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China will avoid aggressive policy moves as growth slows and it attempts to address financial excesses spurred by measures taken to combat the 2008 global economic crisis, according to Pacific Investment Management Co., which runs the world’s biggest mutual fund.
“The story of this year is going to be the story of this dance that they’re trying to do in the balance between the economy and the financial sector,” Ramin Toloui, co-head of Pimco’s global emerging markets portfolio management team, told reporters today in Sydney. China’s policy makers “are really in a very reactive mode.”
The slowdown in China’s economy prompted the People’s Bank of China to reverse course in December, reducing the reserve requirement ratio for banks for the first time since 2008 in a bid to stimulate lending. The central bank had previously implemented a series of increases to address concerns that the earlier infusion of stimulus was creating asset bubbles and was a potential source of financial instability.
Policy makers are likely to fine-tune their response with “doses” of easing and tightening as data become available and they assess the country’s economic pulse, Toloui said.
“Aside from some cuts in the reserve requirement ratio, we do not expect to see aggressively expansionary policy to combat the incremental economic slowdown that is unfolding right now in China,” Toloui, who relocated to Singapore in January from Pimco’s California headquarters, wrote in a report on the company’s website today.
China’s annual growth rate slowed to 8.1 percent in the first quarter from almost 12 percent two years ago. Pimco predicts it will decline further in 2012, to between 7.5 and 8 percent. A Bloomberg survey of financial companies in which the most recent projections are given the heaviest weightings projects a growth rate of 8.3 percent.
The Chinese government this week announced that it would widen the daily trading band for its currency for the first time since May 2007. The move is a signal that the country intends to be more flexible, according to Pimco.
Although the widening doesn’t give much of a clue as to the trajectory of the yuan, Pimco expects the currency to appreciate at a “more modest” pace of 1 percent to 3 percent over the next 12 months.
“They’re experimenting with what kind of market dynamics emerge from a more flexible foreign-exchange market, and then they can make decisions going forward about how to continue the process of liberalization,” Toloui said. “It’s kind of a novel where the author doesn’t know exactly how he’s going to develop all the characters and where the plot’s going to go.”
Pimco, based in Newport Beach, California, is a unit of Munich-based insurer Allianz SE. (ALV)
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