The People’s Bank of China faces substantial challenges as the economy shifts from a development model to a model underpinned by domestic demand-supported growth.
In a recent report, Balancing Risks and Opportunities in the Multi-Speed World, Pimco said GDP growth in China is likely to fall to between 5.5 per cent and 6.5 per cent over the next four quarters – significantly lower than most forecasts.
"The economy confronts a property bust, a collapse in equity prices, falling exports and an over-leveraged shadow banking system,” the report stated.
Pimco said the People’s Bank of China (PBoC) is also losing reserves in an effort to prevent a further uncontrolled depreciation of the renminbi’s exchange rate.
According to the report, inflation is expected to be in the range of 1.5 per cent to 2.5 per cent.
“In the face of such challenging economic circumstances, we expect to see a significant monetary policy response from the PBoC, with 75 basis points in deposit rate cuts, a 200-basis-point cut in the required reserve ratio and devaluation of the [renminbi] to a level of 6.80 to the dollar.”
Pimco argued that a “hard landing” in China continues to substantiate as the most significant tail risk to the global economy.
“Which in the extreme could trigger a currency war and could increase the odds of outright global deflation."
However, significant policy easing and fiscal support by the PBoC over the next year will help to mitigate this risk.
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