PIMCO strategist says China headed for ‘marked slowdown’

A “marked slowdown” in Chinese economic growth appears inevitable by the second quarter of this year, with negative effects for both Asian and Latin American emerging markets, says a senior PIMCO strategist.

Gene Frieda, London-based executive vice-president and global strategist for the bond trader, says in a market commentary that a slowdown in growth “already looks baked into the cake” as the Chinese government’s extreme fiscal stimulus and credit growth in 2016 starts to catch up with it.

Read: Amid trade pressures, Chinese leaders set path for 2017

“China’s sheer size means that a large yuan depreciation, a sharp slowdown in growth or some combination thereof would be highly disinflationary to the rest of the world,” Frieda says. “Add to this the lagged effect of the recent property clampdown in many major cities, and we may see growth hindered.” Tax incentives that had increased demand for new cars is fading, he adds.

While tighter controls have been put on capital outflows, they have not worked as expected to stop an “associated bleed in foreign exchange [FX] reserves,” he adds. Frieda notes China’s leaders have been receiving a deteriorated quality of policy advice, increasing risks over their responses to any shocks.

Read: IMF raises China growth forecast but warns on debt

“The Central Leading Group for Financial and Economic Affairs has replaced the much larger State Council as the primary body for economic policymaking,” he writes. “It mostly comprises bureaucrats with little market experience. Scope for policy mistakes in reaction to events has never been higher.”

Emerging markets, Frieda concludes, could face higher U.S. interest rates under the policies of Donald Trump and a potential shock from China. He adds that the “two exogenous shocks simultaneously […] would affect both Asia and Latin America in profound ways.”

Scotiabank says it expects China’s real GDP growth to decelerate toward 6% in 2018 as leaders prioritize economic stability. The 19th National Congress of the Communist Party takes place at the end of this year to decide party leadership, marking an opportunity for President Xi Jinping to consolidate power in the middle of a 10-year term, Scotiabank says in an economics note Wednesday. Up to five of seven members of the Politburo Standing Committee, China’s most senior policy committee, are expected to retire.

“[W]e assess that injections of fiscal stimulus in infrastructure will be continued, keeping the nation’s output growth close to 6.5% in 2017,” Scotiabank says.

Also read: Is China a currency manipulator?

Staff

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