Pimco eyes WFOE for China bond access

The opening of China’s bond market is offering investment and distribution opportunities and could lead Pimco to put a wholly foreign-owned enterprise (WFOE) in the country in the next year or two, said the US fund house’s Asia-Pacific head.

Speaking at the Bloomberg Markets Most Influential Summit in Hong Kong today, Eric Mogelof noted that the firm had become much more interested in opportunities in the country, and particularly its bond market – the world’s third largest by outstanding debt.

A combination of the market’s appeal and other recent rule changes have led Pimco, which has until now resisted having a physical onshore presence, to consider setting up on the mainland.

“Regulations have changed and there are new opportunities through WFOEs that are creating or encouraging Pimco to think a whole lot more about being onshore,” Mogelof said. “If I were a betting man I’d think Pimco will be onshore in the next year or two.”

Local regulators gave the go-ahead for foreign companies to register investment management WFOEs as private fund managers in June. Asset managers such as Aberdeen, Bridgewater, Fidelity and JP Morgan have already set up such entities, and others are lining up similar moves.

Meanwhile, there has been a lot of liberalisation, noted Mogelof, most recently the widening of foreign access to the interbank bond market, which has attracted a large pipeline of firms seeking to register for access. 

He believes the next step could be China’s full inclusion into international bond indices, which would mean investors following those benchmarks would have to start holding mainland debt. “I think an index inclusion is likely in the next couple of years,” he said.

Currency concerns

While the gradual opening of China’s bond market to offshore investors appears a positive step for fixed income managers such as Pimco, they will have to manage the impact of the weakening renminbi. One year ago, the currency stood at Rmb6.37 to the dollar, whereas today it is at Rmb6.675, according to X-Rates.

“For foreign investors, at first glance yields are pretty attractive onshore, and higher than what you would find in most other locations,” said Mogelof.

This is particularly true of government bonds. China’s 10-year government bond yield stood at 2.758% on September 27, according to Investing.com. That compares to the 1.55% offered by 10-year US Treasuries, or the negative 0.14% rate on German bunds.

“The challenge of investing onshore is that there is currency risk as well, and you need a perspective on the yuan, and many investors are concerned that we will continue to see a depreciation,” said Mogelof. “You can hedge the exposure, but the cost of hedging is quite high now, so I feel that once the currency has stabilised, you are likely to see more investing onshore [by foreigners].”

Beyond China

Outside of China, Mogelof said the biggest issue on investors’ minds were ultra-low yields across the globe, with some $10 trillion of bonds offering negative yields.

“The most popular question and concern we hear from clients is about the negative yields across the globe, which are either low, zero or negative, all the way to 10 years in some areas,” he noted.

With risk returns compressed and frequent bouts of volatility, Mogelof said Pimco was recommending three investment themes. 

One is to focus on income; investors should avoid negative yields and seek strategies that offer steady and stable diversified current income. Second, investors with the capability to do so should invest into alternatives. And third, they should keep some powder dry and be tactical.