Dann on China

March 25th, 2014 at 1:00 pm by David Farrar

Liam Dann writes in the NZ Herald:

We are fortunate to have a favoured status with the Chinese Government but we will need to be actively engaged as a nation to ensure we achieve the best results for New Zealand.

The currency convertibility deal was an important symbolic move. More significant for us was the agreement to target $30 billion worth of bilateral trade by 2020.

That target announced by John Key and President Xi Jinping in Beijing updates our previous objective of $20 billion by 2015. There is no reason to assume we won’t get there.

The Chinese don’t like to miss targets.

Indeed.

You could also argue that all they have done is get a pencil out and extend the growth curve along its existing path.

But growth has been spectacular since the free trade deal was signed in 2008. Another six years of equivalent growth will have an even bigger impact on New Zealand life.

In 2007 two-way trade with China was worth $7.5 billion. Last year it was worth $18.2 billion.

So exports in 2020 may be $22 billion higher. Per household that is around $10,000 per household. And recall Greens and NZ First fought so hard to oppose the free trade deal with China.

We have both had huge growth in the past decade at the low end of the value chain. Where we’ve been relying on agricultural commodities, China has relied on cheap labour to export mass-produced consumer goods.

Now we want to sell more infant formula, wine and gourmet food. China wants to sell more of its own premium consumer products instead of just making them for the likes of Apple and Nike.

New Zealand won’t be a big market for China but will likely be a good test market.

The Japanese made the shift in the 1980s. Its products went rapidly from a running joke in the West to become the benchmark for high quality cars and electronics. The Koreans – led by Hyundai and Samsung – have achieved the same kind of shift in the past decade.

China is planning on making such a transition. New Zealanders should expect to see Chinese companies like telco Huawei and car maker Great Wall pour enormous sums into marketing and branding in the next decade.

Locally we can see the benefits of this shift at F&P Appliances, now owned by Chinese whiteware giant Haier.

Haier is using New Zealand skills to push up the value chain.

The Chinese firm is investing $2.5 million expanding its Dunedin R&D plant and has hired 80 new engineers. It is going to spend a further $5.5 million building a new R&D hub in Auckland and hopes to have F&P Appliances generating $4 billion of revenue in the next decade – up from $1 billion.

But I thought foreign investment was bad, according to Labour?

This is really good news for New Zealand but the cynics will have noticed the downside in the story.

We’ll almost certainly see Haier reducing its commitment to basic manufacturing over the next decade.

That’s an inevitable part of this economic story for New Zealand. It was already happening when F&P Appliances was locally owned. NZX-listed F&P Healthcare is following the same path.

We need to get ready for an acceleration of this shift. We can’t compete with low-wage economies such as Vietnam and the Philippines and we shouldn’t try.

The Green Party might call it a crisis but if we want to maintain a high standard of living and lift the median wage then we need to start viewing this as an opportunity.

It’s what the wine industry went through in the 1980s. They used to compete by being the cheapest wines you could buy as tariffs meant no foreign wines could be sold cheaply. Then the protection went and the result was the NZ wine industry focused on quality and exports boomed as many NZ wines become valued around the world.

Wine exports are over $1 billion a year and in the 1990s were under $100 million.

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Dann on Labour’s monetary madness

March 4th, 2014 at 10:00 am by David Farrar

NZ Herald business editor Liam Dann writes:

Cunliffe and his quietly spoken deputy David Parker seem determined to turn away a large and valuable chunk of the electorate – the business community.

Positioning yourself so far to the left that you don’t think business is worth fighting for is not a strategy that has worked for Labour since Norman Kirk. The Lange government took business with them, the Clark government at least convinced business that it represented a tolerable and temporarily necessary change.

A begrudging acceptance of change from the business community, even if most won’t change their vote, is something that reassures the nervous middle classes who do swing their votes.

Helen Clark talked knowledge-wave and delivered a free trade deal with China that has ultimately been our lifeline through the global financial crisis.

What is David Cunliffe offering? A dramatic experiment with a winning formula? A worrying fix for something that isn’t broken?

Labour’s embrace of Green Party policy to reform the Reserve Bank Act is a big stumbling block for the party if it wants mainstream acceptance from the business community.

In almost every policy area, Labour is moving to the left and embracing Green party policies. They’ve done it on tax, on welfare, on monetary policy, on electricity, on housing and almost on mining.

Helen Clark ran a pretty left wing Government. She was replaced as leader by Phil Goff, a former Rogernome. He came out with policies to the left of Clark, such as paying beneficiaries the in work tax credit.

Goff was replaced as leader by David Shearer, a man who once wrote approvingly about the role the private sector could play in defence and security. he went even more left than Clark and the new Goff and proposed effective nationalisation of the electricity generation sector and setting up a massive Government building programme.

Shearer was replaced as leader by David Cunliffe, who was often seen as one of the most centrist or right leaning members of Clark’s cabinet. Just like Goff and Shearer he abandoned his previous beliefs and tried to go further left than Clark, Goff and Shearer by proposing extending welfare payment to families earning up to $150,000 a year.

Each Labour party leader is trying to be more left wing than the one before. That’s great for National, but not great for New Zealand if they ever finally get elected and start implementing policies which nine years ago they decried as lunatic Green Party policy.

Dann focuses again on monetary policy:

The monetary policy reformists are full of ideas about the magic a broader definition of the Reserve Bank Act might achieve. But they ignore the extent to which having one target – inflation – has worked. And just how fundamental controlling inflation is to creating a stable economy on which growth can be built.

Why, when the act has just seen us through such an enormous global downturn so efficiently, would you change it. In the hope it might bring the dollar down?

Well, if you damage the economy the dollar will certainly fall. But it seems a brutal path to take.

And why, if you were going to make changes, would you loosen the shackles during the growth phase of the economic cycle – just when inflation starts to become a serious risk.

We should be grateful we don’t have to make radical changes to our economy. We’ve come through the downturn well, and while National can take some credit for steering the ship, so too can the last Labour Government for the healthy growth it oversaw.

Radical change is for those nations that have run out of options. Let’s leave it to the Greeks.

Some will sneer that Labour should not worry at all about business opinion, as most business people will not vote Labour, and they are not a large proportion of the population. This is true. But Helen Clark found out the hard way in 2000 what happens when you treat the sector that generates pretty much 100% of the tax take as mortal enemies. They plunged in the polls.

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Dann on Labour’s half baked ideas

October 15th, 2013 at 3:00 pm by David Farrar

Liam Dann writes in the NZ Herald:

The Labour Party under David Cunliffe already looks sharper than the David Shearer version when it comes to picking up on business and economic issues and turning them into ammunition for political attack.

A lot of these issues are complex and Labour seems happy to grab headlines with half-baked ideas that don’t bear serious scrutiny.

Their policy on over-riding the Reserve Bank being a prime example.

But that doesn’t really matter in the rough and tumble world of political point-scoring. Shearer’s more considered and generally more intelligent approach was getting the party nowhere. It is a shame that one of Shearer’s biggest flaws was his tendency to think before he spoke.

Why waste time thinking – all that ever did was give the Greens a chance to get in first with a snappy soundbite? Cunliffe’s Labour Party certainly doesn’t.

Making policy up on the hoof may backfire.

Last week we saw Clayton Cosgrove taking a blunt stick to the Mighty River Power board over the timing of the now-listed company’s share buy-back.

Cosgrove was quite explicit in his accusation that the Mighty River board of directors had made the move to pump the share price so the upcoming Meridian float would go better for the Government.

There is no evidence for this and the suggestion that a highly respected director like Mighty River chairperson Joan Withers would breach the Companies Act and put the interests of a political party ahead of the best interests of shareholders seems quite defamatory. Not to mention stupid. 

Stupid and defamatory – a good description of the MP :-)

A week or so earlier Cunliffe got good mileage by attacking the Government and the Reserve Bank over the new lending restrictions regime.

The restrictions are designed to prevent banks lending too much money on too little equity. They are primarily about preventing property market bubbles, ensuring the safety of the economy in the event of another financial crisis like – I don’t know – a US debt default or something.

That’s something even the Greens have been supportive of.

Cunliffe’s stance on loan to value ratio (LVR ) restrictions puts him in bed with the Bankers’ Association, all the big Aussie banks and most of the property and real estate industry. These are not exactly mates he’ll be shouting about at the next CTU rally.

Labour is campaigning for the right of 23 year old property investors to buy half million houses with less than 10% deposits. You can’t make this shit up.

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Dann on LVRs

September 30th, 2013 at 1:00 pm by David Farrar

Lian Dann writes in support of LVRs in the Herald:

There are at least four good reasons for introducing LVRs.

The first is that they protect first-home buyers from being trapped into high levels of debt that they might not be able to service if interest rates rise dramatically in the next few years – which they are expected to do.

Given the projected interest rate rises of two full percentage points over the next two years, we are likely to see bank rates rise above 8 per cent and it seems entirely reasonable to imagine retail mortgage rates going above 10 per cent within the next five years. That’s where they were in 2007 and in the 1980s they went much further.

Interest rates are currently at historically unprecedented lows and that is a dangerous place to be taking on a low equity mortgage.

Worse still, if were to see the kind of house price crash that happened in the US five years ago, then it is these people with the highest debt levels who will be most likely to hit negative equity.

In other words, they could be left owing more to the bank than the house is worth. In these conditions those with high debt levels lost their homes along with their deposits and all the rest of the money they had put into their homes.

So yes, it is a bummer if you’ve missed the chance to buy a house this year because of the LVRs.

But, if you can’t afford a 20 per cent deposit on a house, then perhaps you can’t really afford the house. And if that’s not fair then it is not fair because of the fact that house prices are too high.

Which is a second good reason for LVRs. If they dampen demand they could potentially lower house prices. In Auckland and Christchurch they almost certainly won’t, but they could help slow growth and that could buy some time for house hunters to keep saving for a deposit.

A third upside to LVRs is that if they work they will reduce the need for the Reserve Bank to raise interest rates as fast as it might have. That’s good for all mortgage holders, especially new home owners with high debt levels.

Finally there is the official reason the Reserve Bank is introducing these restrictions. The bank has a statutory duty to ensure the stability of the New Zealand financial system for the good of the country. That means it has some control over how banks are allowed to behave.

The Reserve Bank is simply not comfortable with the banks holding a high level of low equity loans in the wake of the worst financial crisis the world has seen since the Great Depression. Debt was to blame for the crisis in 2008.

So to those who say the bank is being overly cautious, one can only ask: “Dude, what planet have you been on for the past five years?”

 A good summary of the case for the LVRs. However they are no silver bullet he reminds us:

If the gap between supply and demand is wide enough, no amount of regulatory policy can hold back the market – just look at China where far heavier bank lending restrictions are doing little to cool the urban housing boom.

One has to increase the supply, and that will not work unless you increase the land supply.

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Armstong’s 10 reasons why National remains so high in the polls

March 23rd, 2013 at 2:00 pm by David Farrar

An interesting article by John Armstrong on why he thinks National was at 49% in their last poll. A summary of his 10 reasons is:

  1. Key’s sky-high rating as most preferred Prime Minister
  2.  Key’s moderate conservatism
  3. Key is unashamedly pragmatic
  4. Neutralising of troublesome issues rather than allowing them to linger and fester
  5. A majority of voters view National as the better manager of the economy
  6. Good at maintaining momentum
  7. National is still largely defining what the arguments are about in most policy areas
  8. Opposition parties are instead still devoting considerable time and effort to fighting battles they have lost
  9. Public getting acclimatised to the rather chaotic nature of minority government
  10. Few, if any, issues that are seriously divisive and on which National finds itself stranded on the wrong side of the argument for ideological reasons

I would also add on that the alternative looks chaotic and unconvincing.

In another article, three Herald staffers look at Key’s personal popularity. First Armstrong again:

Why is John Key still riding high in the polls? Put it down to several factors. First, an understanding of and empathy with the New Zealand character and what is acceptable and not acceptable. His moderate conservatism is straight out of Sir Keith Holyoake’s textbook.

Key’s second priceless asset is his finely-honed political instinct in which he has the sense to trust – even when receiving advice to the contrary. Few leaders who have spent six years in the job would have their feet still firmly planted on the ground. He is never aloof. Nor arrogant. He does not talk down to people. He can laugh at himself. …

Key’s affable nature is not a false front to be worn solely for public consumption.

Claire Trevett touches on that last point:

His show of a good-natured, even-tempered, self-deprecating personality is one of his most potent weapons. It makes him seem approachable, and that helps explain why his personal ranking is so high above his party’s popularity. It also blurs the fact that he is wealthier and more powerful than most voters. If his Government is having a hard time, the next time he gives a speech he’ll get in a self-mocking joke about it, a tactic that simultaneously acknowledges the headache it is causing him while getting across the message that it is not as major an issue as is being made out. …

His sense of humour is his most underestimated asset. Voters get bored of leaders – it is one of the most corrosive factors on their popularity. Only tyrants and comedians can slow the process of that boredom. Labour cannot abide it, and that alone shows how powerful Key’s persona is.

While Liam Dann says:

As the Bill Clinton campaign slogan said: it’s the economy, stupid.

People vote with their pockets even when they are complaining about myriad other issues.

And I don’t think voters think the economy will do better with a Labour-Green-NZ First-Mana Government.

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Dann on plain packaging

August 25th, 2012 at 10:00 am by David Farrar

Liam Dann writes in NZ Herald:

For capitalism to work properly the companies that bring us wonderful shiny things such as smartphones, or services like insurance and banking, need to have security about the rules for doing business. Property rights and the security of intellectual property are crucial to provide a platform for a healthy, thriving economy.

Agreed.

British American’s New Zealand general manager, Steve Rush, says plain packaging proposals create a “disturbing precedent” for other industries.

They don’t.

Here I disagree. Health officials overseas are already advocating plain packaging for other products such as fast food. It is naive to think otherwise.

But nothing, no free trade deal or international treaty will ever trump the right of a society to protect its young from harm.

I agree also.

We should include tobacco with the other legal highs being regulated out of existence by Peter Dunne’s new legislation. That legislation puts the onus on distributors of legal highs to prove their product is safe.

If someone invented tobacco today and applied to sell it, it would be declined. But we live in the real world where people have been smoking for hundreds of years, and no country in the world prohibits the supply of tobacco – mainly because such prohibition would not work.

On the one hand it claims that branding and design are of little significance with regard to making smoking more attractive. On the other hand it lobbies at huge cost to maintain those brands.

There is the old argument that packaging is all just inter-brand warfare – that the Marlboro red appeals to one kind of consumer and the Benson & Hedges gold to another. That sense of self-identification with a brand is important in advertising.

It might convince us to choose one kind of jeans over another. But it is the combined effect of all the stylish advertising from the apparel industry that keeps denim cool and hip for each new generation.

As there is little evidence that denim is more dangerous than, say, corduroy – other than in a fashion sense – it would be wrong for a government to get involved in regulating trouser advertising.

If there was clear evidence that denim was deadly, it would be wrong for it not to.

Here Dann misses the point. Look if there was proof that plain packaging reduces smoking rates, I’d have little issue with it. But there is zero proof.

Rather than make decisions to confiscate property rights on close to blind faith, why not do a trial? Have plain packaging in one area of NZ (maybe the SI) and over three years monitor the change in their smoking rates to the rest of NZ.

Shouldn’t decisions be based on science?

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