early 1980’s?

That prognosis is correct but a lot of water has to flow under the bridge before debt forgiveness day. And meanwhile the Chinese can opt to buy assets with its export proceeds from the indebted rather than just allow the debts to pile up. In fact that’s a point we are reaching at present. China has a long term planning horizon, and unlike us is not obsessed with maximising what its households have to spend today. After all elections are not critical to the policy settings in the Middle Kingdom.

One thing we all know is China is natural resource hungry - it has a lot of resources within its borders but not nearly enough to satisfy the demands the world’s largest manufacturer needs. So getting access to resources abroad is a major objective. For example, remember all the fuss in 2009 when the Australians rejected China’s takeover offer for Rio Tinto and the revenge just a year later that saw that company’s executives sentenced to 14 years in Chinese jails? This stuff can get pretty heavy when push comes to shove.

Long before debt forgiveness becomes an issue, expect China to have accumulated a lot of assets in the countries that are happily running along on Chinese credit.

The equity for debt swaps will become ubiquitous as the debt dependency of some countries becomes a drag on their consumption-led growth formula.

New Zealand has to lift the income it earns from deploying its labour and capital, or alternatively just put up with a continued slide in income relative to other countries. 

Choosing the latter underpins brain drain and we become little more than a retirement village for returning ex-pats, and a low income home for the rest.

Choosing the former requires a revolution in our tax, welfare and regulatory policies. We are a nation of incrementalists, so such a revolution is unlikely.
 

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Gareth Morgan is a Director of Gareth Morgan Investments
This article was first published in the NZ Herald.

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4 Comments

Dear Gareth, revolutions have

Dear Gareth, revolutions have unforseen and often unintended outcomes, so we are not into them (except for R Douglas and a handful of supporters of course)

It is easier to have a

It is easier to have a revolution when you promise people the world as Douglas et al did in the 1980s but how, apart from war, you can have a revolution when all you can offer is deprivation, even when the long term goal is to save the country, I do not know

Gareth is correct , we are

Gareth is correct , we are not paying our way in the world , and have not done so since aboot 1973 . Yet we continue to reward ourselves with more government provided " services " , and with an ever increasing array of " entitlement " packages ......

.... The government shows student loans , all $ 11 billion of them , as an asset of it's books ..... try collecting them , bozos ! And those that're interest-free , are cheapening every year as inflation erodes the spending power away .

NZ needs a bloody-strong-willed government to tear up the bullshit policies , to unCullenise the economy .......... to teach us to live within our means .

.... but we got Mild Bill and Jelly Key instead ...... with Goofy & Klinger standing in the shadows .... fully expect the fiddling & tweaking to continue , and the eternal hope that one day the Treasury actually will get it right , and GDP growth of 4 % will occur ....

The US is about to implode as

The US is about to implode as it's housing bubble finally breathes out the last of its over valuation & the Govt debt burden becomes too big to continue any sort of normal policy direction for Dems or Reps; they can't even agree on how to raise the Govt Debt Ceiling from $14.2 Trillion to whatever they need to keep the lights on. They are already raiding the Federal Pension schemes by the tune of $80 billion while Congress dithers. US employment is at 1930's levels and worsening and QEI & QEII money printing has raised real inflation to over 10%. Now the Fed has ceased QE the US markets will correct back to 2008 levels and further as the free money to keep their big banks alive dries up.

The ECB has dithered too long about the debt restructuring for its PIIGS and is also in a death spiral as it's too big to fail banks are now seriously at risk of defaults from Greece and Ireland.

China's self imposed slowdown is severely impacting to good half of Australia's two speed economy and will exacerbate Australia's domestic decline and housing collapse.

Oh and did I mention Mideast insurrections and revolutions, Saudi's failure to suppress the OPEC oil price and the continual rise of global commodities which will lead to further civil unrest across the developing world...

If one or more of these problems get out of hand then the global economy will experience a depression that will make the 1930's look like the halcyon days of Rogernomics.

 As the above tensions continue to heighten counties are continuing to look after their internal self interest more and more. Unfortunately NZ isn't one of them. We're still wandering along toeing the 'free market' globalist line allowing every man and his dog (not just the Chinese, they're just only ones left with any spare cash) to come along and buy our public and private sector assets out from under us via PPP's, the TPP etc..

 The NZ Govt and citizenry need to get it into their heads that we can't afford to keep on delaying paying our public or private debt in the current financial climate. Nor can we continue to allow foreign 'investment' to continue stealing what's left of our family silver. There's an election coming up in a few months; I suggest we stop worrying about Wellywood, resigning Dan and Ritchie, Canes player rotation and that ugly green strip being forced on the Highlanders fans and put a bit of focus on what matters; our future.