Pimco warms towards China bonds on weak economy, monetary easing

BEARISHNESS among foreign investors toward China’s bonds is easing after last year’s rout, with Pacific Investment Management Co becoming the latest to warm up to the debt.

“We have turned neutral on China bonds for a number of weeks now, compared with an underweight bias at the beginning of the year,” said Stephen Chang, a portfolio manager at Pimco. “Data continues to show the Chinese economy losing momentum, and the current monetary policy justifies a more neutral stance for us on duration.” Easing depreciation pressure on the yuan is also supportive, he added.

After a record exodus last year, global funds started returning to Chinese bonds in May, as bets for US interest rates to soon peak and Beijing’s monetary easing boost demand. But optimism has yet to fully take hold, with pricey valuations, a wide US-China yield gap and uncertainties over the yuan’s outlook deterring some investors.

It may take some time for sentiment toward China’s economy to recover completely, even after the Politburo, the country’s top decision-making body, adopted a supportive stance toward the private sector and housing market at its latest meeting, Chang said.

“It’s a matter of where those policies will come through – not only in terms of the exact measures, but also in terms of the timing of when they might become helpful,” he said. “While there is that desire to support growth for it to go back up as the Politburo signalled, the type of measures might be more difficult to implement this time around.”

The probability is also low for a meaningful rebound in Chinese property bonds. “Many Chinese developers will be facing maturity coming through in the next six to 12 months and their ability to meet timely payment of those bonds remains vulnerable,” Chang said.

Pimco holds a more neutral view on developers’ dollar notes, until industry support measures lead to a pickup in actual home purchases that would improve companies’ cash flow and credit profiles, he said. 

While China’s economic fundamentals and policy direction bode well for its local-currency debt, the nation’s sovereign bonds remain expensive on a valuation basis, reducing its appeal relative to other government bond markets, said Chang. 

China’s yield curve is likely to steepen as potential further easing measures pressure the front end, while extra bond supply points to lower conviction on longer tenors, he said. 

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The 10-year government bond yield has fallen since February and touched the lowest in almost a year this month. A gauge of China manufacturing rose slightly in July, but remained in contraction territory for a fourth month, according to data released on Monday (Jul 31).

There may be incremental and modest rate cuts in China in terms of scope; the central bank is expected to keep monetary policy accommodative.

In Asia, Pimco is overweight on South Korea due to the country’s pre-emptive rate hikes and stabilising inflation. It is underweight on Malaysia, where rate hikes have been slow relative to other economies. BLOOMBERG