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In its latest client note, the Pacific Investment Management Company (PIMCO), a US firm that manages circa US$1.9 trillion in assets, cited China’s rolling back of stimulus to be the reason behind the need for developed countries to keep the easy money flowing.

The US firm initially cited China’s plan of a gradual, also early, scaling back of the stimulus, while also saying, “Policy tightening in China is already being felt domestically in the form of tighter money market liquidity, moderating private credit growth, and reduced government bond issuance.”

The analytical piece also describes the People’s Bank of China’s (PBOC) economic forecasts and performance targeting as, “PBOC is targeting overall credit to grow in line with nominal GDP, implying the credit impulse will fall to around -3.5% of GDP by year-end, from a peak above 9% in the fourth quarter of 2020. All else equal, this may slow China’s economic activity to below-trend levels by late 2022.”

In the end, the report relies on the past performance of the global economy, mainly due to China, while confirming Beijing as the key engine of growth and said, “If past is prologue, developed countries may be required to maintain stimulus measures for longer than presently expected.”

FX implications

Given the need for further stimulus by the developed nations, cited in the report, the reflation fears should get stronger, which in turn helps the US dollar and weigh on commodities as well as Antipodeans.