Of Interest

• David Mahon: China, a country 'full of DeepSeeks,' now sees NZ as 'a country of diplomatic infidelity'

  Prime Minister Christopher Luxon visiting India before China could be seen as an insult in China, Beijing-based New Zealander David Mahon says. But he says China's recently announced strategic partnership with the Cook Islands, through which NZ was kept in the dark, shouldn't be viewed as insult to, or provocation of, NZ.Mahon, who is Managing Director of Mahon China Investment Management and has lived in China since 1984, spoke to interest.co.nz in a new episode of the Of Interest podcast.Luxon, who before the 2023 election said achieving a free trade agreement with India would be a major strategic priority for a National government, is set to visit India next month. He's yet to visit China as Prime Minister, but is expected to do so this year."If the Prime Minister had gone to China and conferred upon it as a great power the respect it deserved in the last year or so of his tenure, it'd be fine. But it's almost a statement of a diplomatic insult not going to China before going to India," Mahon said.He said potentially the prospects for NZ products in China over the next two to three years are very good, with China retaining a great need for protein, wanting to buy seafood, and NZ logs still selling reasonably well.However, Mahon suggested after a good relationship with China for many years, highlighted by the 2008 Free Trade Agreement (FTA), NZ is now seen as "a country of diplomatic infidelity.""And for most of my life, we've been the opposite of that. Under Helen Clark, John Key, Jim Bolger, we were the country that was respected. Now people are scratching their heads and saying, what's wrong with New Zealand? It seems to have lost its sincerity, its sense of loyalty."The recent signing of a China-Cook Islands comprehensive strategic partnership, which the NZ Government was kept in the dark over, shouldn't be viewed by NZ as an insult or provocation from China, Mahon said. The Cook Islands is a self-governing state in ‘free association’ with NZ with its citizens having NZ passports."...what China is determined to do is to make sure that it retains this relationship with New Zealand, although New Zealand is struggling in many ways to hold up its end.""We shouldn't be too peevish that they [the Cook Islands] want to do a deal with someone with more money than us," Mahon said."In the end, China is going to invest throughout the Pacific, where it can. Part of it is that it wants to express its influence."The Cook Islands-China agreement reportedly includes plans for co-operation on seabed mining, the establishment of diplomatic missions and preferential treatment in regional and multi-lateral forums, but excludes security ties.An attraction of the Cook Islands deal for China will "definitely" be minerals, Mahon said."If you go back to the technological revolution, which is really what's occurring in Chinese manufacturing, they need these minerals very much," said Mahon. "China is actually very poor in resources."'China is full of Deep Seeks'Meanwhile, Mahon said recent surprise around Chinese artificial intelligence (AI) company Deep Seek highlights westerners taking their eye off China and its burgeoning technology sector."China's full of Deep Seeks. There are companies in China, the names of which we just have never heard of, that are about to change major sectors that influence our lives."So Deep Seek is like the first, I don't want to say shot across the bows because it makes a sort of military metaphor, but it is a flare, a signal.""This is what China's been focused on in the last 10 years. Getting away from making nylon socks and teddy bears and cheap stuff and making really good technology, really sophisticated technology. And so this is what's going to come out of China now in waves and make all our lives cheaper in terms of buying stuff that's important to us," said Mahon."And it's going to be a major challenge to the major tech companies of the West, creating the kind of competition that markets run on. Innovation's driven by it. So this should be perceived as a positive thing."In the podcast audio Mahon talks about these issues in more detail, plus this week's meeting between President Xi Jinping and Chinese business leaders, the "shameful scandal" of NZ immigration and visas "violating the spirit" of the FTA, China's relationship with the United States in the time of Donald Trump's second presidency, tariffs, trade war, and the "ghastly concept" of potential military conflict between China and the US, possibly over Taiwan."China doesn't want a war. China doesn't want to invade Taiwan. If China were to invade Taiwan, it would be out ofthe global financial system within hours. China within six months would face a massive economic crisis," he said.*You can find all episodes of the Of Interest podcast here.

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• Nicola Willis: Growing the economy without spending

  Stats NZ’s final data release for the year revealed the economy has been shrinking at its fastest rate in three decades. While this may not be a very Merry Christmas, there is still hope for a Happy New Year.Treasury, the Reserve Bank, and most economists expect growth to resume in 2025 as interest rates fall. Consumer spending should pick back up and cheaper credit should make business investments more worthwhile. But while private New Zealanders open up their wallets, the Government will continue to tighten its belt. Core Crown expenses are predicted to fall from almost 34% of GDP in 2025 to 31.5% by the end of the decade.This would be enough to balance the books—if you ignore annual losses at the supposedly self-funded Accident Compensation Corporation—and halt net core Crown debt at 45%.But Finance Minister Nicola Willis told Interest.co.nz this wasn’t her top priority. “Our view is you can never ignore sensible fiscal policy, and it's irresponsible to indebt future generations to an extent that they won't be able to have the services that we have today,” she said in an interview.“But at the same time, you also need to make sure that you're maintaining today's services, that you're keeping the foundations for productivity, and that you are ensuring that your measures make sense—not just in the short term for coloring the books and making them look pretty—but will actually generate a sustainable basis for growth in the medium term”.Many left-leaning critics of the Finance Minster would like to see greater Government investment to support the growth forecasts next year. They worry a withdrawal in spending will hamstring the recovery and leave the economy less productive in the future.It may surprise you to hear that Willis agrees with them. She says it is “factually incorrect” to accuse her of austerity, as the Coalition’s fiscal policies are still stimulating demand.   “We have a government that is actually continuing to increase its overall levels of spending, both in absolute terms, but also as a proportion of the economy.  And actually, the fiscal impulse will be positive.”“But the point that we are making is this does need to unwind over time, and so we've set out a path of gradual fiscal consolidation, which we think is the responsible way to go”.She says policies which deregulate the economy, open New Zealand up to more foreign investment, and crack down on uncompetitive industries will be more important to future growth than fiscal stimulus. Banking is one of these uncompetitive sectors in which she wants reform. She's already told Kiwibank to raise $500 million and the Reserve Bank to put more weight on competition when setting regulation policies, and is more than willing to go further. “When I read through the Commerce Commission report on our banking sector, it couldn't have been any clearer to me that we have a major problem,” she said.“I have put the banks on notice and made it clear that if they want to do more of their nice talk about how they're going to be really good … that won't wash with us. They need to be acting or we will take further action, and there are a lot of options for what we can do there”.  She’s open to charging banks a special levy or tax, like in the United Kingdom and Australia, which recognises they benefit from an implied Crown guarantee and earn very high risk-adjusted returns as a result. Big banks beware!

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• Andrew Coleman: Swapping NZ's gas guzzling Holden government retirement income system for an EV

  The Government could run a second retirement income scheme alongside NZ Superannuation as part of a transition to a new system, but according to Andrew Coleman, this couldn't be done without an increase in taxes on older people, or more general tax increases.Fresh from his 13 part interest.co.nz series on NZ's government retirement income system and associated taxes, Coleman spoke to myself and Terry Baucher on a combined episode of the Of Interest podcast and the New Zealand Tax Podcast.Coleman is currently a visiting professor at the Asia School of Business in Kuala Lumpur while on extended leave from the Reserve Bank. He has also worked for Treasury and the Productivity Commission. The views expressed are his own.Coleman says the urgency for making change isn't just down to an ageing population and the increasing taxes he says young people will have to pay. It's also because those under 45 are inheriting a very costly system, which might not be what they like or want.He uses an analogy of a 22 year-old who recruits help from their father or uncle to buy a car."And he says, 'oh, cars, I'm good at cars. You know, when I was a kid we had these great Holdens and you could put six people in them, everyone in the whole family would fit in them. And they had a big six litre engine'... And you say, 'oh, well that's maybe not what I wanted.' But he says 'oh look, I'll go and get you the car, just give me the money and I'll get you the car.' And so you give him ten grand and [he] comes back [with an] old Holden, which is a gas guzzler and not particularly safe.""And you've only got a girlfriend or a boyfriend and no kids and it's nothing like the car that you want and yet you've paid for it. And it's got these high ongoing costs because it's chewing down the petrol," Coleman says."You wanted a little hybrid or electric car or maybe just a Toyota Corolla, which was quite small and fits in your little parking place. And it's a bit like that. Young people today are inheriting a [retirement income] system designed in the seventies when Holdens ruled. And it may not be what they want and it's very costly."In his series Coleman suggests a new pension system, which he calls KiwiSaver 2.1, which would be a shift from pay-as-you-go funded pensions to save-as-you-go funded pensions. I asked him whether a transition could be made to the new system for those under 45, with the current system kept in place for older people, without higher taxes on older people which he suggested in his series would be required to change to a new system."There's no reason why you can't have two systems going. And one of the reasons is that your entitlement would depend on your birth date...that's very straightforward. We would just at some point introduce the second system for people under 45 and build it up and keep old people on the current system," says Coleman."Can we do it without an increase in taxes on older people, or more generally? No.""There is a transition issue. It's like digging a hole. Once you've dug the hole, if you want to get out of the hole, you have to do some work to fill it in again. And so when we adopted a pay as you go system or expanded it significantly back in the 1970s, it meant that to reverse it, some future generations are going to have to be worse off than they otherwise would have been. And that's the political difficulty here. It's like there's this beautiful thing that you want over there, a beautiful island that you can go to, but you can't get there for free.""But there's goodwill out there. I think a lot of people my age... recognise that young people are paying a disproportionate amount of the costs and that if we can find a way of increasing taxes on ourselves in order to make the system better for younger people, that's something that a lot of people would be prepared to do now. It won't have to be a permanent increase in taxes. It's a transitory phenomenon," Coleman says."Once we've got the new system up and running, taxes would come down and we would have a much better tax system. There should be, if we do this, a statue to the unknown 75 year-old who paid a few more taxes so that all the young New Zealanders of the future could be better off and have a better system."In terms of what tax(es) are used, Coleman says a transitional social security tax on older people is an option. Social security taxes, such as Accident Compensation Corporation levies, are paid on labour income.There's much more detailed discussion in the podcast audio including on taxes.*You can find all episodes of the Of Interest podcast here.

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• John Lyon: Why New Zealanders should be grateful insurers remain committed to their country

  New Zealanders should be grateful insurance companies remain committed to New Zealand given the country's risk exposure, John Lyon of Ando Insurance says.In the latest episode of the Of Interest podcast I asked Lyon how well general insurers are serving New Zealanders, how competitive the market is, and how the public should judge strong financial results from their insurers. As well as being CEO of Ando, an underwriting agency, he's also the former CEO of Lumley Insurance. Statistics NZ's Consumers Price Index shows insurance costs rose 14% in the June year, making them a key contributor to households' cost of living pressures and the stubbornly high non-tradable inflation that meant the Reserve Bank held the Official Cash Rate at 5.50% for as long as it did."I think we should be grateful that there are insurance companies who are still committed to the New Zealand market, because what we need is a healthy, strong insurance market because the risks are so great in New Zealand," Lyon says."When you think about the risks we're exposed to from volcanoes that are overdue, to the well known earthquake exposures, the evolving cyclone and climate change issues, [and] we don't really fully understand tsunami risk. There's lots of evidence that there have been major tsunamis along the coast of New Zealand. At what frequency would we expect something like that to happen? We don't know. That's not been particularly well modelled. That's a major risk to the country.""There's a whole bunch of factors in there that we can talk about in terms of what New Zealand Inc needs to do to protect itself from the environment we live in. And climate change is a big part of that. But it's also all of the other generic risks that are there in front of us. So we have to think about how we manage them as well," says Lyon.With the likes of IAG, Suncorp and Tower having recently reported strong financial results, how should we judge how well they're doing financially?"One of the things that the reinsurers did [last year], as well as putting prices up, was they went to the insurance companies and they said, 'you now need to hold more of the risk to your own account'.""The Suncorps and IAGs, and indeed our business, was faced with a situation where if we had been holding, say, $100 million of the risk to our own account before reinsurance comes in, the reinsurers might have put that up to $500 million. So if you think about that, then if you've got an exposure of $500 million for any one event, you're not going to get $500 million every year.""So typically what insurance companies will do is they say, 'well, maybe over five years, we'd expect to have $100 million on average. So it'll be one big event every five years. That's $500 million. We'd spread that cost over five years.' So in every year you'd put a cat allowance [catastrophic event allowance] in of $100 million. If you don't have a cat event, you've got $100 million profit and then the next year you might have no event and you got another $100 million profit. But in year five you've got a $500 million event and you lose $500 million.""That's the market that we have moved to. The insurance companies need to be very profitable in the good years because the cost of managing the bad years is a lot higher. So it's not just reinsurers that suffer when there is a big event. The insurance companies hold more to their bottom line and that's a challenge for all the businesses in that respect," Lyon says."So it's hard to judge insurance on a year on year basis."Lyon suggests the most significant barrier to enter the general insurance market is New Zealand's risk profile, noting a number of international insurers look at NZ and see the economy is relatively small."It'll never be a major strategic value add to a global company in terms of incremental growth. So all you're going to have is a problem when a big thing happens like an earthquake."In the podcast audio Lyon also talks about what he believes should be done that would be more beneficial to customers' insurance costs than a market study, how the insurance industry is lagging from a transparency perspective, the perception of choice created by the big companies being behind numerous brands, how competitive the market is, the level of market power the big players have, climate adaptation, managed retreat and uninsurable areas, whether the general insurance market is a duopoly, insurance policies being used as a taxation device, risk-based pricing, parametric insurance, what the insurance equivalent of open banking could mean, and more.*You can find all episodes of the Of Interest podcast here.

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  43:27
• Murray Harris: The case for higher KiwiSaver contributions

  Milford Asset Management’s head of KiwiSaver says KiwiSaver – the country’s voluntary retirement savings scheme which is in its 17th year – is a teenager that’s about to head into adulthood.“I think it's the right time to have the discussions we were having at the [Financial Services Council] Conference. By and large, providers are pretty well aligned around how we can improve KiwiSaver and make it better for New Zealanders retirements,” Milford's Murray Harris says on a new episode of the Of Interest podcast.KiwiSaver has become a bigger topic of financial conversation this year and the discussion around potential tweaks and changes to the savings scheme has become more of a ‘when they happen’ and less of an ‘if’ scenario.At the Financial Services Council Conference in early September, KiwiSaver was a hot debate, with KiwiSaver providers discussing how New Zealanders are simply not saving enough for their retirement and the Retirement Commissioner pointing out that Kiwisaver governance lacks clarity.Harris tells interest.co.nz that KiwiSaver has been “very successful” in attracting members and the savings scheme doesn’t have a participation problem.The latest KiwiSaver statistics out of Inland Revenue shows over 3.36 million people are now enrolled in KiwiSaver as of July 2024 and Harris says the participation rates are highest amongst those between the age brackets of 25–34 and 35–44.  “The participation's really good, but we have an issue around the contribution rate or the amount that people are contributing,” he says.“Most people are doing 3%, and ... 90% of employers only do 3%. So together, those contributions are not going to be enough to get people to where they need to be for a really comfortable retirement. And I think that's the key issue. That's the real nub of it being very successful in terms of getting people interested and involved, but we're just not contributing enough.”The Financial Markets Authority released its 2024 KiwiSaver report on Tuesday which showed total KiwiSaver contributions – this includes employee, employer and government contributions – came to $11.2 billion in the March 2024 year. This is up 6.5% from the prior year.Harris says the KiwiSaver industry has a job to do in terms of educating its members that the current default contribution rate in KiwiSaver, which is 3%,  is a good start – but not enough to get people to where they likely think they're going to be savings wise by retirement.“Most people think it's 3%, and that's the problem with the settings as they are. You tell people to do 3%, that's what they'll do, and they'll think that's all they need to do. But in reality, it's a lot more,” he says.The Retirement Commission has called for a higher default contribution rate of at least 4% and says employers should be matching at this level or more. Harris says there are also things New Zealand can learn from “the lucky country” – Australia  – when it comes to saving for retirement.  The minimum contribution rate for Australia’s superannuation scheme – the equivalent to NZ’s KiwiSaver scheme – is currently 11.5% for employees and employers. This is being raised to 12% in 2025.“They've amassed a lot of assets and they've been able to reinvest those assets into the local economy. So you go to Australia, you cross some wonderful bridges, the motorway systems, the tunnels through central Sydney. Now they've been built with superannuation money and it's been a win-win because the economy moves better, industry can move their goods and services at a better pace and they've provided some great investment returns for investors, for super investors. So that's a win win. I think that's something that we could definitely learn from,” he says.*You can find all episodes of the Of Interest podcast here.

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