Pimco and other investors are boosting holdings of yuan-denominated assets as debt crises worsen in the U.S., Europe and Japan.
Pacific Investment Management Co. LLC has a “favorable view of the yuan,” fund manager Maria Gordon said April 14, less than a week after founder Bill Gross said he bet against Treasuries in March because of the U.S. budget deficit and risk of accelerating inflation. Shin Kong Life Insurance Co. Ltd., Taiwan's second-largest life insurer, said it may cut holdings of U.S. debt and is seeking an investment quota for Chinese assets.
Standard & Poor's last week cut the outlook on its AAA rating for the U.S. to “negative,” from “stable,” yields on Greece's two-year notes exceeded 20% and Moody's Investors Service Inc. said last month that Japan may reach a fiscal “tipping point.” The yuan will rise 3.7% versus the dollar by the end of the year — the biggest gain in Bloomberg analyst surveys covering 22 emerging-markets currencies — as policymakers allow appreciation to curb inflation.
“Chinese policymakers are well ahead of the curve” on inflation and keen to avoid the pitfalls that derailed growth in the world's biggest developed economies, Chia-Liang Lian, head of emerging Asia at Pimco, said last week at a press briefing in Hong Kong. “What Chinese policymakers have learned is: "Don't wait for the problem to happen.'”
FUND RESULTS
Pimco manages about $200 billion in emerging-markets debt and said last week it has hired Isaac Meng, formerly a Beijing-based economist at BNP Paribas SA, as a money manager in its Hong Kong office. Ms. Gordon, who joined last year, said the shares of the Pimco EqS Emerging Markets Fund she oversees has a “large overweight in China.”
The $6.9 billion Pimco Emerging Local Bond Fund Ticker:(PLBDX) returned 3.7% this year to beat 78% of similarly managed rivals. U.S. government debt gained 0.6%, based on
Bank of America Merrill Lynch's Treasury Master Index. The securities “have little value,” Mr. Gross wrote in his April investment outlook.
China's local-currency debt advanced 2.05% in dollar terms, according to an index compiled by JPMorgan Chase & Co. Yuan-denominated debt listed in Hong Kong, so-called dim-sum bonds, returned 3.1%, according to the
HSBC Offshore Renminbi Bond Index.
'BETTER INVESTMENT'
“China is definitely a better investment option than the U.S., given the economic outlook and its more stable fiscal situation,” said Zeal Yin, who buys Treasuries for Shin Kong Life Insurance, which has the equivalent of $50.6 billion in assets. “The huge budget deficit facing the U.S. is worrying. If the situation doesn't improve, we'll have to consider selling our U.S. government bonds and invest in something else.”
The U.S. budget deficit is projected to top $1.6 trillion this year, or 10.9% of gross domestic product, and President Barack Obama is negotiating with Congress to raise the government's $14.29 trillion legal debt limit.
Japan's debt is set to reach 210% of GDP in 2012, the highest among countries tracked by the Organization for Economic Cooperation and Development, and governments in Greece, Ireland and Portugal have accepted European Union-led bailouts in the past year.
“Selective emerging markets with sound macroeconomic policies and higher yields in Asia outside Japan stand to benefit from the increased downgrade risk to G-3 economies,” said Ray Choy, head of debt market research at RHB Research Institute Sdn Bhd in Kuala Lumpur, Malaysia. “Hence, capital flows would benefit well-managed economies in emerging markets and in Asia outside Japan.”
FOREIGN INVESTMENT
Foreign direct investment into China jumped 33% to $12.5 billion last month from a year earlier, the commerce ministry said last week. Foreign-exchange reserves climbed $197 billion in the last three months to a record $3 trillion, even as the nation had its first quarterly trade deficit in seven years.
