China is in the midst of opening its markets to global investors while encouraging local investment abroad. In the following interview, Eric Mogelof, Luke Spajic, Haining Yin and Isaac Meng discuss the progress so far and what these developments mean for investors.

Q: Why are investors increasingly focused on China?
Eric Mogelof: It is no secret that China has become a critical part of the global economy. Long important in international trade, China also now stands as the world’s largest economy in purchasing-power parity terms and meaningfully affects global growth, inflation and debt dynamics.

In addition, China’s economy is growing in accessibility to investors. Beijing continues to actively explore avenues to open its capital account to offshore investors, and the toolkit of financial instruments available to investors in China continues to grow.

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).

Q: To what extent is PIMCO participating in these programs, and how do we see them evolving?
Yin: PIMCO participates in the QFII program and has applied to participate in the RQFII program. The assets purchased through these quotas are deployed on behalf of our investors in a variety of ways, including within PIMCO’s global bond, Asia local bond and global asset allocation strategies. Notably, we continue to hear interest from clients in a dedicated China strategy, which would allow global investors to access these assets while potentially benefiting from PIMCO’s active management.

Mogelof: In terms of the Stock Connect, PIMCO’s Singapore equity trading desk is set up to access products referencing Shanghai-Hong Kong Stock Connect shares, and aims to begin direct investing in eligible shares listed on the Shanghai Stock Exchange for our mutual funds in the near future.

Finally, PIMCO sees a distinct possibility that bilateral programs could be extended to other countries or regulatory regimes, including UCITS, (Undertakings for Collective Investments in Transferable Securities) over the secular horizon. So, down the road, we see a strong possibility that PIMCO solutions could be delivered through these vehicles.

Meng: In addition to these onshore opportunities, we actively use offshore interest rate trading instruments to express our China macro views and will continue to do so.

Q: What are PIMCO’s highest-conviction China investment strategies? Where do we see the greatest value for our investors?
Luke Spajic:
With the opening up of Chinese onshore markets, there are four key factors that investors will look at: liquidity, value, diversification and the currency.

Local China markets, despite their massive size, do not yet offer the level of liquidity that full engagement with the global markets would necessitate. For now, liquidity availability will evolve at the pace dictated by regulators; however, this pace is quickening. That’s why the architecture we’ve discussed and its build-out are so important.

In our view, the value proposition is clear given the high real rates on offer. We see value in buying government bonds, as well as quasi-sovereign and bank debt. The local yield curves across these asset classes are quite flat. The five-to-seven-year part of the government curve, at 3.3% on average, offers more value per unit of duration than the 10-year at 3.4%. In credit markets, we find value in shorter-dated bank paper – for instance, one-year certificates of deposit in solid Chinese banks.

We also hold a favorable view on Chinese equities, which we have expressed in both dedicated emerging market equity portfolios and our global asset allocation investments.

On diversification, as Eric mentioned, we think it’s only a matter of time before China’s worldwide economic footprint translates into global fixed income investors owning more Chinese assets, especially with developed markets offering such low yields in comparison.

It’s important to note that our local rate and credit market views on China are predicated on currency stability, which reduces volatility and uncertainty for investors. Our strong currency view is both a key call and a key factor in anchoring our real rate expectations.

Q: How do you see the local Chinese investor base evolving in the next two to three years?
Yin: As China continues to build wealth and increase its global economic presence, the number of sophisticated Chinese investors, both institutions and individuals, grows daily. These investors are increasingly tapping into the global markets for both tactical (alpha) and strategic (diversification) investments, and policies are increasingly accommodative for this outbound investment. Indeed, the government has tailored several programs for qualified domestic investors at the institutional level (QDII), the enterprise level (QDIE), the limited-partner level (QDLP) and, potentially, the individual investor level (QDII2).

PIMCO has been working with Chinese investors for over a decade. We aim to deepen our partnerships with Chinese institutions to provide solutions across global markets and asset classes; we will also continue to evaluate opportunities to partner with wealth management investors to help provide access to global investment opportunities.

Q: Any concluding thoughts? Mogelof:
Broadly, we expect the flow of investments to increase both into and out of China. We will continue to strive to provide top-quality investment solutions to China investors as they look globally and to global investors as they evaluate this important and growing market.

The Author

Eric J. Mogelof

Head of U.S. Global Wealth Management

Haining Yin

Head of Greater China

Isaac Meng

Portfolio Manager, Emerging Markets


PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517) and PIMCO Europe Ltd - Italy (Company No. 07533910969) are authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The Italy branch is additionally regulated by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act. PIMCO Europe Ltd services are available only to professional clients as defined in the Financial Conduct Authority’s Handbook and are not available to individual investors, who should not rely on this communication. | PIMCO Deutschland GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Deutschland GmbH Italian Branch (Company No. 10005170963), PIMCO Deutschland GmbH Spanish Branch (N.I.F. W2765338E) and PIMCO Deutschland GmbH Swedish Branch (SCRO Reg. No. 516410-9190) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The Italian Branch, Spanish Branch and Swedish Branch are additionally supervised by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act, the Comisión Nacional del Mercado de Valores (CNMV) in accordance with obligations stipulated in articles 168 and  203  to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008 and the Swedish Financial Supervisory Authority (Finansinspektionen) in accordance with Chapter 25 Sections 12-14 of the Swedish Securities Markets Act, respectively. The services provided by PIMCO Deutschland GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-, Brandschenkestrasse 41, 8002 Zurich, Switzerland, Tel: + 41 44 512 49 10. The services provided by PIMCO (Schweiz) GmbH are not available to individual investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (8 Marina View, #30-01, Asia Square Tower 1, Singapore 018960, Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong) is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862 (PIMCO Australia). This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. | PIMCO Japan Ltd (Toranomon Towers Office 18F, 4-1-28, Toranomon, Minato-ku, Tokyo, Japan 105-0001) Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association and The Investment Trusts Association, Japan. Investment management products and services offered by PIMCO Japan Ltd are offered only to persons within its respective jurisdiction, and are not available to persons where provision of such products or services is unauthorized. Valuations of assets will fluctuate based upon prices of securities and values of derivative transactions in the portfolio, market conditions, interest rates and credit risk, among others. Investments in foreign currency denominated assets will be affected by foreign exchange rates. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is managed and operated independently. The reference number of business license of the company approved by the competent authority is (107) FSC SICE Reg. No.001. 40F., No.68, Sec. 5, Zhongxiao E. Rd., Xinyi Dist., Taipei City 110, Taiwan (R.O.C.), Tel: +886 (02) 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | PIMCO Latin America Av. Brigadeiro Faria Lima 3477, Torre A, 5° andar São Paulo, Brazil 04538-133. | No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world.

Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Diversification does not ensure against loss.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

This material contains the current opinions of the authors but not necessarily those of PIMCO and such opinions are subject to change without notice. This material is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world. ©2015, PIMCO.