A Pacific Investment Management Company LLC (PIMCO) advertisement is displayed on a building in Hong Kong, China, (Photographer: Brent Lewin/Bloomberg)

Pimco Says China Current Account Shift to Pressure Global Bonds

(Bloomberg) -- China’s current-account shifting into deficit will pressure global bond markets and speed the yuan’s move toward a more flexible trading regime.

That’s the view of Isaac Meng, an emerging-market portfolio manager at Pimco in Hong Kong. China’s current-account deficit in the nine months to September -- its first since 1993 -- shows how Beijing has rebalanced its economy away from exports to domestic demand.

"For the first time in a quarter century, China has become a capital importer -- a significant shift in the global pattern of savings and capital flows," Meng wrote in a blog. "Just five years ago, China was plowing $300–$400 billion annually into global markets."

China now takes the bulk of portfolio inflows to Asia, a trend that will likely accelerate thanks to the inclusion of Chinese bonds into global markets, he said.

"The about-face –- from net capital exporter to importer –- could pressure global bond markets, particularly low-yielding local currency bond markets in Asia," according to Meng.

It also means the People’s Bank of China will likely accelerate a push to a more flexible exchange rate regime, he says. The yuan would probably function more as an automatic stabilizer to offset external shocks.

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