Accordingly, PIMCO sees China-based investments as an increasingly important part of investor portfolios, migrating from tactical allocations – often within broader equity or fixed income strategies – to strategic allocations, and we have assembled a broad team specifically focused on China to make this increasingly important market accessible to our clients.
Q: What is PIMCO’s assessment of the macro climate in China?
Isaac Meng: PIMCO has consistently held below-consensus views on China’s growth prospects, and we continue to do so. Chinese officials themselves now refer to a “New Normal” for the Chinese economy of “around” 7% growth, and we continue to think that GDP growth in China will fall short of that. For 2015 we see growth in the low 6% territory, with mild disinflationary pressures emerging. Indeed, China is dealing with a property slowdown and deleveraging of the shadow banking system, and can no longer rely on low wages and a competitive currency to support an endless export boom.
The People’s Bank of China (PBOC) has begun to ease rates and reserve requirements, aiming for a soft landing, and we expect more intensified easing to follow, including potential balance sheet expansion. In terms of the currency, while there is a risk that China could enter a currency war and engineer a competitive devaluation of the yuan, this scenario is unlikely in our view for two reasons: First, Chinese officials seem genuine in their desire to transition to a more domestic-consumption-based growth model; second, they continue to aspire to global reserve currency status for the yuan.
Q: What are Chinese policymakers’ strategic objectives for China’s financial markets?
Haining Yin: The macro picture in China sets a critical stage for policymakers to accelerate the government’s structural reform agenda, an important part of which is to deepen domestic financial markets. After a decade of strong economic growth, China needs more efficient financial intermediation to deploy excess savings back into the real economy. That requires an effective market for capital allocation, sophisticated domestic investors and more participation from global institutions.
So China will continue to move towards opening the capital account and making the yuan a convertible global currency. We also expect China’s fixed income market, which now consists primarily of government and corporate bonds, to develop other sectors and instruments, offering additional opportunities for global investors to gain exposure to China.
Q: What avenues are available to global investors seeking access to China’s markets?
Mogelof: The Chinese government is continuously exploring options for global investors to gain greater access to the Chinese equity and debt markets. This effort has historically centered on the offshore Chinese markets, including “H” shares ‒ Chinese companies traded on the Hong Kong Stock Exchange – as well as dim sum bonds ‒ yuan-denominated bonds issued outside of China.
While the offshore markets remain heavily traded, Chinese policymakers and global investors are increasingly focusing on the onshore markets as well. China is providing access to its onshore capital account in four key ways:
- Through the “Qualified Foreign Institutional Investor” (QFII) and the “Renminbi Qualified Foreign Institutional Investor” (RQFII) programs;
- By granting direct yuan investment quotas;
- By connecting onshore and offshore stock exchanges (e.g., Shanghai-Hong Kong Stock Connect); and
- Through bilateral arrangements, such as the Hong Kong mutual recognition initiative (under consideration).