Forget the Brexit.
Bill Gross, the co-founder of Pacific Investment Management Co. who now runs the $1.2 billion Janus Global Unconstrained Bond Fund, said China is the most important country to monitor in the next year
"We have to watch China
the most,” he told CNBC. “Its leverage has doubled in recent years. It is at 250 percent of GDP where most of the developed world is, but it will be 300 percent before they can spit, and if they cannot keep their supposed economic miracle going at 6 percent of growth then the rest of the world has problems.”
China is treading a fine line between supporting its national currency to prevent capital flight and keeping the renminbi cheap enough to make its exporters competitive with southeast Asian countries that have lower wages.
"There is a chance that 12 months from now, China will have started some type of unwind that is unfavorable for financial markets,” Gross said.
The People’s Bank of China has spent about 20 percent of its foreign reserves since 2014, dumping about $250 billion of U.S. government debt and using the funds to support the yuan and stem capital outflows, Bloomberg News reported
The country’s holdings of U.S. stocks sank about $126 billion, or 38 percent, from the end of July through March, to $201 billion, according to Treasury Department data cited by Bloomberg. That far outpaces selling by investors globally in that span — total foreign ownership fell just 9 percent.
“The Chinese, or other people for that matter, are taking the view that sitting in U.S. equities is presumably quite risky, and I’m not surprised they’re shifting," Fredrik Nerbrand, global head of asset allocation at HSBC Bank Plc in London, told the newswire. “This seems like more of a generation of cash more than anything else, and probably a de-risking of their portfolio.”
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