China Hard Landing War-Gamed for World Economy

Photographer: Brent Lewin/Bloomberg

Toy soldiers with Chinese flags sit on the ground beside a roadside stall on Beijing Road in Guangzhou. Close

Toy soldiers with Chinese flags sit on the ground beside a roadside stall on Beijing Road in Guangzhou.

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Photographer: Brent Lewin/Bloomberg

Toy soldiers with Chinese flags sit on the ground beside a roadside stall on Beijing Road in Guangzhou.

A hard landing in China would hobble global growth and buoy the dollar, says Societe Generale SA in a study that war-games the international implications of a steep decline in China’s expansion.

A plunge to 2 percent from more than 10 percent in 2010 would be enough to slash 1.5 percentage points from worldwide economic growth in the first year as China’s troubles are transmitted through trade, banking and financial market channels, the French bank said in a Feb. 11 report.

Among the reasons to expect such reverberations from what the authors called the “worst reasonable case:” China’s imports are equivalent to 30 percent of its gross domestic product. Asian and commodity-producing nations would be the hardest hit, according to Michala Marcussen, global head of economics research in London.

The impact could be aggravated by China’s bias toward investment, which accounts for half of its GDP. Less worrisome is the risk of China hurting the world through banks, given that total foreign claims of banks on the country are just 3.2 percent of the total, according to data from the Bank for International Settlements cited in the report.

Some multinational companies would be hurt by their exposure and the dollar would also rise 10 percent against the yuan in the first year, according to Societe Generale.

At the same time, a 30 percent drop in the price of oil as China slowed would aid growth elsewhere, as would an easing of monetary policy by foreign central banks, said Marcussen.

Chinese growth wouldn’t have to slow all the way to 2 percent to become a problem for developed markets, according to equity strategists at Credit Suisse Group AG in a Feb. 5 report.

They say growth of 5 percent would be enough to start hurting, although they note such a slump is unlikely given that government debt of 80 percent of GDP gives China’s leaders scope to respond.

Worrisome elements include the third biggest bubble in private sector credit of recent decades and a real estate construction sector equivalent to 20 percent of GDP. Still, even if Chinese growth fades to 6 percent and U.S. expansion to 2 percent, the world could still grow almost 3 percent this year, they said.

Societe Generale forecasts Chinese growth of less than 7 percent this year, below the 7.5 percent targeted by the government and anticipated by the International Monetary Fund.

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Switzerland’s vote to impose quotas for newcomers will have long-term implications for its economy, according to Commerzbank AG.

If net annual immigration increases were to fall to 0.3 percent from the recent rate of about 1 percent, that would reduce the economy’s growth potential by 0.75 percentage point, said Johannes Werner in a Feb. 12 report. The reasoning: the productivity of foreigners probably isn’t lower than that of Swiss citizens, and therefore the influx is positive for growth.

In recent years more than 45 percent of all immigrants have held a post-secondary degree, greater than the 37 percent of local residents, Frankfurt-based Werner said. The Swiss population already can’t meet demand for workers, adding further pressure on the economy.

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The ability of emerging-market central banks to drive their economies may be determined by how free of political meddling they are.

In a bid to discover which ones are most independent, Alexander Kazan, director of emerging markets strategy at the Eurasia Group in New York, asked his colleagues to score key developing countries on the strength of the legal and institutional framework governing monetary policy and the actual independence and conduct of interest-rate policy.

They determined Colombia, South Africa, Chile, Mexico, Peru and Poland were the most independent. Less so were China, Argentina and Ukraine.

Politics may be particularly prickly this year given that 44 emerging nations are holding elections. That’s the most since 2007, Eurasia calculates.

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European policy makers may have a new tool to deploy if they want to encourage the decline in bond yields across their cash-strapped nations.

Analysts at Citigroup Inc. looked at the European Reward System, a policy initiative proposed by Christian Dargnat, president of the European Fund and Asset Management Association.

It posits that most of the highly rated sovereign bond issuers have benefited from a flight to safety during the crisis and so been able to issue bonds and borrow at low rates. They thus should be willing to share some of the rewards from such flows by transferring money to those who have met the commitments of their bailouts.

Recipients of such support would be those economies that stick to budget cuts and who have paid more to fund themselves than the average of those countries willing to participate.

The proposal has a “reasonably good chance of being accepted by member states” because it doesn’t require treaty changes, limits the size of budget transfers and supports the restoration of debt sustainability, the Citigroup economists said in a Feb. 7 report.

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Quantitative easing in the U.S. was a success. Between 1870 and 1913, at least.

During that period, the Treasury made a lot of large open market purchases of Treasury securities, according to Benjamin Chabot and Gabe Herman of the Federal Reserve Bank of Chicago.

While not conducted with the aim of stimulating the economy, the buying narrowed the yield spread between Treasury bonds and riskier assets, they said in a report this week.

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The main channel through which emerging markets could roil developed economies is the financial system, now that international capital markets have become more integrated, according to UBS AG.

The conclusion comes as investors are suggesting there will be no repeat of the crises witnessed in economies from Thailand to Brazil in the late 1990s. Stephane Deo, head of asset allocation at UBS, says stress in developing nations could still be transmitted elsewhere given the rise of financial connections since then.

Emerging-country stock markets now account for 20 percent of world market capitalization, up from 8 percent in the late 1990s. Cross-border lending has also jumped. Turkey is one concern given that German bank loans to the country have quadrupled since 2000.

“If investors (including banks) react swiftly to perceived emerging risks by quickly reversing capital flows, emerging economies could see sharp falls in output, which could materially impact DM recovery,” said London-based Deo in a Feb. 11 report. “Therein lies the chief risk to the global economy and capital markets.”

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Handing control of a company’s cash to a woman results in more conservative financial-reporting policies.

A study published by the Bank of Finland found female chief finance officers are more likely to back less stock-price-based compensation, lower dividend payouts and smaller company risk.

The report was based on a sample of 1,500 U.S. companies from 1988 to 2007 and aimed to discover whether, following a change in CFO, there was a large shift in accounting conservatism attributable to gender.

“Overall the study provides strong support for the notion that female CFOs are more risk averse than male CFOs,” said the report’s four authors, among them Iftekhar Hasan of the Finnish central bank and Fordham University in New York.

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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