China Enters Nomura Danger Zone as Fed Tapers: Cutting Research

China, Hong Kong and India are in a “high-risk danger zone” because their monetary policies have stayed too loose over the past four years, according to Nomura Holdings Inc.

A June 28 report by the bank’s economists and strategists showed the average ratio of domestic private debt to gross domestic product across Asia had ballooned to 167 percent in 2012 and most of the region’s property markets are “frothy.” The debt ratio has increased by over 50 percentage points in Hong Kong and Singapore and between 30 and 40 points in Malaysia, South Korea, China and Thailand.

A measure of monetary policy based on output gaps and inflation shows that interest rates have also been persistently below what economic models suggest, and even more so if the financial cycle is accounted for, the report said.

That leaves countries financially vulnerable. Indonesia is at the lower end of the high-risk zone, while South Korea, Malaysia, Singapore and Thailand are in the middle-risk range, ahead of Japan. The Philippines and Taiwan seem the least prone to any economic crisis. Hong Kong is a Special Administration Region of China although it pegs its currency to the dollar.

Investors are set to begin differentiating between economies throughout the region once the Federal Reserve begins pulling back stimulus, the Nomura report said. Their preference will be for sustainable expansion rather than fast growth.

The risk is Asian policy makers are falling into the same trap as their U.S. and European counterparts did prior to the global financial crisis and as Asia did in the 1990s: “That is, keeping policies too loose by focusing too much on the standard business cycle and low inflation and not enough on the financial cycle,” said Nomura.

* * *

Egypt has a 3 percent chance of losing democracy in any given year because of its low income levels, according to Renaissance Capital Ltd.

An army-appointed interim president took office in Cairo yesterday, hours after Mohamed Mursi was ousted as the country’s first democratically elected civilian leader. In a June 22 report, Renaissance economists led by Charles Robertson said the risk that democracy can’t be taken for granted is because Egypt’s per capita GDP of $5,000 leaves it in a similar position to Tunisia in 2003 or Turkey in 1975. Based on a study of 150 countries with a population above 500,000 from 1950 to 2009, democracy is only “immortal” once income tops $10,000 per head.

“Egypt at least has energy to export, but its high budget deficit and public debt ratios represent risks, and these may worsen as newly elected governments may not feel comfortable reducing subsidies,” Robertson and colleagues said.

As with Turkey in the 1970s, any Islamic-minded government may find it hard to manage relations with a more secular military, the report said.

* * *

How much competition there is among euro-area banks helps determine how well the European Central Bank’s low interest rates flow to consumers and companies, according to a Bank of Finland study.

Using a group of banks from 12 euro-area members from 2002 to 2010, Bank of Finland economists Zuzana Fungacova and Laura Solanko, along with the University of Strasbourg’s Laurent Weill, analyzed the reaction of loan supply to monetary policy decisions.

They found that the transmission of monetary policy through the bank lending channel is less pronounced for banks with market dominance, according to their June study.

“These results suggest that the bank market power has a significant impact on monetary policy effectiveness,” said the economists. “Therefore, wide variations in the level of bank market power may lead to asymmetric effects of a single monetary policy.”

* * *

Becoming a chief executive officer is enough for business leaders to increase their political contributions 137 percent.

A study of U.S. elections from 1991 and 2008 published this week found 1,556 campaign donors who had become CEOs during that period. Economists Adam Fremeth, Brian Kelleher Richter and Brandon Schaufele concluded that on becoming the top boss of a Standard & Poor’s 500 Index (SPX) company, an executive increased personal giving by an average $4,029 per election cycle.

“While some fraction of CEOs’ contributions can be attributed to long-standing preferences, the striking changes in behavior cannot be explained by these factors alone,” the economists wrote in this month’s American Economic Journal: Applied Economics.

* * *

The Bank of Japan may replace the Fed as the world’s leading provider of liquidity as soon as the first quarter of next year.

While the Fed is signaling it may begin tapering its $85 billion in monthly bond by the end of this year, the Bank of Japan is aiming to double its monetary base to 270 trillion yen by the end of 2014 from 138 trillion yen.

That suggests monthly net asset purchases of 5.5 trillion yen, about $56 billion at current exchange rates, Capital Economics Ltd. economist Julian Jessop said in a June 27 report.

The question is then whether additional BOJ purchases will offset the slowing Fed buying. While a dollar’s worth of additional liquidity at a Japanese bank has the potential to support markets as much as a dollar at a U.S. financial institution, there are some caveats, said Jessop.

The BOJ’s buying was announced in April, so some of the support should already be reflected in markets. The dollar value of the Japanese program will also fall as the yen does and also Japanese banks may have a lower propensity to recycle funds into riskier assets than U.S. counterparts.

“Nonetheless, the Bank of Japan’s plans are another example of how global monetary conditions are set to remain loose even if the Fed scales back its own purchases,” said Jessop.

* * *

Emerging markets need to ramp up infrastructure investment as they approach middle-income status or risk seeing their development surge run out of steam, according to Ashmore Investment Management.

Such economies need to take heed because they are exhausting their scope to grow as they close in on industrial rivals, said head of research Jan Dehn in a June 28 report.

Countries that have successfully transitioned to high income status have typically invested between 30 percent and 40 percent of GDP in roads, bridges, railways and other projects when their GDP per capita ranged from $2,000 to $15,000.

The average in emerging markets today is 32 percent, ranging from 21 percent in eastern Europe to 37 percent in Asia.

To aid the shift up, governments should welcome inflows of cash from capital markets and reduce red tape that restricts investment, said Dehn.

“How well each individual emerging market adapts to the new global reality will largely determine who succeeds and who does not,” said Dehn.

* * *

Italian banks that have the fewest women in top decision-making positions, such as chief executive officer or chairman, may be making riskier decisions as a result, according to a Bank of Italy working paper.

The study by Silvia Del Prete and Maria Lucia Stefani found the number of women at the top is greater in banks belonging to major banking groups with larger and younger boards and in banks that are more cost-efficient.

The data show “credit policies are more stringent when women are on the board, possibly due to their higher risk aversion,” Del Prete and Stefani said.

* * *

There is no global currency war under way if the price of Apple Inc. (AAPL)’s iPad Mini is any indication.

A June 27 blog by Benn Steil and Dinah Walker of the Council on Foreign Relations sought to test the so-called law of one price, which says identical goods should trade for the same price in an efficient market.

This is the rule tested by The Economist magazine’s Big Mac Index, which uses the price of burgers in a common currency to estimate whether various exchange rates are overvalued or undervalued. Bloomberg News similarly monitors the price of Ikea bookshelves.

The weakness in that approach is that the absence of cross-border flows of burgers means prices won’t align internationally, said Steil and Walker.

The iPad mini has more modern characteristics than a burger because it is a global product that travels, they said. Apple is also highly attuned to shifting currency values: Spokesman Takashi Takabayashi said May 31 that the company raised its Japanese prices in May to offset the sliding yen, for instance.

The study of 33 countries found excluding sales taxes, “there are no major violations of the law of one price in the global market for iPad Minis.”

The Swiss franc may be overvalued and the Malaysian ringgit undervalued, but the scale in which they are wrongly valued is much less than the Big Mac index. In China, an iPad mini sells for 5.6 percent more in dollar terms than in the U.S., suggesting the yuan may be closer to a correct level than Big Macs imply.

To contact the reporter on this story: Simon Kennedy in London at

To contact the editor responsible for this story: Craig Stirling at

Tomohiro Ohsumi/Bloomberg

The Oriental Pearl Tower, center left, stands at night in the Lujiazui district of Shanghai.

The Oriental Pearl Tower, center left, stands at night in the Lujiazui district of Shanghai. Photographer: Tomohiro Ohsumi/Bloomberg

July 3 (Bloomberg) — Tim Riddell, the Singapore-based head of global markets research at Australia & New Zealand Banking Group Ltd., talks about the impact of Federal Reserve monetary policy on Asian markets. Riddell also discusses China’s economic growth and credit outlook. He speaks with Rishaad Salamat on Bloomberg Television’s “Asia Edge.” (Source: Bloomberg)


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