Q&AMAY Understanding Investment Opportunities in China

Transcription

1 Your Global Investment Authority Q&AMAY 2015 Understanding Investment Opportunities in China Eric J. Mogelof, CFA, FRM Managing Director Head of PIMCO Asia-Pacific Luke Spajic, Ph.D. Executive Vice President Head of Asia ex-japan Emerging Markets Portfolio Management Haining Yin, CFA Executive Vice President Head of China Account Management 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. Isaac Meng, CFA Senior Vice President China Portfolio Manager

2 The Chinese government is continuously exploring options for global investors to gain greater access to the Chinese equity and debt markets. ERIC J. MOGELOF 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. 2 MAY 2015 UNDERSTANDING INVESTMENT OPPORTUNITIES IN CHINA

3 For 2015 we see growth in the low 6% territory, with mild disinflationary pressures emerging. ISAAC MENG 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 yuandenominated 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). UNDERSTANDING INVESTMENT OPPORTUNITIES IN CHINA MAY

4 Chinese Investment Programs THE QFII AND RQFII PROGRAMS These programs allow foreign licensed professional institutional investors to trade certain eligible securities in China (including listed shares, bonds, warrants and fixed income products traded in the inter-bank bond market) within the quota obtained from the Chinese State Administration of Foreign Exchange, or SAFE. The QFII program requires investors to convert foreign currency to local currency and has fairly strict liquidity provisions, asset class allocation requirements and repatriation caps. The RQFII program is a more flexible extension, allowing investors to use offshore currency (CNH), providing better liquidity and placing fewer restrictions on asset allocation. DIRECT INVESTMENT QUOTAS Since 2012, the PBOC has granted yuan quotas to certain foreign institutions to invest directly in onshore bond markets. Three types of investors have been awarded quotas: around 30 foreign central banks, sovereign wealth funds and multilateral development banks; 11 offshore-yuan clearing banks; and long-term investors, such as insurance companies. By the first quarter of 2015, the PBOC had granted direct investment quotas totaling US$60 billion-us$80 billion. THE STOCK CONNECT PROGRAM Launched on 17 November 2014, this program, currently between the Shanghai and Hong Kong Stock Exchanges (with a Shenzhen-Hong Kong program contemplated for later this year), enables investors to trade eligible shares listed on each other s market through local securities firms or brokers. THE BILATERAL PROGRAMS (UNDER CONSIDERATION) The Hong Kong Securities Futures Commission and the Chinese regulator CSRC have been in dialogue since early 2013 on a mutual recognition regime to enable funds domiciled in Hong Kong to be offered in China, and vice versa, through a streamlined approval process. 4 MAY 2015 UNDERSTANDING INVESTMENT OPPORTUNITIES IN CHINA

5 China will continue to move towards opening the capital account and making the yuan a convertible global currency. HAINING YIN 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. UNDERSTANDING INVESTMENT OPPORTUNITIES IN CHINA MAY

6 With the opening up of Chinese onshore markets, there are four key factors that investors will look at: liquidity, value, diversification and the currency. LUKE SPAJIC 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 limitedpartner 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. 6 MAY 2015 UNDERSTANDING INVESTMENT OPPORTUNITIES IN CHINA

7 BIOGRAPHIES Mr. Mogelof is a managing director in the Hong Kong office and head of PIMCO Asia Pacific, with responsibility for the firm s business throughout the region. In his previous roles, he was head of PIMCO s institutional business in the Americas and was global head of PIMCO Advisory. Mr. Mogelof is also a member of PIMCO s Inclusion and Diversity Committee and served on the board of directors of the PIMCO Foundation. Prior to joining PIMCO in 2003, Mr. Mogelof worked as a financial analyst in the investment banking division at Salomon Brothers Inc. and was also an associate at Jupiter Partners LLC, a private equity firm. He has 18 years of investment experience and holds an MBA from Harvard Business School. He received an undergraduate degree in mathematics and economics from Yale University. Dr. Spajic is an executive vice president and portfolio manager in the Singapore office. Dr. Spajic leads emerging markets portfolio management in Asia and manages Asian credit portfolios. He is also a member of Asia-Pacific Portfolio Committee. Previously at PIMCO, he was a senior credit portfolio manager in Newport Beach, head of U.S. credit research and a member of the Americas Portfolio Committee. In PIMCO s London office, he was head of pan-european credit and ABS portfolio management and a member of the European Portfolio Committee. Prior to joining PIMCO in 2007, he worked as a trader on the global macro proprietary trading desk at Goldman Sachs. Previously, he was in portfolio management at Highbridge Capital, a division of J.P. Morgan, and prior to that, he worked for Lehman Brothers. Earlier in his career he was a consultant to the European Commission and Bankers Trust. He holds a Ph.D. in economics from Cambridge University. Ms. Yin is an executive vice president in the Hong Kong office and head of PIMCO s China account management team. She is responsible for managing the institutional business and providing investment advice and customized portfolio solutions to a broad range of clients in China. Previously, she was a product manager in PIMCO s Newport Beach office, specializing in global macro fixed income strategies across developed and emerging markets, including the proprietary GDP-weighted Global Advantage Strategy. Prior to joining PIMCO in 2008, she was a manager in Capital One s strategic finance group, working with senior executives on corporate M&A and bank capital strategies. She has 13 years of investment experience and holds an MBA from Harvard Business School. She received her undergraduate degree from Tsinghua University in Beijing. Mr. Meng is a senior vice president and emerging markets portfolio manager in the Hong Kong office. He focuses on macroeconomic and financial analysis of China and regional linkages integral to portfolio strategy. Prior to joining PIMCO in 2011, he was with BNP Paribas in Beijing for nine years, most recently as senior financial economist and director of China macro analysis and strategy. Mr. Meng previously worked at the Atlanta-based commodities trading firm Mirant, where he structured and traded energy derivatives. He also worked in fixed income sales covering Chinese financial institutions at Bank of Montreal and began his career as a foreign exchange trader with the Bank of China. He has 18 years of investment and financial services experience and holds an MBA from the Graduate School of Business at the University of Texas at Austin. He received a bachelor s degree in international politics from the Foreign Affairs College in Beijing. UNDERSTANDING INVESTMENT OPPORTUNITIES IN CHINA MAY

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