Pimco Says China’s Interbank Bond Market a ‘Curiosity’ for Now

  • China needs the affirmation of being included in index: Spajic
  • Pimco bearish on the yuan and expects 5 percent depreciation

Pacific Investment Management Co. said it’s holding back on its investments in China’s interbank bonds for now and that issues including settlement still need to be sorted out in the market.

The world’s third-largest bond market, which China opened further to foreign investors in February, remains more of a “curiosity,” said Luke Spajic, head of portfolio management for emerging Asia, at a briefing in Hong Kong on Wednesday. “It’s a market that although it’s big, it’s basically a teenager masquerading as an adult.”

The comments come after Citigroup Inc., which in March welcomed China’s opening of its bond market, said last month that it is seeking client feedback that can be used in any potential review. While policy makers have allowed global funds greater access to the interbank debt market, investors flag restrictions such as a ban on onshore foreign-exchange trading, unclear tax rules and curbs on bringing home profits. MSCI Inc. cited a repatriation limit when it said in June that it wouldn’t include Chinese stocks in its benchmarks.

Index Inclusion

Pimco, which overseas about $1.5 trillion worldwide, is keen to increase its participation in the interbank note market but hasn’t done so since the further opening in February, according to Spajic.

“You really need to have the affirmation that comes with being in an index,” he said, adding that he expects inclusion in 2017. “When you get that, I think it’s a game-changer.”

The firm has been channeling resources toward understanding the market better. “The opening up of China’s onshore interbank bond market is probably the most significant event in the history of capital markets,” Spajic said.

Pimco expects the yuan to depreciate five percent against the dollar for the one-year period through May 2017, as China’s central bank is biased toward weakening the currency further, according to Spajic. The currency has declined 2.9 percent this year.

“It is very important to emphasize that their bias is to weaken and keep weakening,” Spajic said, adding that Pimco is long the dollar against offshore yuan at the moment. Pimco will review its yuan forecast in the coming weeks, he said.

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