Q+A: Economist Rodney Jones interviewed by Corin Dann

Q+A: Economist Rodney Jones interviewed by Corin Dann

Beijing based, NZ economist Rodney Jones – urges a ‘careful’ approach to China’s ‘One Belt, One Road’ strategy

‘Well, I think we have to be a little bit careful here. How will we gain. We— The world needs China to do the next step of reforms, to open up. And the conversations are kind of happening on China's terms right now. We— The world has to think about what does it need’

CORIN Well, but I guess the thing with Australia and the 'One Belt, One Road' is that if Trump is cut off— cut us off with the TPP, why wouldn't we move towards China and it's new geopolitical strategy?

RODNEY Because we have to be patient. Healthcare failed on Friday in the US. There's— Trump does not dominate everything in the US. There are checks and balances, and so we have to be patient. The sense I got from the minister was a sense of overreaction. TPP's important. TPP's the best thing that we have to get China to open up, and somehow we have to keep it on life support for the next four years. But we just have to be careful not to overreact.’

Rodney Jones told Q+A, ‘the world needs to start thinking about services in China, and that's what we need to start pushing on. Just like 20 years ago, we thought about goods. Today we have to think about services, and you think about the New Zealand economy. We are constrained in how many goods we can produce. We're not constrained in services.’

Mr Jones also said a tightening of China’s capital controls will be having an impact on the property market.

‘China has had very rapid growth in money supply in China over the last five years, and that money has been flowing out and been going abroad. As China's opened up, they also opened up the capital account. Well, in the last 12 months, they've realised they went too far, and they're now tightening those controls, and in January this year we had another round of tightening, so now it's very difficult to get money out. And we are starting to see an impact of that — the anecdotal in Auckland, the anecdotal in Sydney, we— Melbourne. We're seeing a drying up of Chinese flow into property markets.’

Please find the full transcript attached and you can watch the interview here.

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Q + A

Episode 03

RODNEY JONES

Interviewed by CORIN DANN

CORINAnd watching that interview was New Zealand economist Rodney Jones, the principal of Wigram Capital an economic advisory firm based in Beiging. He is back in New Zealand and joins me from Dunedin. Good morning, Rodney. Nice to have you on the show again. What did you make of that interview and, I guess, New Zealand's enthusiasm for the 'One Belt, One Road', because Australia, it seems, has been a bit more reluctant?

RODNEYYes, good morning, Corin. Good to be here. The— I think we need to respect Australia's concerns. We need to understand it. New Zealand's done well from being an early mover, and, you know, the minister talked about FTA. He talked— He didn't talk about AIIB that we joined, when—

CORINThat's the development bank.

RODNEYThe development bank that we joined early when everyone else was staying out of it, so we've done well moving early. This may be something, though, that we have to really understand deeply, because 'One Belt, One Road' is an essential part of China's geopolitical strategy, so it combines— Some people now use the term 'geo-economics.' It combines politics and economics, so it's different from what's gone before.

CORINDo we stand to gain hugely from it?

RODNEYWell, I think we have to be a little bit careful here. How will we gain. We— The world needs China to do the next step of reforms, to open up. And the conversations are kind of happening on China's terms right now. We— The world has to think about what does it need, and China's an amazingly dynamic economy. It's resumed growth. It's had a difficult period in 2014 to 16. It's coming out of that. It's resuming relatively fast growth. And how's the world going to benefit? How do we engage? Do we just export commodities or can we have access to services? The minister talked about the digital economy, but that's closed off in China. Can our firms— service firms go to China and compete? Right now they can't.

CORINWell, but I guess the thing with Australia and the 'One Belt, One Road' is that if Trump is cut off— cut us off with the TPP, why wouldn't we move towards China and it's new geopolitical strategy?

RODNEYBecause we have to be patient. Healthcare failed on Friday in the US. There's— Trump does not dominate everything in the US. There are checks and balances, and so we have to be patient. The sense I got from the minister was a sense of overreaction. TPP's important. TPP's the best thing that we have to get China to open up, and somehow we have to keep it on life support for the next four years. But we just have to be careful not to overreact.

CORINSo if we overreacted, are you worried that we would upset the United States?

RODNEYWell, we will swing too far, and we will support things that are not necessarily in our long-term interest. We have to keep our eye, as the minister said, firmly on 2030. Now, Trump will not be around in 2030.

CORINYou can imagine, though, that Li Keqiang when he talks to government ministers tomorrow is going to want that commitment to the 'One Belt, One Road' proposal.

RODNEYWell, 'One Belt, One Road' is changing. The proposal has been there since 2010. They've been doing things in Sri Lanka and Cambodia and Myanmar. It's been around for a long time. What's changed is the expansion. They're trying to expand it to Oceania, which judicially has been New Zealand and Australia's area of influence.

CORINWhat— When you talk about China and opening up, I mean, what can we get out of China with an enhanced free-trade deal? Do you think that it's more important, rather than just getting the dairy tariffs down, to get some more access to those services?

RODNEYI think we need to start. The world needs to start thinking about services in China, and that's what we need to start pushing on. Just like 20 years ago, we thought about goods. Today we have to think about services, and you think about the New Zealand economy. We are constrained in how many goods we can produce. We're not constrained in services, and we've got to have agreements that open up that service market, and that was the beauty of TPP. It was a carrot to get China to open up. We need to encourage the reformers in China. Reform has gone nowhere in the last five years. It's been a discouraging time if you wanted to see China take the next step. We need to see reform.

CORINWell, that's interesting because I know in the past we've talked about capital controls, the housing market in New Zealand, Chinese capital flooding into, you know, Auckland housing market. We— The politicians tell us that there isn't the evidence to back it up, but what are you seeing and what's happening with China's capital controls?

RODNEYOK, see, this is the— this is the change since we last spoke, when you were in Beijing. That China has had very rapid growth in money supply in China over the last five years, and that money has been flowing out and been going abroad. As China's opened up, they also opened up the capital account. Well, in the last 12 months, they've realised they went too far, and they're now tightening those controls, and in January this year we had another round of tightening, so now it's very difficult to get money out. And we are starting to see an impact of that — the anecdotal in Auckland, the anecdotal in Sydney, we— Melbourne. We're seeing a drying up of Chinese flow into property markets.

CORINShould we be concerned about it? I suspect there will be some people who'll be quite happy about that.

RODNEYIt's a good thing. That's why I argued for a stamp duty. We should be more concerned when it was coming. It will take the edge off Auckland property. It will give us some breathing space.

CORINWhat else do you think will be on that agenda in these talks with Li Keqiang? I mean, there's obviously— there's often issues around extradition treaties. I mean, just trying to get a sense for what China wants. I mean, I know they like to think of us as a model trade partner, but surely it's more than that.

RODNEYWell, I think this— this— overall this 'One Belt, One Road' discussion kind of shows us China never sits still, and Trump has provided China with an opportunity, created a space that they can move into, and they're moving into that— that space. And so the discussion really will be, as we saw in Australia, really about joining China's initiatives, and that's going to be the challenging part for New Zealand.

CORINJust finally before you go, what's your sense, being in Beijing, about Trump, about the mood in China, the fears of Trump whacking on a 10% tariff or— you know. What's the feeling? How worried are they?

RODNEYI think they're reasonably confident. You know, China— Trump's bluster doesn't carry so much weight there, and they're preparing, and I think they feel they're in quite a strong position, and you don't get the sense of anxiety that you get elsewhere.

CORINAnd president Xi, do we see the same power around him? Because there's often questions about, you know, his role.

RODNEYWell, you know, they now use the term, the title 'Core' to describe him, and he is core. He's really centralised power. We're moving towards an important political transition. This his second term this October in the party and March next year. And so he's really consolidated power, and he's, you know, a very strong leader.

CORINDo you have confidence that he can actually do the reforms that are required in China?

RODNEYWell, we haven't seen evidence of that in the first five years, and that's something we should really be watching closely and encouraging. The message to China should be we need China to take the next step. We need more reform. We need more opening up. It's worked for 30 years. We need it to work for the next 30.

CORINOf course, there are plenty of those who worry about China, in particular its debt mountain. Where do you sit on that particular debate?

RODNEYWell, I'm one of those worriers. I've used the term 'financial Star Trek' to describe China — that we're going— we've left the solar system behind, so we're going beyond where we've been. We haven't seen this before. The debt numbers are enormous, but they're holding it together, so we've been worrying, but they've got through it so far.

CORINRodney Jones, thank you so much for your time. We always appreciate it.

RODNEYOkay, thank you.

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