Bloomberg News

Market Underrating China Hard Landing Risk, GAM’s McNamara Says

February 03, 2012

Feb. 3 (Bloomberg) -- Investors may be underestimating the risk of a “hard landing” in China, a scenario that would see the dollar gain at the expense of emerging-market currencies, according to Paul McNamara, who manages $7 billion of developing-nation debt at GAM Investment Management Ltd.

“The market has walked away from the whole China hard- landing idea, which I think is premature,” McNamara said by phone from London yesterday. “The probability of a China hard landing is higher than is currently priced in. That’s something we want to keep an eye on.”

The cost of protecting Chinese bonds against default for five years using credit-default swaps fell to a two-month low yesterday on speculation slowing growth in the world’s second- largest economy will spur policy makers to provide stimulus such easing lending curbs or further cuts to banks’ reserve requirements. Yields on China’s dollar-denominated bonds due in 2027 fell to a four-month low of 3.8 percent yesterday.

“It’s very optimistic to say that there’s a tap they can turn on and off again,” said McNamara, referring to lending controls. “Historically it’s much easier to turn the tap on than turn it off again. There are policy variables that policy makers cannot control as neatly as they thought.”

The dollar is the best hedge against an economic slowdown in China, said McNamara, whose company oversees $60 billion in assets.

While he owns debt of Mexico, Brazil, Indonesia and Poland, McNamara said he is “less committed to” emerging-market currencies because of expectations the dollar will rally this year.

--Editors: Marie-France Han, Emma O’Brien

To contact the reporters on this story: Ye Xie in New York at;

To contact the editor responsible for this story: Emma O’Brien at

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