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Communist China Prefers Capitalism on CEO Pay: Cutting Research

Chinese executive pay is looking more Western.

Compensation of chief executive officers is increasingly linked to corporate performance even as the communist state retains control of the largest firms, Alex Bryson, John Forth and Minghai Zhou wrote in “Same or Different? The CEO Labour Market in China’s Public Listed Companies.” It appeared in the February issue of The Economic Journal, a publication of the U.K.’s Royal Economic Society.

The authors’ survey of Chinese listed companies from 2001 to 2010 showed the link between pay and performance became more sensitive during that time. The strength of the link is similar to that found in Europe, though it’s less correlated than in the U.S.

While pay is “well below” what executives earn in the West, it’s rising very rapidly, doubling from 2005 to 2010, according to the paper. Average total cash and bonus compensation for top executives in China in 2010 was equivalent to $129,399, the authors found. Bryson and Forth are at the London-based National Institute of Economic and Social Research, and Zhou is at the University of Nottingham in Ningbo, China.

“Despite differences between China and the West in the composition of the public listed sector and the governance of market relations, its executive labor market resembles executive markets elsewhere,” the authors wrote. “There appears to be something about executive jobs and how they are managed which transcends national economic, political and cultural differences.”

The study of China also reveals another similarity to the West: executives may “skim” profits of companies with poor governance. The authors found CEOs earned a 10 percent premium if they sat on the committee that determined their compensation.

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Amid bouts of financial market volatility in developing nations, it’s worth looking at central bank independence and autonomy when determining how vulnerable some emerging economies are, Eurasia Group strategists led by director Christopher Garman said.

Eurasia scored key emerging markets by the strength of the legal and institutional frameworks governing monetary policy and a central bank’s autonomy to set monetary policy, independent of the legal framework. The authors then mapped autonomy scores by using international reserves as a coverage ratio of annual imports and the amount of external debt. The coverage ratio is a measure of a country’s ability to meet its financial obligations.

Those with institutional independence and high autonomy include Mexico, Poland and South Africa. Countries with independent central banks, including those in this group, typically have lower reserve coverage ratios because their monetary and currency policies enjoy greater credibility with markets. In intermediate cases, where there are weaker institutional frameworks with higher autonomy, central banks generally have higher reserve cover ratios, they said. India, Brazil, Thailand and Malaysia fall into that group.

“Central bankers in these countries have effectively taken advantage of their operational autonomy to help overcome their weaker institutional frameworks by building exceptionally large reserve cushions,” the strategists wrote in a Feb. 24 report.

The final grouping includes emerging markets with reasonable legal frameworks and low autonomy due to political constraints. Those central banks tend to have much lower reserve cover ratios, the analysts said. Among them are Argentina, Ukraine, Hungary and Turkey.

“In these four countries, political constraints are much more likely to hamper the ability of economic policy makers to respond effectively to external shocks,” the strategists said. “As a result, these four countries are particularly exposed to the risk of a currency crisis.”

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After indulging in debt the past five or six years, governments in Asia excluding Japan probably will be more cautious about increasing leverage at the same pace, according to Morgan Stanley.

The region didn’t use its borrowings productively and has lost productivity, economists led by Chetan Ahya in Hong Kong wrote in a Feb. 24 note. Aging populations will make it even tougher for them to manage debt levels, they said.

“The sharp rise in leverage over the past five years has meant that the region has now borrowed extensively from its future to fund past growth,” the economists wrote. “The rising age dependencies in many countries in the region and the current disinflationary trends will mean that nominal gross domestic product growth will probably be weaker, which in turn imply that managing the debt dynamics will be more challenging than before.”

High leverage, weakening demographics and poor productivity growth are “downside risks” to the region’s medium-term growth outlook, they said. China, Hong Kong and Singapore may be most at risk, followed by South Korea, Taiwan, Malaysia and Thailand, the economists said.

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Political stability and higher growth don’t necessarily go hand-in-hand in India, according to JPMorgan Chase & Co. analysts Sajjid Chinoy and Toshi Jain.

They created an index of political stability, using the ratio of seats held by the largest party of the ruling coalition to the total number of seats in the lower house of Parliament. It showed that over the last 20 years, more stable regimes were associated with lower growth, Chinoy and Jain wrote in a January note. The larger the ratio, the more politically stable the government is presumed to be, the authors said.

One explanation for political stability not producing higher growth might be that stronger regimes try to improve government finances and address price gains more aggressively, they said. Instead, stronger regimes were associated with bigger fiscal deficits and higher inflation, the data showed.

The authors hypothesized that too much stability doesn’t create the necessary incentives to make economically important but politically difficult decisions. “Perhaps more insecure governments are forced to be more responsible in order to remain in power?” they suggested.

External shocks weren’t a factor because the Asian financial crisis in 1998 and the global recession in 2008 happened at times when there was low political stability.

“The evidence of the last 20 years does not provide support for the notion that political stability = better economic outcomes,” the analysts said. “If anything, there is an inverse correlation. So be careful what you wish for.”

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Marriage remains an institution for the rich in Canada, to an “astonishing” degree, a new report says.

Canadians were married or in a common-law relationship 86 percent of the time if they were in the top 25 percent of families by income. The rate was 12 percent for the poorest 25 percent of families and 49 percent for the middle class, using data from 2011, according to the Ottawa-based Institute of Marriage and Family Canada. The figures across income brackets were little changed from 1998.

“This is a concern since marriage itself is a powerful wealth creator,” according to the Feb. 25 report from Peter Jon Mitchell and Philip Cross, former chief economic analyst at Statistics Canada.

Companies should consider policies to improve work-life balance and “how their marketing portrays marriage,” while governments should offer tax incentives, the authors said in their report.

To contact the reporters on this story: Shamim Adam in Singapore at sadam2@bloomberg.net; Jennifer Ryan in London at jryan13@bloomberg.net; Greg Quinn in Ottawa at gquinn1@bloomberg.net

To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net Craig Stirling at cstirling1@bloomberg.net Paul Badertscher at pbadertscher@bloomberg.net

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