1. The news that mattered this morning

Canada's SIS described New Zealand as the 'soft undebelly' in Five Eyes because of National and Labour's sanguine approach on Chinese interference here. Andrew Little confirmed sentencing reforms to house prisoners in the community who were sentenced to less than two years in jail. Google New Zealand paid $392,917 in tax last year after receiving more than half a billion dollars in revenues from customers here.The eurozone crisis eased a bit overnight as Italy pulled back from the brink of elections and China threatened to retaliate against Donald Trump's latest anti-China tariff move.

Soft underbelly? - Canada's Security Intelligence Service published a report from a conference workshop of academics and officials where New Zealand's status as a Five Eyes partner with Britain, Canada, America and Australia was questioned because it is seen by China as the 'soft underbelly' in the alliance.

"New Zealand provides a vivid case study of China’s willingness to use economic ties to interfere with the political life of a partner country. An aggressive strategy has sought to influence political decision-making, pursue unfair advantages in trade and business, suppress criticism of China, facilitate espionage opportunities, and influence overseas Chinese communities," the SIS said in the report published on a Canadian Government website on Monday.

"New Zealand is valuable to China, as well as to other states such as Russia, as a soft underbelly through which to access Five Eyes intelligence," it said, adding our port facilities and proximity to the Beidou2 satellite system in the South Pacific and Antarctic made it valuable.

A whole section of the report (pages 71 to 82) is a well written and pithy summary of the situation and the views of Canada's security and academic establishment on New Zealand's stance. It carries a disclaimer that it does not represent the official views of Canada's Government, but it's a clear and public expression on a Canadian Government website. It's the second pseudo-official warning from a Five Eyes partner this month. An American congressional hearing heard of similar concerns.

The report described the Labour Government as being in an awkward position in the wake of National's "Faustian choice" of cooperating closely with China, given Labour had connections in its own ranks with China's United Front for overseas political activities.

"In order to deal with the issue, it cannot just attack the policies of the previous government; it also has to clean its own house and deal with the involvement of some of its own senior politicians in united front activities," it said.

"New Zealand must indicate to its allies that it is going to address the issue, but it has to do so in a way that will not offend the PRC, which is watching the new government’s actions like a hawk. It will take strenuous efforts to adjust course on the direction the previous National government set New Zealand, which aimed to develop an ever ‘deeper and stronger’ relationship with the PRC."

Prime Minister Jacinda Ardern dismissed the report out of hand, saying none of New Zealand's Five Eyes partners had raised it with her.

"I take my steer on these matters from official channels, not opinions expressed at a workshop," Ardern told Stuff.

Struck out - Justice Minister Andrew Little confirmed a report from Newshub's Tova O'Brien that the Government was planning to remove the three strikes law.

Little told reporters in Parliament he would take a proposal for legislative reform to cabinet in 10 days. He also spoke in favour of looser sentencing laws, saying the current tough approach was not working.

"If you have a sentence of two years or less, you're at the lower end of offending," he said. "We can still do something with you, so it's better that you're out in the community housing those jailed for two years or less in the community."

Really? - Google paid $392,917 in tax last year after receiving more than half a billion dollars in revenues from New Zealand customers. The entity known as Google New Zealand Ltd reported a loss of $1.013 million in accounts for calendar 2017 filed with the Companies office on Wednesday. It reported revenue in New Zealand of $13.8 million, up from $12.6 million the previous. Most of Google's advertising revenue is booked in Ireland and Singapore, which have lower corporate tax rates.

The Internet Advertising Bureau's survey of total online advertising revenues showed search (which is almost entirely Google) made $541 million in calendar 2017. Google also gathered revenues from mobile ($55 million) and display advertising including video ($150 million). Google may well have earned over $600 million from New Zealand customers in 2017, but paid $392,917 in tax. It has around 30 staff in New Zealand, including a full-time lobbyist based in Wellington. Google NZ's senior manager for public policy and government affairs is Ross Young.

Taking a breather? - Prime Minister Jacinda Ardern, who is due to give birth on June 17, acknowledged on Wednesday some of her family had asked if would soon slow down. She was speaking during a visit to Northcote to support Labour's candidate in next weekends Northcote by-election. She is due to travel to Northland on Friday with ministers to meet locals.

"I do have a few more things that I'd like to get through, but I am taking a bit of breather in between, but otherwise it's all manageable," she said, adding however she could give birth any day now. That's just a statement of fact. I haven't got any particular reason to know that or believe it, I'm just at the stage where it could." ( RNZ )

Off again - In international news, Italian bond yields dropped sharply last night as fears eased about an imminent Italian election turning into a referendum on Italy leaving the euro. This followed reports the Five Star-Northern League coalition would find a finance minister more acceptable to Italy's bond holders. ( Reuters )

Trade war - China hit back at Donald Trump's surprise announcement of new 25 percent tariffs on China's technology exports to America, saying it was ready to fight back if Trump wanted to start a trade war. ( Reuters )