LISTEN: Key on trade, China & net zero

As the economic recovery from COVID picks up speed, the geopolitical landscape is shifting under our feet. China is responding to slower growth, and the changing climate is becoming a bigger factor in business and policymaker decisions.

As part of his Blue Lens on Mic series, ANZ Chief Economist Richard Yetsenga sat down with former New Zealand Prime Minister and current ANZ NZ chair Sir John Key to get his view on where these trends may lead.

The following is PART TWO of a lightly edited transcript of that discussion. You can click here to read PART ONE, or listen to the full conversation on podcast below.

RY: China is a $US15 trillion economy. Enormous, the second largest in the world. But it does seem to have stepped down structurally in terms of how quickly it will be growing. And it seems to me that it's 2 per cent, 3 per cent or 4 per cent, rather than the 6 per cent, 7 per cent or 8 per cent that we've been used to.

What are the implications of a slower growing China, do you think?

SJK: Well, I think globally it’s negative, actually. I go back to 2008 and say, well, look, China was the third leg of the stool that actually held up the stool really after the global financial crisis.

The United States was very weakened with the banking crisis. Europe was in trouble. China's growth went through us.

And I mean, they just have a burgeoning middle class. They have a demographic problem; we all know that. An ageing population.

But if you take a little country like New Zealand, I mean, what do we do well? We sell food, we invite tourists and foreign students, and we do some quite creative sort of cutting-edge things actually. And when I look at all of that, China's been the Mecca for us in terms of buying the things that we produce, or sending tourists or students. It’s been fantastic.

They are our largest trading partner, which is no mean feat given the geographic proximity and the strength of our relationship with Australia.

I think in some respects what we're going to see with China now is more of a political response, probably a more predictable response. I think they’re definitely becoming more inward-looking, there's no question about that.

I think the question for the world will be how do they want to engage? Because they might be difficult to read, and there might be some challenges, but they're also difficult to ignore.

As you pointed out, they're a massive economy and they might not be growing as fast as a while ago but man, they can still buy a lot of products from Australia and New Zealand and from ANZ customers.

I don't know whether I would want to abandon the Chinese dream just quite so quickly.

RY: Certainly, Australia and New Zealand, and much of the region, in fact imports a lot from China as well as exports a lot from China. So that relationship and dependency goes both ways.

We've spoken about macro, about China, about politics, about Trump. How does the world that we've spoken about affect New Zealand? How does New Zealand fit into this?

SJK: Well, I always used to say New Zealand's this little country at the bottom of the world, no one owes us a living, so we better get out there and make our way in the world. We’re the last bus stop on the planet, us and a few penguins down in Antarctica.

New Zealand is by definition a country that needs globalisation and engagement. And I think New Zealanders understand that.

When I got on the plane and we negotiated free trade deals, or I went off and met leaders and markets where we were going to export - whether it was Australia or China or the United States or anywhere else - that was popular. Because New Zealanders understood we need to make our way in the world.

If you think about our dairy sector, which is very dominant in New Zealand in terms of global exports, we’re nowhere near the biggest dairy producer in the world.

What we are is a very small domestic consumer and a large exporter. So plenty of countries produce a lot more than us, they consume it locally. So we need the world to engage.

One of the worries is this view that trade is no longer the right way to go, and not trendy, and that fully integrated global supply chains are not the way to go. That actually works against a country like New Zealand.

And COVID has certainly had some impact on people travelling or sending their kids to study in a country like New Zealand.

Having said all of that, I'm a born optimist anyway and I'm pretty optimistic about New Zealand and Australia because I just look at them and think ‘they’re resource rich, they are fundamentally and philosophically safe places to live, they've got great climates as a general rule, although heating up’.

There is a bright future out there for us and we're still young countries. You know, we don't have some of the demographic challenges you see in Japan or China. But that doesn’t mean it’s going to be an easy path.

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RY: John, you mentioned a safe place to live. You said to me once voters care about four things: the economy, health, education and law & order. Climate change challenges at least two of those. How difficult is this transition going to be? Can we in fact get there?

SJK: I think we can get there. I personally believe in anthropogenic climate change, and I think any self-respecting sort of economists and scientist in the world does really.

I'm a little less negative than others because I think technology will help resolve our issues. I don't think it's a linear reduction down to a global warming of 1.5 or 2 degrees.

I sat next to the CEO of BMW [Harald Krüger] the other day when I was in Germany, and he said they make 250,000 cars across Rolls-Royce, Mini and BMW. Quite a bit less than 10 per cent of those cars today are electric, but by 2030 they won't produce a Mini that's not electric. I suspect most of their range will be [electric].

Now a lot depends on the source of that energy and maybe hydrogen is the answer. But you can sort of see where it's going to go. I think more and more as these cars have the range and all the other benefits, and the capital cost comes down, people will get in them.

I don't think people in Australia and New Zealand are philosophically opposed to doing the right thing for the climate. They don't want a change in the standard of living.

I think what the challenge is for somebody like New Zealand is that we have an emerging country profile, and so our issue is half of all our emissions come from agriculture – methane and nitrate emissions.

And even though we as a government helped set up the Global Greenhouse Gas Alliance, we're constantly looking for nitrate and methane inhibitors, we bought in the emissions trading scheme - the change in the challenge for those areas is significant.

I mean, people just sit there sometimes and say, well, you know, the world is heating up a little bit. But yeah, okay, if you live in Dunedin in New Zealand, a little bit more heat might be seen as a good thing. But the blunt reality is that's not what climate change is really all about.

The world is heating up, but what does all of that mean? It's catastrophic weather patterns. It's significant impacts on plant species and on fish.

Right across the board, there's going to be a lot of changes. One of the things we've been doing at ANZ is saying, firstly we have a responsibility as a financier to work with our clients. To work alongside them to say, ‘well, do you have a plan? Are you thinking about all these things?’

The second thing is we have to put our money where our mouth is. And we are financing increasingly great areas of sustainability. I think we’re the largest in Australia financer of green bonds. In New Zealand we just had these 1 per cent loans for energy, where if you’re doing all sorts of different energy projects both at a retail and wholesale level you can access that, and they've been very, very popular with consumers.

There is no question the finance sector has a role to play with corporate New Zealand and Australia, and households, as they transition to a greener world.

The only other point I’d make is the challenge was with the stuff - and I can tell you from a political point of view, these are the two things you run into.

Up front, people don't feel the same way. They are starting to now with the weather patten changes. The second is, even when they do feel it, and when they really care about it, they often throw their hands in the air and say, well, the three big emitters in the world are China, the United States and India. So, what’s the point in us doing much if they’re not going to pull their weight?

I think my own view of that is actually: China is doing more on climate change than people think.

RY: China and India are also at much lower standards of living. So there is, I think, a different development ask.

One aspect of climate change - despite this broad acceptance, which you mentioned - carbon taxes in general remain too narrowly based and rates too low.

Why can't we seem to get there on carbon taxes? Are there any good strategies to improve adoption?

SJK: It's largely the impact on consumers, business and politics.

Our government brought in an emissions-trading scheme. Now we didn't put agriculture into the scheme straight away and we kept carbon prices, because obviously we were concerned if we transitioned too quickly, there would be enormous demand, very difficult to offset, and the price would go up a lot.

You’ve probably worked out by now I'm a born capitalist and great believer in the market. Maybe overly trusting, some might argue. My point was, in my time, there was never a fossil-fuel power plant consented in New Zealand.

Not because the government stopped it, but because the economics didn't work to support it. And I think you have seen a lot more trees being planted for sequestration, all those kinds of things.

I think you do ultimately have to price carbon. The question is, okay, if you let that price just run away on you without a reasonable transition period, it's going to be difficult. Because those prices will become very, very challenging for consumers and ultimately those prices will get passed on.

Mum and Dad will go off to Woollies or Coles or whatever and wonder why the hell they're paying such enormous prices for the products they’re buying. And that just feeds into the inflation debate.

But somewhere along the line, you have to move the dial. Eventually, you have to say, we tax some things, not just for raising money, but that have negative outcomes. And we’ll reduce taxes, if you like, on things that don't.

This is PART TWO of a lightly edited transcript of that discussion. Click here to read PART ONE.