Makhlouf says 21st century will be dominated by Chinese growth, putting NZ economy in prime position; Public needs to understand that reality

By Alex Tarrant

The twenty-first century will be about China's economic ascendancy, meaning New Zealand's economy is a prime position to feed off Asian-led growth as the centre of the global economy moves closer to our shores, the new Treasury Secretary Gabriel Makhlouf says.

But policy makers need to work hard to ensure the New Zealand public understands the facts and reality about China's rising economic power, as the opportunity to be part of the China growth train cannot be missed, he says.

Makhlouf will be keeping a very close eye on the Chinese economy in terms of dangers posed by a possibly over-heating property market and strong inflation, but says although there may be crises along the way, in the long run China will grow to dominate the world economy.

Meanwhile in other comments to interest.co.nz on his first day on the job yesterday, Makhlouf said the view that there should be little screening of foreign investment into New Zealand had been the view held by Treasury for some time. He defended Treasury's stance on the pending government sell-down of four State Owned Enterprises, and also said he wanted to hold more regular policy workshops like the one held by Treasury and the Reserve Bank in Wellington last week.

China of massive importance to us

China’s economic growth was massively important to the world, and especially to Australia and New Zealand.

"So we are keeping a very close eye on developments in China," Makhlouf said.

"People talk about Chinese growth slowing...but it’s still growth. That’s one of the message I give," he said.

Makhlouf visited China in April, attending a series of meetings with government officials and business representatives.

“The consensus was that growth will continue. [Economist Nouriel] Roubini keeps talking about it’s all going to implode in 2013 or something, but people think he’s an outlier. Lots of people are telling me that," he said.

Makhlouf took a longer-term view on China.

"I’m fairly confident when I say the 21^st century is about China, in the sense that the 20^th century was about the US, and the 19^th century was probably about Great Britain," he said.

“China will grow. It’ll go up and down, there will be crises, but it’s going to dominate the world economy. And the closer that we are attached to it, I think ultimately the better for New Zealand."

Perfect storm of opportunity

New Zealand obviously did not want to only rely on China, but was in an incredible position at the moment.

"The centre of the world’s economy is moving in our direction. The demand for our commodity goods is growing. Technology’s arrived – it’s actually bringing us closer to the rest of the world," Makhlouf said.

“If you actually look at it like that, there’s almost what I’d describe as a ‘perfect storm of opportunity’ for us, and the big challenge is how do we seize it, and the risk is that we fail to," he said.

Treasury was watching what was happening to inflation in China, as well as watching to what was happening to house prices. The issue worried Treasury.

"There’s a big issue in China whether actually the housing market’s completely unstable. Anything that’s potentially going to damage Chinese growth, as our second-biggest trading partner, could have a big impact on us," Makhlouf said.

"On the other hand, I’d just observe that in China, there’s not a lot of leverage [in the property market]. So it’s not the typical consumer debt-fuelled scenario that a lot of the Western world’s gone through, but we have to keep an eye on China,” he said.

"The long and short of it is we’ve got to keep an eye on China, and understand it, and understand the opportunity, but also understand the risks there so we can better manage them.”

Responsibility to ease public fears

In connecting with China, policy makers had a responsibility to ensure the public was informed of the situation, as people were likely to be weary of the rising superpower.

“I think the Treasury, and opinion formers around the place, probably have a responsibility to make sure people understand the facts, understand the reality," Makhlouf said.

"It’s not surprising, and it’s not unusual that people look at a country as economically powerful as China and worry that they’re going to get ‘taken-over’. If you look in history, people [generally – not just New Zealanders] had similar views about the Japanese, people definitely had similar views about the Americans with their economic power – ‘are they actually taking us over?’You’ll find in Europe, people had views that the Germans were going to do all that [economically-wise]," he said.

"So it’s not unusual for countries, for people, to feel vulnerable to economic superpowers. But I think you and I, and people like us who understand how the world works, who understand actually if you’re in a country like New Zealand that’s got a savings ratio that it has, that it does need foreign capital to grow."

'What matters is how you use land not who owns it'

Makhlouf brushed aside suggestions he had controversially waded into the foreign investment debate a couple of weeks ago by suggesting there should be little screening of foreign investment into New Zealand.

"That’s not a piece of news. I know it was news, but that’s the Treasury’s view," he said.

Treasury had given advice to ministers in that regard, and had held that view for quite a while.

“I’m still of the view that what matters is how you use land, rather than who owns the land. That’s what I think we should be focusing on. I didn’t invent this a few weeks ago,” Makhlouf said.

Last year the government tightened foreign investment rules by giving Ministers the power to turn down foreign applications to buy into New Zealand assets, especially productive land. The issue has been heightened since a Chinese-based company, Natural Dairy, was denied in its application to buy the 16 Crafar farms earlier this year. Another Chinese-based company, Shanghai Pengxin, has applied to purchase the farms, although the Overseas Investment Office has delayed its decision. Speculation is that the decision will be left until after the general election in November.

Despite the vast difference between Treasury’s view and the government’s actions, there was no feeling Ministers weren’t listening to their officials.

“I think it’s the exact opposite. My sense is that Ministers do listen very carefully to what the Treasury has to say, but then they come to their own view. We’re entirely comfortable with Ministers deciding to do something different," Makhlouf said.

“By and large, a lot of what the government has done has followed our advice. There are some things...where it’s a political call for them to make. But if you look at the advice that we’ve published over the last two-and-a-bit years, a lot of it Ministers have followed,” he said.

SOE sell down, shallow capital markets

When asked about Treasury's advice on selling State Owned Enterprises, Makhlouf quickly corrected the questioner by pointing out advice was on the mixed-ownership model.

“From my perspective the mixed-ownership model will deliver a number of things. It will release capital for the Crown to invest in other assets," he said.

“I think there is something...which we haven’t done very well, but we’re leading the world in terms of thinking about it, which is, managing our balance sheet.

There was a big issue around New Zealand's shallow capital markets and doing something about them.

"Which is broadening share ownership and helping people to save in different ways,” Makhlouf said.

Asked whether that was therefore an argument to sell more than just the four companies involved in the government's planned sell-down, Makhlouf said the government had to balance a series of interests.

“It’s also fair to say that, in terms of the political sensitivity around the whole issue...you want to move at an appropriate pace. And at the moment the government feels it has to retain control of these assets, so it’s going to hang on to 51%. But our advice on the mixed-ownership model remains that it’s something that will bring advantages to New Zealand," he said.

“Because the capital markets are shallow, there’s a limit to what you can do – you couldn’t sell everything even if you wanted to. But then you don’t need to. For the sorts of things you’re trying to achieve, you don’t have to go much further than what the government has proposed to do."

In terms of deepening New Zealand's capital markets, Treasury did not have much on the go that had not already been announced, but what had been announced would make a difference.

“I don’t think there’s anything that hasn’t been publicised or announced. There’s the mixed-ownership model, obviously, some of it is around using KiwiSaver, and promoting KiwiSaver. I actually see the changes [to regulatory bodies] – the Financial Markets Authority and that whole framework is changing the context in which people invest," Makhlouf said.

“There are a whole series of steps that I see that are all about helping in the space,” he said.

Need more debate

Makhlouf said he was relaxed about people criticising Treasury over holding 'talkfests' on the economy like the one held in conjunction with the Reserve Bank last week. He said he would like them to be repeated more regularly, as they informed the policy making process.

“New Zealand’s economic problems are not straightforward, and bringing together, like we did last week, a range of people from international academics, New Zealand academics, journalists and commentators, politicians, Treasury officials – a whole bunch of people together to actually talk about this, and try and understand it better, I think is a positive thing," Makhlouf said.

“If all you did was talk, then fair enough, there comes a point where that’s just a waste of time," he said.

The discussions would definitely inform the policy making process.

“Are you suddenly going to see a decision made tomorrow based on the discussions last week? No you won’t. But do they inform? Absolutely. One of the things that I want to do in this job is to encourage the Treasury to engage with as wide a community of people as possible. Not just the Wellington circuit, and not just the Wellington and Auckland circuit, but as wide a community across New Zealand as we can so that we tell people what we think, but we listen to what they think," Makhlouf said.

“I think we’ll be better placed to give better advice to Ministers as a result of that," he said.

OECD experience a highlight

Finally, asked about his past experience in the UK and OECD, Makhlouf said if he was going to highlight something about his past, it would be the four years he spent working at the OECD. See Makhlouf's biography here.

"Because one of the things that gave me is an appreciation of both the commonality of issues that nations face, but also the differences they bring to the table," he said.

“Ultimately I think that we’ve got a lot to learn from each other. All countries are different – they have their own histories and own issues. Some are very different, but what we do all have, and what we should be open to is, the opportunity to learn from others.

“So what I’ve learnt from my OECD experience, and also my British experience, is precisely that. I’ve done lots of different things but working in that OECD community, with countries like the United States, but also Asian countries like Korea, is there are lots of different ideas around the place," Makhlouf said.

“If I learnt one thing, it would be do not be ashamed to copy good ideas," he said.

And there were lots of good ideas in New Zealand.

“No one’s got an exclusive set of good ideas. Countries are at different stages of development, and as a result are facing different challenges and have to look at particular things to meet those challenges.”

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