Yesterday Mr Robb rose from his sick bed to celebrate the latest “Aussie sell out” deal with one of our trade ‘partners’.
These agreements are not about trade they are about unproductive capital exports from China to Australia – end of story.
Long ago we reduced our tariffs on Chinese goods imported to Australia so we already have the benefit of low cost imported goods. Anyone out there struggling to find some cheap Chinese imported goods in the shops?
So the only relevant trade issue is why the Chinese have not already removed their tariffs on all of our exports and why even after signing this agreement they will still maintain tariff and other barriers on a range of potential Australian exports.
But trade is a side issue as all these “FTA” agreements are really about is giving our exchange rate manipulating trade ‘partners’ an even easier path to exchange rate manipulation which they do by exporting ‘capital’ to Australia via several key channels that are described below.
To induce chumps, like Andrew Robb, to make the path easier, the counter-parties to these FTA agreements sprinkle around some loose change in the form of some easily dodged promises that they may relax some of their existing tariffs on some of our goods at some point in the future – mostly goods they actually want to import anyway as they plan to turn them into finished goods they can export back to us and other countries.
As noted above the Chinese are going to maintain a whole bunch of tariffs on anything they don’t want Australia to export to China.
What a stupendously dud deal – they are going to keep a bunch of tariffs on our exports even though we removed our tariffs on their exports years ago.
Why does China – a poor developing country – want to export capital to Australia anyway?
When unproductive capital is exported to Australia by China (and other currency warriors) by buying:
- hundreds of billions of IOUs from our banks (yep that is where those low mortgage rates comes from that result in massive household debt bidding up house prices), and;
- hundred of billions of Australia government bonds (Joe’s big debt is being sold offshore), and;
- assets in $1 Billion chunks (no questions asked).
it forces up the $AUS and forces down their own currencies.
All that exchange rate manipulation amounts to a massive tariff on Australia industry and workers. Our exports are more expensive and as a result industries like car manufacturing and other key industries shut down – probably for good.
One thing you will NOT be hearing about over the next few days and weeks is how lopsided the China FTA is with regard to capital flows into China. You see when it comes to capital flows it is a one way street. Exchange rate manipulators don’t see much point in allowing capital flows the other way.
Isn’t it odd that a developing country where the average wage is about $US7000 doesn’t need capital from one of the rich economies like Australia?
Isn’t it weird that boof heads in Australia try to argue the reverse – that Australia needs Chinese capital to develop?
Sure the agreement has a bit of wilted parsley to get it past the 6 pm news, in the form of allowing a few Australian Universities to set up ‘information kiosks’ in China or perhaps allowing a few ‘joint ventures’ in China in hospitality or nursing homes (or – kid you not – ‘fast food’) – but this is small cheese – the big stuff is all the other way.
Ask Mr Robb how many Chinese manufacturing businesses, key industries, land or other significant economic assets the Chinese government plans on letting Australians buy outright and operate without interference – the answer is ZIP.
By the way the point of a “joint venture” from the Chinese perspective is to maximise the likelihood that any useful skills Australian companies have will be transferred to their Chinese ‘partners’. Of course there are no such constraints on Chinese investment in Australia. Surely, if the Chinese force Australian companies into joint ventures when we invest in China the same should apply to Chinese investment in Australia. Instead the FTA provides that not only Chinese firms can buy Australian assets outright but bring their own staff with them.
Sadly, too many Australian are completely clueless about the significance of capital flows and how they are used by our trade competitors to place a tariff on our industry and workers.
Instead most Australians, in a breathtaking act of cognitive dissonance, just keep demanding lower interest rates so they can maintain consumption – while ignoring how that demand results in a much higher $AUS and a hollowed out economy.
So next time some politician dances around telling you:
- how they will keep ‘…interest rates lower…’ by allowing our banks to rely on cheap capital imports
- why ‘foreign investment’ is such a swell idea even though our super funds have almost $2 trillion in savings.
- that Australia has a history of selling off chunks of its assets to foreigners to fund consumption and the process is as natural as Waltzing Matilda.
- that foreign investors ‘can’t take the assets with them ‘ – (No but they can sure repatriate the profits and BYO a workforce)
just remember the price that your kids and grandkids will pay as they grow up in an economy that has been sold off and massive foreign debt incurred on their behalf.
To read the original version of this comment in the original context at Macrobusiness.com.au click this link. (link maybe locked – but there is a free trial available).
When independent research/data collation hits critical criticism policy may finally start to become democratic, like they say it is….
I am still not convinced by this assessment of the risks of foreign ownership of Commonwealth government bonds. A few points I would note:
1. The flow of purchases rather than the stock would be more relevant to potential pressure on the A$. In the chart you posted, the % holdings of non-residents has been decreasing, and as Debelle notes the “recent decline is not because of any net selling, but rather because buying has not quite kept pace with recent issuance”.
2. It doesn’t really make sense to look at purchases of Commonwealth government bonds in isolation when considering buying demand for A$. For example, in the same speech there is another chart of total foreign liabilities which has remained quite stable. Again quoting Debelle: “over the past five years, foreign holdings of Australian government debt have risen to around 20 per cent of GDP, with a broadly offsetting decline in foreign holdings of Australian bank debt as a share of GDP”. Even that picture only focuses on financial assets held by non-residents, a full picture of demand for A$ would also consider investment in businesses, real assets and goods and services from non-residents.
3. I also disagree with your assessment of the cause of the increase in foreign ownership of government bonds: “And the point in doing so? To manipulate local interest rates downwards to increase the local demand for debt – both public and private”. The RBA targets the short-term rate and has very effective control of this rate without any need to be selling bonds to non-residents. In fact, if you look at QE programs offshore (which target longer term yields which, to date, the RBA has not been particularly interested in partly because there is little borrowing in Australia at long term fixed rates unlike, say, the US) they involve buying not selling bonds. I think that Debelle’s explanation is closer to the mark: non-resident investors “attracted to the Australian Government’s AAA credit rating and favourable level of yields relative to other highly rated sovereign issuers”. It’s a “flight to quality” combined with the fact that alternative low risk investments have offered very low yields. In fact, the more recent decline in the non-resident ownership % coincides with growing expectations first of “tapering” of QE and more recently expectations of imminent rate hikes in the US.
“..I am still not convinced by this assessment of the risks of foreign ownership of Commonwealth government bonds..”
Are you unconvinced that the ownership of Commonwealth government bonds places upward pressure on the exchange rate or unconvinced that any resulting upward pressure on the exchange rate presents a risk?
In response to your points 1 – 3.
1. The impact of specific flows on the exchange rate would definitely be interesting but as to whether it would be ‘more relevant’ is debatable as any ‘flows’ would be significantly affected if non-resident ‘stocks’ of CG bonds were either heavily restricted or completely prohibited. Without non-resident stocks of CG bonds there can be no flows as non-residents could not be entering FX transactions if they have no stocks to sell or there are not stocks they are permitted to buy.
2. It certainly wouldn’t make sense to look at purchase of CG bonds in isolation in terms of factors driving the exchange rate. My focus is directed to ALL of the key non-productive capital inflows. The big three at the top of the list are 1. Off-shore borrowing related to mortgaqe operations on existing residential property 2. CG bond sales to non-residents and 3. Mere transfers of ownership to off-shore parties.
Note: I don’t have a problem with productive capital flows so it follows that I accept that during the mining boom the exchange rate was strongly influenced by the massive capex involved in building the mines and ports etc. Though I will leave to another day the issue of whether permitting a bulge of mining capex was good national policy .
3. I have not suggested that the purpose of the sale of CGS bonds (or the wholesale borrowing related to residential mortgages) are directed to manipulating the RBA target rate. The RBA can set the target rate at whatever it chooses. However, for a given target rate, other rates (mortgage rates, government bond rates) ARE affected by the extent to which the local banks and the government are permitted to enter (directly or indirectly) lending transactions with non-residents.
As we have seen recently a range of rates can change without any change in the target rate by the RBA. Of course the RBA can alter the target rate and seek to offset any rate changes resulting from shifts in non-resident enthusiasm to enter those transactions but it seems clear that it (and APRA) are happy to use non-resident ‘enthusiasm’ or ‘search for yield’ to produce lower mortgage and other rates and therefore live with the impact on the exchange rate of those decisions.
Ultimately that is the point I am making. The price of lower interest rates (mortgage or CG bond yields) for any given RBA target rate, when those low rates depend on the ‘saving/ money printing / manipulating habits of foreigners’ is an exchange rate that is higher than our trade performance warrants.
“I think that Debelle’s explanation is closer to the mark: non-resident investors “attracted to the Australian Government’s AAA credit rating and favourable level of yields relative to other highly rated sovereign issuers”. It’s a “flight to quality” combined with the fact that alternative low risk investments have offered very low yields.”
I agree completely with that assessment but what Debelle does not question is whether it is in Australia’s interests to accept the ‘flight to quality’ of capital flows that are driven by deliberate monetary policies by our trade rivals that are designed to manipulate exchange rates.
What Debelle quaintly describes as capital flying to quality I would characterise as capital being driven out towards ‘open’ capital markets like Australia’s for the key (there are others) objective of manipulating relative exchange rates.
Unfortunately we have barely even discussed the possibility (or benefits) of restricting certain capital inflow transactions (i.e. the three I noted above) because in Australia we can happily the discuss the merits of regulations to restrict the inflow of noxious plants, diseases or animals or even the movement of people but any discussion of controls on capital flows is beyond the pale.
The reason I suspect is that once we start talking about the possibility of restricting or regulating in a significant way the flow of ‘capital’ we are start to question the absolute core of the neo-liberal experiment of the last 40+ years and that penny is only starting to drop.
Out of abundance of caution I should make clear that I am generally in support of free trade in goods and services and the movement of people – subject to the usual protections of quarantine and an aversion to the concept of ‘guest worker’ in its various well spun contemporary manifestations.
It is unproductive and often predatory and manipulative capital flows that are my primary concern.
An interesting article that focuses on the poor quality of data recording regarding who owns our govt debt and also the ‘black hole’ represented by custodian and nominee holdings.
This may explain some of the discrepencies between the RBA graphs and the AOFM data – they both involve guesses.
What quality? The quality we Australians get to pay for by having competitiveness stolen? Your suggestion about the mechanism of current operation may all be very good but it tells us nothing about what’s it’s doing or why we should keep doing it.
I think you might be out by an order of magnitude when you talk about China buying “hundred of billions of Australia government bonds”. According to figures provided by the Australian Office of Financial Management, as at June 2015, North Asia (i.e. China, Japan, Korea – so mainly China) holdings of government bonds were just over A$10b.
“…When unproductive capital is exported to Australia by China (and other currency warriors) by buying:..”
That link records off shore holdings of Aust Govt bonds as $120 billion. I am not a betting man but I would think the odds that figure will crack $200 billion in the not too distant future are quite short.
You may question whether all of those countries comprising those holdings warrant classification as currency warriors. Considering there is little need for a soveriegn country to issue debt in the first place and if it was considered necessary the objectives should only be domestic (soak up excess ‘stimulus’), I think it is reasonable to adopt that description to make the point that selling Australian govt bonds offshore inflates the exchange rate and renders our industry and workers less competitive.
What would you argue is the legitimate reason for a soveriegn currency government to issue debt to off shore holders? Issuing debt is an arcane practice in any event as it is not as though issuing debt to off shore parties results in bags of local currency being flown in from off shore strong rooms.
It would be quite easy to introduce a system of registered bonds whereby the ownership of a bond is registered (like title to property) and registration is limited to locals.
From the perspective of government accountability what could be better than requiring governments who seek to issue bonds to limit their issuance to voting locals.
Needless to say I am in favour of governments funding deficits explicitly rather than via the outdated charade of bond issuance.
With one exception, treasury could issue zero interest non transferrable bonds to the RBA in exchange for an accounting entry to the Treasury ES account. When required it could require the RBA to ‘sell’ them back with a corresponding debit to the ES account.
By issuing such bonds no one could say the government was doing anything so crass as printing money. The charade of issuing bonds could thereby be maintained but without the damage arising from allowing off shore currency warriors to use them to drive up the exchange rate.
Th offshore total is only $55b. The $120b odd total under “Total identified by country of beneficial ownership” includes $67b of Australia. Other larger holdings include South/South East Asia ($18b), non-eurozone European (which would include the UK) ($17b) and the US ($7b). A significant proportion of this would be held by central banks.
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Oh yes – $56b – that will teach me to read spreadsheets during the final scenes of a Bollywood spectacular. A little bit confusing putting Oz at the top and domestic custodians and nominees below but anyway.
Ok – purchases by foreigners of Australian govt bonds has not reached $100B yet – only a matter of time I suspect as the current government seems to be keen to recreate the magic of the Howard years where external liabilities are the gift that just keeps on giving. The only difference being that the growth will be more on the public side what with households probably close to peak debt with rates already quite low.
By the way do you disagree with my central point that unproductive capital inflows (residential mortgage IOUs, asset and land sales, govt bond sales) inflate the exchange rate and make Oz industry and workers less competitive?
Or do you subscribe to the traditional view that it is all great because it means we can buy more stuff with our inflated exchange rate from mercantalists like Germany, Japan, China etc.
I would certainly agree that capital flows have been a significant factor propping up our currency until recently (irrespective of whether you’d consider it productive or not – there has been plenty of investment by the Chinese in productive assets, including food production, mining etc, although they’d be productive regardless of who owns them). Exchange rates rather than the price of foreign liabilities has been the major factor in getting interest interest rates down in a couple of ways. First an appreciating currency has helped keep inflation low, giving room for the RBA to cut, and second with every other developed country with record lows in interest rates, if our rates weren’t low, our currency would have gone through the roof. The expectation that the US will finally lift rates soon is a big part of the reason that the currency has now fallen somewhat.
The mere acquisition of title to an Australian asset is what I am referring to as ‘unproductive’ investment. There is nothing productive about transferring ownership of a productive asset. If the hope is to obtain more skill in managing an asset then the answer to that ‘shortage’ is clear – hire some decent managers. At best there might be room for joint ventures to encourage skills and technology transfers.
When foreign investment actually increases the productive capacity of the economy it is productive. Aldi is a good example of that though it is sad that the Australian retail management sector and our financial/equity sector had to leave the idea of a simple low cost grocery business to the Germans. But then starting businesses is not nearly as much fun as selling them or speculating on real estate with leverage underwritten by the taxpayer.
Unfortunately, capital inflows that result in an increase in the productive capacity are the exception rather than the rule.
The distinction was discussed ( see the replies) in a bit more detail here
As for the argument that selling off productive assets, IOUs public and private and other income streams (to prop up the exchange rate) to make it easier (due to lower tradeable inflation) for the RBA drive the demand for private debt with lower interest rates, that is exactly what I am talking about.
Our exploding levels of private debt and now rising level of public debt have had a very heavy price. Selling off assets and claims on future income by the bucket load plus hollowing out the economy with an exchange rate that does not reflect our trade performance..
It is no surprise that Mr Robb is crowing about speeding up unproductive capital inflows (though he tries to pretend they will be productive) with FTA and TPP, for a lazy neo-liberal LNP govt, driving the economy by selling it off is an easy lazy option. A model perfected by Howard.
Sadly, I don’t think many in the ALP still have any idea how to respond to policies that essentially amount to an offer to the current generation to support their ‘lifestyles’ by selling off assets and claims on their children’s income. As I note in some of those links the solution is to distinguish between productive and unproductive capital inflows and closely regulate and limit the transactions that comprise the later. Let the mercantalists drive up someone else’s currency.
Further to the question of who holds bonds (IOUs) issued by the commonwealth govt is this paper by the RBA.
It included the following graph
That graph and the paper suggests that the sale of govt securities to non-residents has greatly increased in recent years. As those sales will put upward pressure on the exchange rate, I think it is fair to argue that the competitiveness of all Australian industry and workers is being undermined by policies that permit non-residents to purchase and own commonwealth govt securities.
And the point in doing so? To manipulate local interest rates downwards to increase the local demand for debt – both public and private. Though in the case of public it is mainly about hiding the real cost of govt borrowing (higher exchange rate for a lower rate on govt debt).
Considering we are a fiat currency country and selling a bond to a non-resident does not expand the supply of local currency, we are paying a very high price to run an economy on interest bearing debt created money as against simply creating debt free money.
But addressing that issue will require a process of education as probably 95% (or more) have no idea how the private banks have been given a monopoly to create money with a trailing commission attached (interest).