For years, PIMCO has closely monitored and researched the evolution of China and its macroeconomic impact on the global financial markets. A key component of this evolution and resulting influence is the increasing accessibility of China’s financial markets to global investors.
Historically, global investors seeking exposure to China have relied on offshore markets, including “H” shares ‒ Chinese companies traded on the Hong Kong Stock Exchange – and dim sum bonds ‒ yuan-denominated bonds issued outside of China. Now, however, China is also focusing on the onshore markets, providing access to global investors in four key ways:
- The “Qualified Foreign Institutional Investor” (QFII) and the “Renminbi Qualified Foreign Institutional Investor” (RQFII) programs
- Onshore and offshore stock exchange connections (e.g., Shanghai-Hong Kong Stock Connect)
- Bilateral arrangements, such as the recently launched Hong Kong mutual recognition initiative
- Direct yuan investment quotas from the People’s Bank of China
In our view, the value proposition Chinese fixed income presents is clear given the high real rates on offer there. Also, going forward, we expect China’s bond market ‒ which now consists primarily of government and corporate bonds ‒ to develop other sectors and instruments, offering additional opportunities. We also hold a broadly favorable view on Chinese equities generally, though security selection remains important.
There are other considerations when looking at local China markets, of course. Despite their massive size, they do not yet offer the level of liquidity necessary for full engagement with the global markets. While liquidity will evolve at the pace dictated by regulators, this pace is quickening. Diversification is another consideration, and we believe it’s only a matter of time before China’s economic footprint translates into global fixed income investors owning more Chinese assets, especially with developed markets offering such low yields in comparison.
Underpinning our positive outlook for Chinese investment is currency stability. In our view, China is likely to maintain currency stability as it attempts to transition to a more domestic-consumption-based growth model and achieve global reserve currency status for the yuan.
All of this adds up to an important opportunity for global investors. For more details, see “Understanding Investment Opportunities in China.”