Pimco Sees $3.7 Trillion Reason for Adding Yuan: China CreditDavid Yong and Kyoungwha Kim
The yuan ranks in the top three on Pacific Investment Management Co.’s emerging-market investment radar, partly because of a $3.66 trillion currency pile that China’s central bank this week described as excessive.
Saudi Arabia, China and Russia ranked above 43 other developing nations when given equal consideration to reserves, short-term debt-to-economy ratios and current-account surpluses, according to data compiled by Bloomberg. Chief Executive Officer Mohamed El-Erian outlined the Pimco filters at an Oct. 10 conference in Washington. The yuan has gained 2.3 percent against the dollar this year, beating the pegged Saudi riyal and a 7.6 percent slump in the Russian ruble.
Pimco, State Street Global Advisors and Aberdeen Asset Management Plc are among companies favoring China, after scanning the globe for markets least at risk to a tapering of Federal Reserve stimulus. An acceleration in China’s shift in its economic growth model away from investment and exports is also encouraging investment. The nation’s central bank said increases in foreign-exchange holdings no long benefit the country, adding to signs that policy makers will rein in dollar purchases that limit yuan appreciation.
“Reaction to Fed policy is certainly the critical driver of asset prices in the near term, but it’s not the only driver over a longer period of time,” Ramin Toloui, Singapore-based head of emerging markets at Pimco, said in a Nov. 14 interview. “The leadership has articulated the principles and priorities, so the focus will now be on the implementation and timing. These are critical to finding a growth model that evolves away and weans off the dependency on investment and credit.”
Toloui, who oversees $100 billion of assets, didn’t reply to a Bloomberg e-mail yesterday seeking comment on El-Erian’s criteria.
Foreign investors boosted their ownership of Chinese government bonds for an eighth straight month in October to a record, according to data compiled by Bank of America Corp. Their holdings rose 8.9 percent from September to an unprecedented 109.6 billion yuan ($18 billion), or 1.4 percent of tradeable securities. China’s 10-year sovereign notes yielded 4.67 percent on Nov. 18, or 200 basis points more than Treasuries, the widest gap since October 2011.
President Xi Jinping, after a meeting of the Communist Party leadership last week, reiterated a goal to make the yuan fully convertible, as part of the biggest set of economic reforms in China since the 1990s. The central bank will “basically” end daily foreign-exchange intervention and broaden the yuan’s trading band, People’s Bank of China Governor Zhou Xiaochuan wrote in a book after the party plenum.
The yuan, which rose 0.01 percent to 6.0923 per dollar in Shanghai today, touched 6.0802 on Oct. 25, the strongest level since the government unified the official and market exchange rates at the end of 1993.
China’s economy grew 7.8 percent in the three months through September, after a two-quarter slowdown, helping shield the yuan from emerging-market volatility stoked by speculation on when the Fed will eventually trim its bond purchases. One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, was 1.53 percent today, compared with 11.48 percent for India’s rupee and 14.38 percent for Indonesia’s rupiah.
“The yuan is a low-volatility currency and we’re in a high-volatility environment,” said Kenneth Akintewe, a Singapore-based money manager at Aberdeen, which managed $324.6 billion globally as of Sept. 30. “The steps are in the right direction and while progress will be gradual, they have probably moved quicker than people expected a few years ago.”
The Chinese currency will appreciate as much as 4 percent next year, Akintewe said in a Nov. 19 interview. Median forecasts in surveys conducted by Bloomberg have the yuan rising 0.7 percent by June, the fourth-best among 22 emerging currencies, while Goldman Sachs Group Inc. on Nov. 21 upgraded its 2014 forecast to 6.05 per dollar from 6.15.
State Street bought yuan-denominated government bonds maturing in August 2016, October 2020, May 2023 and August 2023, according to October filings. Aberdeen purchased June 2017 notes, a September statement shows, while funds managed by BNP Paribas SA added July 2014 securities, based on July releases. Investors are treating China, South Korea and Taiwan like developed markets and these places could be immune should there be another stumble in emerging markets, Simon Derrick, London-based chief currency strategist at Bank of New York Mellon Corp., said in a Bloomberg TV interview yesterday.
“We expect the yuan to continue its gradual appreciation,” said Gerard Teo, head of strategy and currency in Singapore at Fullerton Fund Management Co., which manages S$12 billion ($9.6 billion). “We see this as a medium-term positive for the currency” while the timeline or appreciation bias in China’s currency management remain to be seen, he said in a Nov. 20 e-mail interview.
Efforts to rein in shadow banking, or unregulated lending, and the debt burden incurred by local-government financing vehicles have led to cash squeezes that helped drive up borrowing costs in June and October, hurting bond performance.
Investors in China’s local-currency government debt have lost 2.6 percent this year, a JPMorgan Chase & Co. Index shows. In Hong Kong, yuan-based Dim Sum bonds have produced monthly gains for U.S.-based investors since June, according to the HSBC Offshore Renminbi Bond Index.
China’s foreign-exchange reserves surged $166 billion in the third quarter to a record, suggesting money poured into the nation’s assets even as developing nations from Brazil to India saw an exit of capital because of concern the Federal Reserve will taper stimulus. “It’s no longer in China’s favor to accumulate foreign-exchange reserves,” Yi Gang, a deputy governor at the PBOC, said in a Nov. 20 speech at Tsinghua University.
Quotas under the Qualified Domestic Institutional Investor and Qualified Foreign Institutional Investor programs will be expanded and then scrapped, PBOC Governor Zhou said in a guidebook explaining reforms outlined following the Communist Party plenum. The central bank will start a trial program, called QDII2, that will allow individuals to invest overseas, Yi said.
China approved 5.3 billion yuan in quotas last month for companies investing offshore yuan in onshore markets, State Administration of Foreign Exchange data show. The total so far was 139.6 billion yuan for 47 institutions as of end-October.
“China’s new leadership has sent a clear message about what they want to achieve and the market reaction so far reflects optimism,” said Raymond Tang, chief investment officer in Kuala Lumpur at CIMB-Principal Asset Management Bhd., which manages about $14 billion. “This should underpin foreign inflows into China, as people are beginning to reduce their underweights in regional portfolios.”