China's economic growth looks set to miss the government's targets, but the mainland's markets still offer good value, Pimco said in a note Wednesday.
"China is dealing with a property slowdown and deleveraging of the shadow banking system, and can no longer rely on low wages and a competitive currency to support an endless export boom," Isaac Meng, Pimco's emerging markets portfolio manager, said in the note.
Pimco expects the mainland's economic growth in "the low 6 percent territory" this year, compared with official expectations for around 7 percent.
But that hasn't stopped Pimco, which has around $1.59 trillion under management, from continuing to invest there, both in fixed income and in stocks.
When it comes to fixed income, "the value proposition is clear given the high real rates on offer," Luke Spajic, who manages Asian credit portfolios at Pimco, said in the same note. Pimco is buying government bonds and both quasi-sovereign and bank debt.
"We also hold a favorable view on Chinese equities," Sapjic said, noting that Pimco is holding those equities in emerging market equity portfolios and global asset allocation investments. Its China fixed income assets are held in global bond, Asia local bond and global asset allocation investments.
Pimco noted it's seeing client interest in a dedicated China strategy, but it doesn't offer a fund that invests only in China. While the company doesn't have immediate plans to launch a dedicated China fund, the country is the world's third-largest bond market and "it is likely not a question of 'if,' but rather a question of 'when,'" Eric Mogelof, head of Asia Pacific for Pimco, said via email.
The fund management giant isn't alone in seeing a disconnect between China's economy and its markets.
The mainland's economy is certainly slowing. China's central bank this week cut interest rates for the third time in six months, in response to weaker-than-expected economic activity data, raising concerns that the government's annual gross domestic growth (GDP) target of "around 7 percent" could be at risk.
The economy expanded 7.4 percent in 2014, its slowest pace in 24 years and undershooting the government's target for the first time since 1998.
"China's economy is not expected to strengthen significantly any time soon," John Higgins, an economist at Capital Economics, said in a note Tuesday. "Indeed, the sustainable rate of growth in China is decreasing, not increasing."
China stocks appear to have defied the gloom to storm higher, with the Shanghai Composite advancing around 36 percent so far this year.
Higgins attributes China's recent stock market strength to non-economic factors, including authorities' efforts to encourage equity investment and ease regulations, spurring a surge in new account openings by retail investors. He also noted valuations were comparatively low when the rally began and that property sector weakness has encouraged an investment shift toward financial assets from "real" ones.
Higgins expects a market correction ahead, with the Shanghai Composite likely to trade around 4000 in a year, compared with around 4394 Wednesday.
Note: This story was updated to add comments from Eric Mogelof, head of Asia Pacific for Pimco.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter