In a new report, Policy Support Amid Sluggish Growth: Asia’s Economies in Transition, Pimco said investors will need to monitor the mix of tools used by policymakers across the region.
Pimco executive vice president and report author, Adam Bowe, said investors will need to answer three key questions going forward: What combination of tools will policymakers use? How successfully will they kick-start and growth and inflation? And how will financial markets react?
“The answers to these questions are critical because in many instances the policy tools are second-best options; transmission channels and outcomes are far from certain,” Mr Bowe said.
“Countries across the region face policy constraints due to excessive debt, excessive growth in debt, challenging and delicate political environments, potential asset bubbles and policy tools that are reaching their natural limits.”
Mr Bowe argued that China, Japan and Australia are already “grappling” with many of these challenges, simultaneously, across numerous areas of their economies.
When it comes to China, Pimco argued that the People’s Bank of China (PBoC) will cut rates by a further 50 basis points this year, and likely reduce its reserve requirement ratio by at least 150 basis points.
However, the report said that the most influential aspect of Chinese policy in 2016 will be its foreign exchange. The renminbi’s inclusion in the International Monetary Fund’s (IMF) Special Drawing Rights (SDR) was a “game changer”.
“Since the yuan’s inclusion in the SDR on 30 November [2015], we have seen greater tolerance for volatility and much faster yuan depreciation,” the report said.
Pimco said that China’s 2016 will likely echo that of 2015 – “this means paying even more attention to Chinese policymaking in 2016”.
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