Investors in China on edge
The continued stress in the local bond market and disruptive market moves are expected to feed into the general pressure on growth in China, with a forecast slide in GDP growth to six to 6.5 per cent in 2017 against the current 6.7 per cent, according to PIMCO.
Furthermore, Chinese local interest rates that rose substantially late last year, along with the cancellations of bond offerings created some extra pressure for the local firms.
At the same time, the country experienced the decline of the yuan and continued capital outflows while the People's Bank of China (PBOC) took steps to tighten conditions.
According to PIMCO, China was facing a "trilemma" at present, which meant it struggled to achieve all the three goals simultaneously, including a stable or fixed foreign exchange rate, free capital movement and an independent monetary policy.
This, coupled with tighter financial conditions, might lead to a situation in which the currency would remain an "escape valve", it said.
Additionally, PIMCO stressed that in the short-term, the capital outflows were expected to continue and the base case for yuan was to decline against the US dollar by a mid-to-high single digit percentage.
PIMCO also admitted that the PBOC might allow the yuan to float and that this possibility increased.
The company also predicted yields to remain both volatile and elevated for some months while clear buying opportunities were expected not to surface until well into this year.
"As the Fed raises US interest rates in 2017, we anticipate two to three increases, and the Chinese yuan continues to decline, we still favour long positions in the US dollar versus the yuan and other emerging Asia currencies," the company said.
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