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Black Monday wasn’t so bad, John Key is worse

Written By: - Date published: 8:51 am, August 31st, 2015 - 37 comments
Categories: China, Economy, john key, national - Tags: , , ,

Well, the fallout from the latest stock market ‘correction’, this time in China, is still reverberating. However it is becoming clear. Not much has changed from the weeks and months before. The major affected major stock markets outside China are largely back to where they were. The economies that became too dependent on Chinese imports of raw materials like Aussie, us, much of Africa and South America, and many other parts of the world are still down.

Quite simply the Chinese stockmarket is such a small proportion of the Chinese economy as a leader in the Economist pointed out in “Taking a tumble“, that it’s fall was a symptom of internal confidence rather than a shift in the economic base.

So is this the hour of China’s crisis? Highly unlikely. Though the economy faces grave problems, the financial tumult is misleading. China’s stockmarket has long been derided as a casino, and for good reason. The bourse is small relative to the economy, with a tradable value of a third of GDP, compared with more than 100% in developed economies. Stocks and economic fundamentals have little in common. When share prices nearly tripled in the year to June, they no more reflected a stunning improvement in China’s growth prospects than their collapse since then has foreshadowed a sudden deterioration.

Less than a fifth of China’s household wealth is invested in shares; their boom did little to boost consumption and their crash will do little to slow it. Punters borrowed lots of money to buy stocks in good times, to be sure, and some of that debt will default. But it amounts to just 1% of total banking assets, a potential hit that, although unpleasant, is hardly systemic.

The property market matters far more for China’s economy than equities do. Housing and land account for the vast majority of collateral in the financial system and play a much bigger role in spurring on growth. Yet the barrage of bearish headlines about share prices has obscured news of a property rebound. House prices have perked up nationwide for three straight months. Two months after the stockmarket first crashed, this upturn continues.

That isn’t to say that the exchange doesn’t reflect fundamental underlying changes in the Chinese economy, it is. But as a casino, it lags a lot on the real economy. It means that the usual rush of gamblers to a new market that went bull happened. People threw their savings into the pot, and then borrowed to throw more in. Then most failed to exit early enough. Emily Rauhala at the Washington Post has an eloquent description of the classic pattern in a farming village in China  (well worth reading).

For Nan, the taste of fast money has been hard to forget. His wife, Wang, wants him back in the fields, but he believes he can recover what he lost, maybe more. If he is angry, he won’t say so, fulsomely praising the local chief and the Communist Party as he compulsively checks for market news on his phone.

For me, it reminds me of the once-were-millionaires in Auckland in 1989 as they tried to get rid of assets to clear debt and avoid bankruptcy. I believe most of them also followed their ever hopeful religious beliefs and went on to supporting the Act party.

The change that has been happening in China over a number of years has been the slowing of growth, and in particular the frantic infrastructure growth that China initiated in 2008/9 as a response to the GFC. That was perfectly placed to take advantage of the lower commodity prices as the other major industrial consumers faltered, and then to take advantage of the rising markets in the west as the GFC effects diminished there.

But now the housing are built, the rail lines in, and the infrastructure is largely done. So much of the need for many of those commodity imports has diminished.

On the downside, there is little chance this [housing] rebound will translate into a big acceleration in building activity, because Chinese developers still have to work through a glut of unsold homes, the legacy of their building frenzy of recent years. But the stabilisation of prices reduces the risk of a property-market crash—an event that would be for China what a stockmarket crash would be in America or Japan.

However the external markets are full and the massive potential Chinese internal market isn’t sucking up the supply.

Investors are now trying to delve beyond iPhone shipments and gauge where China’s economy—and so the world’s—stands. In terms of global impact, a “hard landing” in China would now rival an American depression. Countries from Australia to Angola have grown richer from digging stuff out of the ground and shipping it to China. Industries from carmaking to luxury goods look to China for new business. It has been the most stable contributor to world economic growth. Will that continue?

Certainly, there are reasons to think it is in trouble. Exports are stumbling, bad loans rising and the industrial sector at its weakest since the depths of the global financial crisis. Never entirely credible, the government’s claims that the economy is chugging along at 7% now elicit derision.

At present, skeptics think that the real Chinese growth rate is in the order of 2-3%. Less than that of the US at 3.7%.

For the next few years, the bulk of the issue with the Chinese slowdown will be to do with the developing economies who have been supplying China with raw materials. Their exports and export prices on commodities have dropped and are unlikely to rise any time soon.

The Guardian has a useful simplified interactive graphic to demonstrate what likely effects on commodity suppliers is likely to be.


Click to enter interactive page

Needless to say, because of the John Key government’s headlong pursuit of dairy and other agricultural/forestry commodity sales in the last 7 years, New Zealand is one of the countries most at risk of slowdowns in imports from China. However we have a double whammy because our next biggest trading partner is Australia, who are just about as badly exposed in a completely different area of minerals. It is unlikely that the kiwi economy will sidestep both issues.

John Key seems to prefer us to be a developing world commodity trader, without any significiant intellectual property in the bulk of our exports. Certainly in the last 7 years, his government has systematically removed almost all of the economic inducements to develop more advanced products for selling offshore, while at the same time using the power of the state to favour dairy. This leaves us at the mercy of not only of competitors entering the low bar of dairy farming, but also to downturns in particular markets like China.

Black Monday on the casino Chinese stock markets wasn’t a particular problem for New Zealand. Living with the consequences of  John Key’s short-term thinking government will be. Both us and our next biggest trading partner Australia are heavily exposed to falling Chinese imports and falling commodity prices. That is going to hurt even more than now over the coming years.

37 comments on “Black Monday wasn’t so bad, John Key is worse ”

  1. Pat 1

    good broad summary..would add one observation however,although there is a complete disconnect between the SE and the economy in China, even more so than the west, the panic occured when the realisation of that fact hit home coupled with the actions ,or lack of ,of the Chinese gov not continuing to prop up the casino….though the countless billions of good money after bad was ultimately reinstated when they could see no bottom…..the phrase “kicking the can down the road” appears to travel.
    As Mr Williams is wont to say, watch this space.

  2. Draco T Bastard 2

    John Key seems to prefer us to be a developing world commodity trader, without any significiant intellectual property in the bulk of our exports.

    That seems to be a National Party characteristic. Commodities are cheap and easy to produce and thus don’t require huge amounts of investment in development. This translates into higher profits for the owners – until commodity prices drop due to everyone getting on the bandwagon as has happened over the last few years.

    Black Monday on the casino Chinese stock markets wasn’t a particular problem for New Zealand. Living with the consequences of John Key’s short-term thinking government will be.

    Again, that’s not specific to John Key but to the National Party in general and National Governments in particular. They do cheap and easy and then whinge when it no longer works. They simply don’t seem to have the intellectual capacity to think in the complex terms of an entire economy. IMO, it’s this lack in the intellectual abilities that draws the right-wing into supporting free-markets and specialisation. They like the idea of specialising an entire economy because they can understand it that way whereas they can’t understand it in it’s full complex glory.

  3. Detrie 3

    Good summary. The whole short term, commodity trader thinking is perhaps a natural strategy when we have an ex currency trader in charge too. Looking for short terms gains and manipulating of numbers is how this ‘game’ is played, at our expense.

  4. Sans Cle 4

    Bill English and John Key would benefit from a sobering read of “Ship of Fools” by Fintan O’Toole, to identify the parallels of their economic (mis)management with that of Ireland. The saving grace for Ireland is their investment in educating people and strong firm level R&D (ups killing and intellectual capital), whereas we are so dependent on dairy.

  5. RedLogix 5

    A relative of mine is working in Macau at the moment. He reports that the relationship between Chinese and casinos is a thing to behold.

  6. les 6

    Chinas demand for commodities like coal and iron ore used for manufacturing will reflect demand from their customers.Therefore it is actually consumer confidence in those countries that import chinese manufacturers goods that will determine any downturn in the supply/demand equation.

    • lprent 6.1

      Not really.

      Most of the increases in iron ore, coal, and other commodities since 2008 were used for infrastructure and building – not manufacturing. That is your first misunderstanding.

      The problem is actually one of over supply from suppliers in most cases in a late response to demand.

      For instance since 2008, I think that NZ has massively increased its production of milk. But so have other countries. The demand for milk in China and elsewhere hasn’t grown as fast, and so the prices drop.

      Since 2009, the amount of iron ore exported out of aussie went up like a rocket, and they are still adding new plants like the new plant that Gina Reinhart which will increase aussie total ore production by something like 20% or more. The demand from China flattened out years ago, so the price went down.

      That is all imports for China’s internal changes.

      The actual exports from China have simply plateaued because growth in their markets has been satisfied. But they are as high as they have ever been. They just aren’t increasing as fast as many governments would like.

      • les 6.1.1

        You need to understand that prior to 2009 China was a net exporter of coal.They introduced new tariffs on imports in 2014.As for iron ore as the worlds biggest manufacturer/exporter its not so much demand that has reduced as the fact that supply has increased leading to price reductions.You sort of contradict yourself by acknowledging the increase in capacity but then say ‘ The demand from China flattened out years ago, so the price went down.’..

        • lprent

          Nope. You really should learn about supply, demand and price.

          The demand from China for iron ore pretty much peaked in 2013.

          *Dealing with geological idiot deep sigh* all coal is not alike. The bulk of China’s thermal coal came from internal and probably still does. However China started importing a lot of special coals off the international market over a decade ago – mostly for steel making. Some of that came from here, more from Aussie. Again, the demand peaked from China a few years ago. That is a large part of the reason why Solid Energy is having difficulties. They expected that high profit direct (and indirect) business with China to keep funding their supply expansion, and it didn’t.

          Milk powder, the same thing.

          Same in other countries for things like copper, manganese, cobalt, and a host of other materials. Fracking oil in the US. etc

          They all spent big on expending supply because the prices of such commodities was high making marginal extraction worth doing. But the demand growth slowed down, the supply projects kept running, and now we have falling prices on virtually every commodity material in the international market.

          Just look at the massive increases in international milk supply in the last 6 years, not only from here, but from the US (went from 10% of the market to 50% in WMP). Effectively the same thing happened in most commodity markets. Which why being a commodity supplier is such a risky business for a country to be in.

          If you look around

      • les 6.1.2

        ‘Most of the increases in iron ore, coal, and other commodities since 2008 were used for infrastructure and building – not manufacturing’….says who?Lets make it simple…have coal and iron ore prices crashed due to supply or demand?

        • lprent

          Supply by far, helped bit by the changes in the USD. Demand is definitely the 3rd factor. That is faltering, but hasn’t fallen as nearly as far as the prices. It also looks like in most areas it has hit steady state – at a lower price level with ample supply.


          Pretty basic

          The real curse for producers is over-supply in almost all raw materials. Yet they continue to act as if they are blithely unaware of it. Capital is still pouring into holes in the ground, creating a hangover that may last at least a decade. Jeff Currie of Goldman Sachs, a bank, says past cycles suggest it can take up to 15 years to work through the over-investment. “The world has just flip-flopped,” he says.

          Analysts point out that not all commodities act the same way. Coal prices started falling in 2011; crude oil hung on until mid-2014; agricultural prices hinge on the weather. But a generalised whiff of fear about China’s economic prospects has re-emerged in recent weeks, partly caused by sliding stockmarkets and by the unexpected devaluation of the yuan this month. So far this year, almost all major commodities—energy, industrial metals and agriculture—have fallen in a 10-20% range, a fairly homogenous performance. What’s more, the supply glut is being fed by three common factors. Cost-cutting has led producers to think they can bear the pain of falling prices for longer. Heavy hitters, whether OPEC princes or global miners, still yearn to increase market share. And funding is still available.

          The cost cuts are part of a self-reinforcing downward spiral. Outside America, cheap currencies vis-à-vis the dollar have made domestic inputs, such as manpower, appear less pricey. Ironically, cheaper energy and steel help, too. In Australia, for example, Gina Rinehart, a mining tycoon, uses low costs to justify opening a $13 billion mine in the outback that is expected to produce 55m tonnes of iron ore a year—as much as America’s annual output.

          It isn’t like this is exactly unprecedented. It has a easily predicable cycle that is just long enough for optimistic idiots to ignore it.

          If these are daunting headwinds, they are not unusual. When prices fall far enough for long enough, output does eventually decline, as it started to do with nickel last year. In the meantime, big mining and oil firms will take over smaller ones and shut down their weakest assets. Then another decades-long cycle can start.

          You can find essentially the same information across any of the business magazines from about 3 years ago and up until today.

  7. Vaughan Little 7

    Chinese culture tragically has some really pathetic elements. I put their propensity to gambling and other short-term investment thinking down to the political culture. there are simply no property rights here. It’s doesn’t pay to build a durable, successful business because some apparatchik or his crosseyed whoring son will swoop in and grab it all off you, often getting the local police to beat the shit out of you in the process. and if you do want to build a business, you better be ready to send the local politicians the right amount of prostitutes, liquor and cash bribes. in perpetuity. it’s as childish and grotesque as a kindergarten sprung from the mind of h r giger.

    that kind of culture promotes the way of thinking that runs “how can I get as rich as possible as fast as possible from something that I can walk away from at the drop of a hat?”

    • Draco T Bastard 7.1

      “how can I get as rich as possible as fast as possible from something that I can walk away from at the drop of a hat?”

      That sounds remarkably like capitalism. Plenty of people in NZ start a business, get rich, and then walk away shutting down the business so that there’s no come back on them when it turns out that they didn’t do their job well.

      Dammit, I recall one a few months ago when a business was ruled against by the courts to pay one of their ex-employees several thousand dollars. The owner closed that business and opened another same day just so he wouldn’t have to pay out the sum. All perfectly legal.

  8. bearded git 8

    I don’t remember The Economist forecasting the GFC in 2008 so not sure if we can rely on its analysis that this is not the start of a whole new crash.

    • lprent 8.1

      I haven’t time to dig out links. But I will point you in the right direction. 🙂

      You will find that The Economist were moaning about the Greenspan prescription of easy money as being irresponsible for a long time earlier than that. After 1990 it allowed lousy financial practices to get embedded into the US finance system. There would have been few months that they didn’t point out it’s flaws.

      They were warning about the packaging of junk mortgages in the US as gilts at least back to 2003 – ie the subprime mortgages. For that matter they have been saying much the same about the over supply in unused housing and other property in China now.

      Forecasting something like a GFC wasn’t hard, there were many people pointing to it a decade or more earlier. The only thing that was strange was that it didn’t happen sooner and in smaller more manageable lumps. The reason for that was with a number of governments institutions, noticeably the central banks, trying too much for soft landings.

      But generally I’d suggest that you simply weren’t looking before the GFC for astute people pointing at the issues that caused the GFC. It was an unraveling of a structure based on some lousy economic precepts from the previous decade and a half.

      There are global and local economic risks in where China is at present. Most notably in the drop in imports impacting in the developing world (including us), overcapacity in those suppliers (look at those massive new iron ore plants in aussie), in the property market in China, and in paying off the rather large pile of debt that China used from 2009 onwards to finance their infrastructural build.

      However the stock market in China has bugger all to do with anything in the basic economics apart from the credibility of the Chinese government after rather stupidly trying to prop it up for a few days.

      • Draco T Bastard 8.1.1

        But generally I’d suggest that you simply weren’t looking before the GFC for astute people pointing at the issues that caused the GFC.

        Possibly but there were also rumours about the End of History, The Great Moderation and other prominent economists saying that all was fine and dandy – right up until the collapse of the global economy. At which point they all seemed to invent excuses as to why they didn’t see it coming.

        • lprent

          I’d agree with that. But it is a bit like why climatologists who are employed by oil or coal firms tend to have a ‘skeptical’ view on fossil carbon induced climate change. Except in this case the majority are employed by banks, financial, and consulting institutions of various forms.

          Their employers / customers aren’t that interested in shouting from the rooftops that there are financial clouds coming. If they take notice at all, they’d prefer that the suckers stay in the markets a lot longer than they do so that they can offload the iron pyrites versions of gilt financial instruments.

          In this case it’d be a long time between nasty downturns. The financial market population had turned over. Many of the larger institutions were left holding the hot potato because they’d forgotten how to be cautious…

    • Pat 8.2

      is not a new crash …it is simply the ongoing play out of the original as yet still unresolved crash….china through its massive infrastructure investment since the GFC has prevented the true impact of the GFC from occurring, but now has found that even they can no longer ignore the economic realities …the impact will be self perpetuating now as although the main cause was the pull back from infrastructure investment the economies which were supplying that will consequently have increasingly reduced capacity to purchase the products from the Chinese factories, even with the devalued renminbi…not a pretty picture.
      There may be one glimmer of hope however, and a much needed and timely one…there is an outside chance that a massive investment in low/zero carbon infrastructure worldwide may result as a concerted effort to return the world to growth as growth is the only plan our great leaders have…..all with helicopter money of course so a lot of back peddling will be required.

  9. infused 9

    I think this was just the warm-up act to be honest.

    • Draco T Bastard 9.1

      yep. In fact, I’m still looking at the GFC as the first warm up act. The economies of the world haven’t yet corrected enough of the psychedelic fuelled boost that they got in the early 2000s. We actually need the rich to become poor and the money that they have to be destroyed.

      • lprent 9.1.1

        That may still happen. I just don’t think that it is going to happen from the Shanghai market turning.

        If the property market turns in China, then could be more of an issue. But so far I think that it is squeaking through a narrow passage between excessive capacity, easy Yuan, and low interest rates.

  10. linda 10

    I remember one economist after the gfc. Said its only just began ra lity. Centrel bankers are still in emergency Mode debt is rocketing as income collapses around.
    the world.the only pillar left in new zealand is a speculative houseing market new zealand. Is house of cards and shakeing has started

  11. linda 11

    I remember one economist after the gfc. Said its only just began ra lity. Centrel bankers are still in emergency Mode debt is rocketing as income collapses around.
    the world.the only pillar left in new zealand is a speculative houseing market new zealand. Is house of cards and shakeing has started

  12. photonz 12

    Nearly $8b of$10.5b of our exports to China is NOT dairy.

    So the argument that we’ve put all our eggs in the dairy basket, is a misleading myth.

    And trade agreements like the TPP and Korea FTA will give us better market access to export higher value products, so that’s also a positive for those who complain we rely on exporting commodities too much.

    But don’t let that get in the way of doomsday predictions, month after month, year after year.

    • Draco T Bastard 12.1

      And trade agreements like the TPP and Korea FTA will give us better market access to export higher value products, so that’s also a positive for those who complain we rely on exporting commodities too much.

      1. Except for the fact that it actually won’t
      2. A country reliant upon trade is actually a really bad idea

      • photonz 12.1.1

        Yeah – much better to be self reliant and not trade like North Korea and Zimbabwe.

        If we didn’t trade, you wouldn’t be sitting there on your computer – you’d be in a cave.

        • Draco T Bastard

          If we didn’t trade, you wouldn’t be sitting there on your computer – you’d be in a cave.

          1. We would have our computers – they’d be made here, farming would make up 2% or less of the economy as it should do and our economy would be developing
          2. I didn’t say I was against trade, I said that no country should be reliant upon it
          3. The TPPA isn’t a trade agreement but a corporate takeover

    • lprent 12.2

      Bullshit. What my post said was that NZ under National had put almost all its eggs into exporting unprocessed or barely processed commodities, with dairy as the primary example. To be precise I said “dairy and other agricultural/forestry commodity sales”

      But I guess you missed that rather basic point in your headlong rush to be seen as an idiot.

      Whole unprocessed logs and meat constitute all except a small fraction of the rest of the exports to China. They barely make a profit. The idea of exporting in trade is to make a profit.

      Have you seen what the international profit margins and prices for both of those have been doing for many years? At least the dairy used to have a decent profit margin for a short time.

      I have no problem with actual free trade deals (I do with restraint of trade as in the TPP). I was pointing out that

      John Key seems to prefer us to be a developing world commodity trader, without any significiant intellectual property in the bulk of our exports. Certainly in the last 7 years, his government has systematically removed almost all of the economic inducements to develop more advanced products for selling offshore, while at the same time using the power of the state to favour dairy.

      Big words for you to understand….. But rather than rather foolishly inventing what you think that what I wrote, why don’t you try reading what I actually did write.

      • photonz 12.2.1

        lprent says”National had put almost all its eggs into exporting unprocessed or barely processed commodities, with dairy as the primary example. ”

        Wrong – National doesn’t export a thing. Private companies do.

        National doesn’t decide what to export. Private companies do.

        Even if National offered up hundreds of millions in corporate welfare, it would barely effect the main decisions on what companies export.

        The idea that they have overall control over what is exported is delusional.

        They can make it as easy as possible for everyone to do business, but they have very little control over what sectors private companies decide to invest in.

        That’s why Labour failed to transform NZ into a knowledge economy. Even hundreds of million in incentives and corporate welfare is nothing more than tinkering. And most well run businesses make decisions regardless of govt – not because of it.

        Otherwise their success or failure relies on the three year election cycle, annual budget cycle, or simply a policy change.

        And BTW, I was talking about the dairy myth in general – not specifically about your quote, though I do note you said the government is “using the power of the state to favour dairy.”

        Whereas in reality when you talk to dairy farmers it’s the high prices over past years is what has really driven them to invest, the govts position has had virtually no influence over those decisions.

        • lprent

          You really are a complete idiot.

          Labour spent 10s of millions on promoting knowledge based industries over a decade, mostly in providing opportunities to help with marketing. The result was a set of industries from programming to hitech manufacturing.

          We went from having less than 100 million in exports from this sector in 1999 to having close to 2 billion in exports less than 15 years later. More importantly they kept growing through the GFC, and their average profit level is several times higher than the peak of whole milk powder.

          Meanwhile National gave massive subsidies to dairy farmers through things like irrigation schemes, destroying the planning processes and enabling vast amounts of pollution (eg Enviorment Canturbury), and did a massive amount of state marketing on behalf of dairy and agriculture. The total cost in the last 7 years is probably approaching a billion dollars.

          The nett effect is that we have vastly increased production capacity in agriculture generally, but especially in dairy. We also have demand and price levels that are about as low as they ever had been, and demand shows no signs of improving over the next few years. If it does, then because National pushed high cost growth like irrigation, then we will get undercut by lower cost producers elsewhere.

          That is why trading in barely processed commodities is idiotic. I guess that is why you approve it. It is what always happens.

  13. Hello 13

    That picture seems wrong by usings a double negative, a Fall of -%20 = %20 rise.
    A fall of %20 = a rise of -%20 …

    Errors like that make the research look dubious.

  14. photonz 14

    LPRent says “Whole unprocessed logs and meat constitute all except a small fraction of the rest of the exports to China. ”

    Utter nonsense.

    In the year to March 2015, we had
    – $10.7b of exports to China
    – $2.8b of dairy
    – $1.6b of logs and wood products
    – $1b of meat and offal

    That leaves $5.3 billion of other products. – $5.3 billion!!!!. That’s not a “small fraction” of $10.7b – its 50% of total exports.

    And that 50% includes wine, fruit, machinery, fish, wool, vegetables, metals and minerals, and services etc.

    • lprent 14.1

      You really are an idiot. Remove the barely processed commodities that match what I am saying are useless exports. ie fruit, fish, wool, vegetable, metals and minerals…

      Then see how much you have left. Or since I don’t think you can add, perhaps you should provide your reference so that others can add it up for you.

      BTW: most of the “machinery” we export to China is scrap.

      • photonz 14.1.1

        Sorry – you’d better ring up Statistics NZ and tell them they should have wine, fruit, machinery, fish, wool, vegetables, metals and minerals, and services, education etc all listed under “Whole unprocessed logs and meat”

        I’m glad I know now. Instead of asking for a bottle of wine at my local supermarket, now I’m going to ask for a bottle of ” Whole unprocessed logs and meat”

        LPRents says “BTW: most of the “machinery” we export to China is scrap.”

        Now you’re just making up more utter nonsense – scrap comes under metal exports – not machinery exports.

  15. TheDude 15

    I’m not a economy expert just regular dude and I had my fair share in the dot.com bubble and learned my lessons over the last twenty years.

    I’m not here to convince anyone here and not a foil hat nut. I read the blog of Martin Armstrong who is real economy guru and have seen the docu about his life (The Forecaster). And the best part is that he is not connected/embedded as all the others Goldman-Sucks and JPM’s are and only focusing on single share/market/region so he can say what he really thinks can happen in the next few years.

    Also check his personal history as he was imprisined on civil contempt by these market players including corrupt laywers/judges to get get control of his computer model so they can rig the market as they do since decades.

    It is the global government debt and confidence and not just China/Europe/USA and the short message is – everything is connected !


    It’s you personal choice who do you believe and follow but I prefer someone who is really independent and payed a very high price personally and this makes him and his forecast even more trustworthy.

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  • New Zealand marks 20th anniversary of 9/11 attacks
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  • Speech to SPREP Environment Ministers
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