By Alex Tarrant
The market for New Zealand’s public debt is becoming more liquid as the Government borrows to fund budget deficits, putting it on the radar screens of investors in Asia looking to diversify away from the US dollar, Finance Minster Bill English says.
English has just concluded a week-long trip to Hong Kong and Singapore, where he met with political leaders, monetary authority officials and bond market participants, in order to highlight the government’s third budget and detail investment opportunities in New Zealand.
In a phone interview with interest.co.nz, English said the rates for New Zealand government bonds were likely to fall further as the Government reduces issuance of new debt this year. He also raised concerns about the allocation of capital in New Zealand, saying in the long-run that might be the most important context for tax changes or partial floats of sate owned assets.
Meanwhile, English said the Chinese government was well aware about sensitivities in New Zealand regarding foreign investment, and that the Chinese government wanted to be seen as a "long-term, committed, beneficial investor".
This follows interest.co.nz’s article on Thursday that said the Chinese sovereign wealth fund, the China Investment Corporation (CIC), is believed to have allocated 1.5% of its money, or about NZ$6 billion from the government’s foreign exchange reserves to invest directly in New Zealand assets.
English said he had met with officials at the CIC on a trip to China last month, as well as those who had written China's five year plan, and the nation's two next-in-line political leaders.
"We didn't have any specific discussion with them [about buying New Zealand government bonds]," English told interest.co.nz.
“CIC is kind of like the equivalent of the [New Zealand] Super Fund, and they run their foreign exchange a bit like the bit of the Reserve Bank who run the foreign exchange operation," English said.
“We don’t know for sure – they’re probably buying, they’ve certainly expressed an interest – the SAFE people had," English said in relation to the Chinese State Administration of Foreign Exchange (SAFE), which is thought to have reserves of US$3 trillion.
NZ govt debt getting cheaper
The measure of the purchase of New Zealand government bonds at the government's end was what was happening with the tenders, which were being very heavily oversubscribed now, English said..
"Over the last three months the interest rate has dropped from about 5.8% to 5.2% - new debt’s getting cheaper all the time," he said.
Debt was becoming cheaper as demand stayed strong while the Government began to constrain supply - average weekly New Zealand government borrowing will fall from an average of NZ$380 million a week currently to NZ$100 million a week from July 1.
Meanwhile, the market for New Zealand government debt had become much more liquid due to issuance, meaning it was appearing on investors' 'radar screens,' English said.
"Because we’ve gone from NZ$30 billion outstanding [govt debt] last year to NZ$50 billion this year, and it will actually grow over the next three years to about NZ$70 billion, it’s a liquid market," English said.
"It’s now got on the radar screens, because it’s got big enough for them to take notice. They’re trying to get away from the US dollar, and they like our story," he said.
Asian investors particularly liked the Government's budget story. English made the trip to Hong Kong and Singapore to 'sell' the budget to sovereign and private investors.
'Biggest rally in the world'
"They’re pretty skeptical about fiscal consolidation – they’d like to know what our programme’s going to be," English said.
"From their point of view the more [debt issued] the better, because it suits them. But if they’re interested in our debt, and supply is going to be constrained, then the pricing might continue to improve,” he said.
“It has [become cheaper] in the last three months. The DMO tell me it’s been the biggest rally in the world, on our bond market.”
The sales pitch was well received, although New Zealand's growth rates were not as high as those experienced in the Asian region, English said.
“You’re talking about economies where they’ve had growth rates of 10% plus. So when you say you’re going to be 2% in the next 12 months and then 4% after that, the wonder what the hell’s going on?”
“They just think that it should be higher – if you had your policies right you’d be getting more growth,” English said.
'Chinese aware of sensitivities'
English told interest.co.nz that the Chinese and other Asian governments, as well as private Chinese firms, were well aware of sensitivities in New Zealand on foreign investment.
New Zealand's Overseas Investment Office is currently considering an application from a Chinese property development company to buy the 16 central North Island Crafar farms. The Government tightened overseas investment rules last year to make it harder for foreign companies to buy New Zealand assets.
“When we were over there, we explained to them that investment in New Zealand needs to be seen to be beneficial to New Zealand. That’s what the Overseas Investment tests do, not just on farm land but on the other stuff," English said.
"There’s almost zero Chinese investment here. We’ve got long standing Singaporean, Hong Kong and Japanese investment, have had for 30 years, but almost zero Chinese. Despite the fact there’s high profile investments around minerals and resources...actually they haven’t been exporting capital much," he said.
But now China had built up large cash reserves and was privatising more of its economy.
"It’s the Chinese companies that are starting to look quite a lot more outward, as much as the government," English said.
“When we say we need the investment to be beneficial to New Zealand, they are quite aware, particularly the government organisations, that most developed countries are sensitive around significant foreign investment. The Chinese government wants to be seen as a long term, committed, beneficial investor," he said.
English said he was surprised at how candid Chinese officials were in their understanding of the politics around Chinese investment, not just in New Zealand, but in other parts of the world also.
“The other side of this equation is, when our companies go there, and do well selling quality products, it’s going to attract interest," English said.
“We’re trying to get the best of both worlds here, and that is, take advantage of the massive opportunity to sell into not just China, the other Asian markets where they’re willing to pay a lot more, for our food, but also for other things, on the one hand, and make sure, at the same time, the growing interest in New Zealand is going to be beneficial to us. Certainly selling our products there is very beneficial to us. In the long run –the next 20 years – that’s how we’re going to lift our incomes,” he said.
Wants more diverse HK, Singaporean investment
Meanwhile there may be opportunities to attract more diverse investment from Hong Kong and Singapore, away from traditional investment in commercial property, and into other areas needing capital in New Zealand, such as the small to medium enterprise (SME) and export sectors.
Anyone from Hong Kong or Singapore who had invested in New Zealand's small domestic market for a period of time found it a difficult, low return market. Those looking to invest in New Zealand's export market also found it difficult, because local capital was constrained.
“It’s hard to get into the exporting business, and the domestic market’s so small that you have to be very committed to make it work, and I say to the Chinese, you’ll find the same," English said.
“Over the years there’s been waves of corporate agriculture, and it hasn’t worked – disappeared.”
Reforms made by government in its three budgets such as easing Resource Management Act restrictions and changes to the tax mix were positive signs.
“But if you go sector by sector: oil and gas, they don’t do it; the mining, they don’t do that stuff – not our kind of products; core agriculture production is very hard to get into and hold a place in it, and they just don’t know it – like the Crafar Farms bidders, they’ve said they don’t know much about it [farming]," English said.
“If anything the problem isn’t so much that there’s some flood of investment coming, the problem is that we know we need capital, but it’s reasonably hard for it to get access [into New Zealand], other than commercial property," he said.
“In the long-run, that’s the issue that’s going to matter.”
Asian venture capital wanted
English said he did a talk in Hong Kong for the New Zealand Venture Capital Association, which brought together a bunch of potential Hong Kong investors: “They’re just trying to get 1% of their allocation to help them raise NZ$100 million for investment in New Zealand,” English said of the NZVCA.
That market was going to be increasingly important in New Zealand and for SME lending.
“Non-public capital matters a lot in New Zealand. The venture capital guys are much better at finding the SME opportunities, so those funds are going to be increasingly important, particularly since your second-tier business financing’s disappeared,” English said.
“You need vehicles that are going to channel capital into SMEs. It’s not the stock market, it’s not KiwiSaver, it’s not the Super Fund – they’ll do a small amount of private equity stuff, but the vast bulk of their funds are not recycled for New Zealand business,” he said.
The government had been working on changing how New Zealand capital was allocated, such as away from property investment to areas such as SMEs.
“I don’t want to make this sound any more grand than it is, but if one of the channels for incoming investment is into the private capital market, well that’s a good thing," English said.
"Capital allocation is a big issue, and over the last couple of budgets you can look at a number of the measures that we’ve taken in that context," he said.
“In the long-run that might be the most important context in which to look at a tax change or other measures around partial floats and re-regulation of financial markets, because it improves your capital allocation.”