Stress Testing a China Hard Landing

Oct 23, 2015

The persistent decline in Chinese equities and commodity prices this summer renewed investor concerns about a possible economic hard landing in the Asian giant. Combining the MSCI Macroeconomic Risk Model with RiskManager’s predictive stress testing capabilities, we illustrate how investors can quantify the potential impact of a China hard landing on global multi-asset class portfolios. We design two stress test scenarios: a medium contagion scenario and a high contagion scenario. Under the former, a sharp decline in Chinese GDP growth could result in a modest 3% decline in a hypothetical multi-asset portfolio, while the drop could reach 8.4% under the high contagion scenario.