China Ponders Slow-Growth Dilemma
Leadership May Have to Sacrifice Reform Agenda to Maintain 7.5% Economic-Growth Target
By Lingling Wei
Mr. Zhou is seen by many officials and economists as willing to hold the line against short-term growth to put in place financial reforms such as interest-rate liberalization that would better allocate credit and, many say, better serve the economy over the long term. So his fate is seen by some as a measure of the leadership's commitment to reform.
China's Communist Party chief Xi Jinping is considering replacing Mr. Zhou as part of a wider personnel shuffle that also comes after internal battles over economic overhauls, The Wall Street Journal reported Wednesday. A final decision has yet to be reached, party officials told the Journal.
Over the past few months, Mr. Zhou, who has headed the central bank since 2002, has resisted pressure from other parts of the government to broadly stimulate the economy for fears of deepening China's debt problems, according to the central bank advisers.
All talk, you might say, until you look at the effect his move is having on share prices, at least in the short term.
Shares in Allianz SE , the German insurance company that owns California-based Pimco, fell sharply as soon as the news broke, dragging Germany’s DAX index lower.
But Allianz’s loss is Janus’s gain. Shares the NYSE listed asset manager leapt an astonishing 40% to a four-and-a-half year high.
And it’s not just the shares that are moving. News of Mr. Gross‘s exit sparked selling in Treasury bonds, traders said. Mr. Gross manages the world’s largest bond fund which holds 41% in U.S. government-related holdings.
Traders say it is a knee-jerk reaction given that Mr. Gross is one of the most renowned bond-fund managers in the world and the news raised questions about what will happen with Pimco Total Return’s large holdings of Treasurys.
“There are concerns that a large liquidation will result due to his abrupt departure,” says Tom di Galoma at ED&F Man Capital Markets.
Gregor Macintosh, head of fixed income at Lombard Odier Investment Management, with $16 billion in assets under management, said that his fund trimmed its holdings of long-dated U.S. Treasurys upon seeing the news of Mr. Gross’ departure, on the assumption that large amounts of money could be withdrawn from Pimco’s bond funds, which are a big player in the market for Treasurys.
Mr. Macintosh said that even the enormous U.S. bond market is vulnerable to such events because investment banks’ proprietary trading desks, which provided so much liquidity in the past, have been shut down by regulations. “The market does not have the capacity to absorb this kind of event as it did in the past,” he said. Immediately following the news of Mr Gross’ departure “there was a noticeable weakening” of Treasurys, he added.
“The market is effectively scrambling to look at the holdings data of Pimco’s funds and look at their own holdings and evaluate how wedded they are to various positions.”
“They’re a vast player in the market and the market does not have the ability to warehouse this risk.”
Yields on the 10-year note moved slightly higher to 2.52% after news of Mr. Gross’s exit broke, and moved higher in the early New York afternoon to 2.54%, according to Factset. Yields move in the opposite direction to prices.
Min Zeng, Cynthia Lin, Juliet Samuel, Ulrike Dauer and Thomas Leppert contributed.