Pimco Says Bet on Yuan After Dubai Reminds of Risks (Update3)

By Wes Goodman and Garfield Reynolds
Dec. 3 (Bloomberg) -- Pacific Investment Management Co.
said bets that China will ease controls on its currency are among the best in emerging markets, after Dubai World reminded investors that risks remain following the financial crisis.
"Go east, young man," Michael Gomez, co-head of emerging markets at Pimco, which runs the world’s biggest bond fund, wrote in a report on the company’s Web site. "Lower global investment returns are likely to track slower aggregate global GDP growth," the report said.
Dubai World, the state-owned company that is seeking to delay payments on some of its $59 billion in obligations, shows investors shouldn’t forget the lessons of the crisis, Gomez wrote. Equity markets around the world have surged this year, with the MSCI World Index gaining 28 percent, prompting economists including New York University Professor Nouriel Roubini to warn of a "bubble" in financial markets.
Investors should prepare for a period of slower-than-usual economic growth, rather than "shrugging off" the risks and pushing up prices of stocks and high-yield bonds, the report said. Pimco recommended investors focus on emerging-market nations that are showing the most resilience, including China and Poland.
China, which has kept its currency at about 6.83 per dollar since July 2008 to help sustain exports, will need a flexible currency to develop a market-based economy, Gomez wrote. The shift would allow other Asian currencies to rise as the region leads a rebound in global growth, he said.

Forwards Signal Gain

Twelve-month yuan non-deliverable forwards were little changed at 6.6225 per dollar as of 11:09 a.m. in Hong Kong, indicating traders expect the yuan to strengthen 3 percent in a year from the spot rate of 6.8269, according to data compiled by Bloomberg. Forwards are agreements in which assets are bought and sold at current prices for future delivery. Non-deliverable contracts are settled in dollars.
China let its currency strengthen 21 percent in the three years after a dollar peg was scrapped in July 2005. The yuan’s stability in the past year is helping China and the global economy’s recovery, Commerce Minister Chen Deming said in a transcript on the ministry’s Web site today.
"The government’s signal is very clear that it won’t let the yuan appreciate in the short-run to allow more time for growth," said Guan Jiaying, a Beijing-based fixed-income analyst at China Citic Bank. "The currency’s appreciation pressure will accumulate as the economy recovers."

Loosened Constraint

A market-based currency would shift the focus of China’s growth to domestic demand from exports, more efficiently allocate resources and reduce the risk of asset bubbles, Pimco said.
"Portfolios should express a secular tilt to benefit from eventual flexibility in the Chinese currency," Gomez wrote.
"That flexibility should, in turn, loosen what has been an implicit constraint on the ability of Asian currencies to appreciate."
Poland is the most attractive emerging market in Europe because it is the only nation in the region that will have full- year growth in gross domestic product for 2009, Gomez wrote.
Investors should avoid Hungary, Romania and the Baltic countries, the report said. Brazil’s and Mexico’s local bond markets are also "attractive," Gomez wrote.
The financial crisis, which started with the collapse of the U.S. property market in 2007, has triggered $1.73 trillion of writedowns and credit losses at banks and other institutions and sent the global economy into its first recession since World War II. Roubini said in a speech in Lisbon Nov. 20 that there is a beginning of "a bubble in financial markets."
Pimco, in Newport Beach, California, is a unit of Munich- based insurer Allianz SE.