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E.g., 25-04-2017
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    Gavekal Research

    China’s Kim Problem

    Last weekend's extreme tension on the Korean peninsula is just the latest episode to severely test Beijing’s patience with North Korea. Yet even as elements of the Chinese leadership tire of Kim Jong Un’s grandstanding, China remains unlikely to make a bold move that threatens the regime. Despite acute US pressure, China will seek to preserve the status quo.

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    Gavekal Dragonomics

    A Pivot To Regulatory Tightening

    China’s economic data were once again surprisingly good. This solid growth momentum will allow policymakers to pivot more to reducing financial risk and curbing speculative property purchases. But while policy will continue to tighten at the margin, Long argues this will now occur more through regulatory tools than rate hikes.

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    Gavekal Research

    Audio & Transcript — Gavekal Research April Call

    In the aftermath of the first summit meeting between Xi Jinping and Donald Trump, the critical issues remain the same: a prickly trade and investment relationship which American businesses feel is increasingly skewed against them, and rising danger of confrontation over North Korea. In the background lies the question of how long China’s current economic expansion will keep running. Arthur Kroeber and China policy analyst Yanmei Xie discussed...

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    Gavekal Dragonomics

    What Is Happening With The Tourism Numbers?

    China’s outbound tourism is clearly a big deal, but statisticians are having problems figuring out just how big: a huge upward revision has just been followed by a huge downward one. In this piece, Ernan cross-checks the numbers, and finds that Chinese foreign travel is growing rapidly, despite confusing revisions and falling travel to Hong Kong.

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    Gavekal Dragonomics

    Reflation Without Inflation

    China’s producer price index slowed slightly year-on-year in March. However, this does not signal a halt to Chinese growth, nor is it likely to cause equities to roll over argues Thomas. The momentum from last year’s big housing stimulus remains, and the level of commodity prices is high enough to keep profit margins decent, supporting corporate investment and wages.

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    Gavekal Research

    Downfall Of A Regulator

    The chief of China’s insurance regulator has become the latest “crocodile” to be snared by the Communist Party’s anti-corruption agency—the first leading financial regulator to face such scrutiny. Chen Long outlines two important implications for the insurance sector and for China’s financial markets.

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    Gavekal Research

    Squeezings From The Citrus Summit

    Last week’s Citrus Summit between Xi Jinping and Donald Trump came in with a gale of empty punditry and drifted away on a warm breeze of genial platitudes. Arthur argues that the risk of a damaging trade war between the two countries has now evaporated, and that the directionless White House has yet to sort out its economic priorities on China.

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    Gavekal Dragonomics

    The Worst Is Over For Mass Consumer Goods

    It’s been a rough few years for Chinese consumer-goods firms: sales growth for items from soft drinks to instant noodles to sportswear has slowed dramatically since the 2000s, and price wars have slashed margins. In this piece, Thomas argues that the worst is now over: our models point to a more gradual and manageable slowdown in coming years.

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    Gavekal Research

    London Seminar — March 2017

    In Gavekal’s seminar in London last week Will Denyer, Charles Gave, Tom Miller and Anatole Kaletsky presented their macroeconomic outlooks and offered investors asset allocation advice.

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    Gavekal Dragonomics

    Macro Update: A Strong Start To A Stable Year

    In our latest quarterly chartbook, Chen Long reviews the latest data and the broadly positive outlook for 2017. Industrial reflation likely peaked in Q1, but the momentum of investment and consumption is solid. Policy is getting marginally tighter as the housing market keeps surprising, but the moves are gradual in this politically sensitive year.

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    Gavekal Research

    Hong Kong: Meet The New Boss

    Meet the new boss. Same as the old boss? Last Sunday saw the “election” of Carrie Lam, CY Leung’s former Number 2, to the post of Hong Kong chief executive. The hope now has to be that, just as Robert Wagner in Austin Powers proved altogether more competent than Dr Evil, Hong Kong’s Number 2 will show herself to be more competent than her former boss in handling the territory’s affairs.

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    Gavekal Research

    Hong Kong Seminar — March 2017

    In Gavekal’s Asia focused seminar in Hong Kong last week Arthur Kroeber, Udith Sikand and Tom Holland presented their outlooks for the rest of the year.

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    Gavekal Dragonomics

    A Shaky Foundation For Iron Ore

    Iron ore prices are still high, but for how much longer? Returning from a field trip, Rosealea is now more convinced prices will fall. A government campaign to close low-end steel producers is aggravating cyclical swings rather than changing the structure of the industry. As supply is now rising to meet demand, prices will come under pressure.

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    Gavekal Research

    A-Shares Come In From The Cold

    Last year, MSCI raised three objections which prohibited the inclusion of China’s onshore A-share markets in its benchmark indexes. In a document published yesterday MSCI suggested two of those obstacles can now be overcome. Chances are high that the third objection can also be dealt with, allowing the inclusion of A-shares as early as this year.

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    Gavekal Dragonomics

    Sanctions With Chinese Characteristics

    Since South Korea decided to host a US missile-defense system, China has restricted tourism and closed local operations of Korean firms. The dispute will mean some economic pain for Korea, but no lasting damage. But China is ever more willing to use such “sanctions with Chinese characteristics” to disrupt trade with countries that displease it.

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    Gavekal Dragonomics

    The State Of The State Sector

    After forty years of market reforms, state-owned enterprises retain an exceptionally large role in China’s economy. Though their financial performance is deteriorating and their debts are growing, SOEs’ share of the economy is rising rather than falling. In this chartbook, Andrew pulls together the data to show the true state of China’s SOEs.

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    Gavekal Research

    Audio & Transcript — Gavekal Research March Call

    Yesterday’s call had Cedric Gemehl and Anatole Kaletsky opine on political risk leading up to French and German national elections later this year. Nick Andrews argued that the eurozone recovery is becoming self-sustaining, and offered views on capturing the upside, while hedging against political risk.

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    Gavekal Dragonomics

    The Tightening That Dare Not Speak Its Name

    China’s central bank has raised short-term policy rates for the second time this year—while going to great lengths to avoid signaling an aggressive tightening. The central bank likely still hopes that a coming roll-over in producer price inflation will calm sentiment, and that other, non-monetary measures will help cool down the property market.

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    Gavekal Research

    The Risk Picture Diminishes

    Yesterday’s 25bp rate rise from the US Federal Reserve was universally expected. The relative dovishness of Fed officials was not. With headline CPI inflation in the US running at a brisk 2.7% in February, ahead of the meeting at least some market participants had been pricing in four rate hikes this year. But after the latest dot plot signaled that policymakers continue to see only three hikes—including yesterday’s—in 2017, those expectations...

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    Gavekal Dragonomics

    Older And Unhealthier

    China’s rapid development came with impressive improvements in basic health indicators. Yet growing richer and older is now creating tremendous health challenges. Without swift action, China is heading for a public health crisis.

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    Gavekal Dragonomics

    Public Health, Private Gains

    Failings in China’s public health system open up great opportunities for private players. Yet, to be successful, they will have to navigate a changing legal environment, swim with the policy tide, and cope with intense competition.

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    Gavekal Dragonomics

    For China, Trump Is A Paper Tiger

    The risk of a trade war between China and the US is fading as economic pragmatism gains ground, despite administrative incompetence in Washington. But Trump’s America-alone approach is weakening the US’s hand while China’s economic leverage grows ever stronger.

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    Gavekal Dragonomics

    Debating Reflation And Tightening

    We expect only marginal and gradual tightening from the PBOC. But three factors could make it more hawkish: higher than expected inflation, rising financial risk, and a shift in the politics of growth.

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    Gavekal Dragonomics

    Chinese Football: Here We Go

    The excessive money spent on China’s domestic football league has raised both eyebrows and fears of yet another Chinese bubble. But the sector has undeniable assets: a large domestic fan-base, strong political backing, and countless big businesses with a taste for the game.

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    Gavekal Dragonomics

    The Ghost Of A Communist Past

    Despite what Beijing thinks, political liberalization wasn’t what brought down the USSR. The economy did. Andrew Batson reviews Chris Miller's The Struggle to Save the Soviet Economy.

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    Gavekal Dragonomics

    CEQ: Healthcare—Crisis Or Opportunity?

    China’s growing economy has brought its people longer lives, but also a new set of health problems. Though the government is trying to improve coverage, change is happening slowly. So there is a growing opportunity for private companies to fill the gap. This issue of China Economic Quarterly investigates the nation’s health problems, and solutions.

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    Gavekal Dragonomics

    An Early Harvest Of Bumper Profits

    China’s listed companies won’t report their final Q4 earnings for another month, but preliminary numbers show it was their best quarter since 2010: profits for the median company jumped 28% in Q4 after a 25% rise in Q3. Strong earnings mean that fundamentals are supporting the slow but steady rally in A-shares that is now about nine months old.

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    Gavekal Research

    The North Korean Wedge Between The US And China

    This week’s missile launches by North Korea, the latest in a recent series of provocations, are forcing the US into a position where it must take steps to limit the threat to itself and its Asian allies. But such moves are certain to antagonize China, and shatter the fiction that the US and China have common interests in dealing with North Korea.

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    Gavekal Dragonomics

    Relief For Workers Is Coming

    Premier Li Keqiang says pressure on employment is growing, so he has raised the government’s target for urban job creation in 2017. Ernan however disagrees with the premier: the pressure on China’s job market will actually ease somewhat this year, as the cyclical recovery in the economy means that companies have less need to cut jobs.

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    Gavekal Dragonomics

    Fiscal Stimulus? What Fiscal Stimulus?

    China’s latest budget report reinforces its recent shift toward marginally dialing back economic stimulus. In 2016, the finance ministry raised the deficit to 3% of GDP from 2.4% in 2015; for 2017, it is standing pat, targeting a 3% deficit again. Less publicized but more relevant is the fact that off-budget public works spending is also slowing.

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    Gavekal Research

    On Borrowed Time In Hong Kong

    Last month, home prices in Hong Kong’s secondary market climbed to a record high, up more than 150% from the depths of the financial crisis. At the same time, Hong Kong’s stock market has been among the world’s strongest major markets so far this year, comfortably outperforming the S&P 500. The buoyancy of Hong Kong assets owes more than a little to investor enthusiasm for the global reflation trade, and to inflows of Chinese money. But more...

    2
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    Gavekal Dragonomics

    Picking Apart The Iron Ore Conundrum

    Is China’s continued rally in iron ore prices the result of benign structural change in the steel sector, or frenzied financial speculation? Rosealea and Arthur review the competing explanations, and find both have some merit. So while a lot has to go right to avoid an ore price crash, this correction could still take a while to materialize.

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    Gavekal Research

    Strategy Monthly: Reflation Gets A China Boost

    For the last three months, markets have been focused on “Trumpflation”. But the global reflation trade began long before Donald Trump’s November election, with China’s surprisingly strong growth rebound early last year. This suggests that China’s growth performance in 2017 will be a key factor in determining the sustainability of global reflation. In this edition of Gavekal’s Strategy Monthly, Arthur Kroeber and Chen Long argue that China’s...

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    Gavekal Dragonomics

    A-Shares Ride An IPO Boom

    The state of initial public offerings is one of the Chinese stock market’s longest running embarrassments: regulators have been holding up IPO approvals for hundreds of firms for years now. But they are now finally picking up the pace, making it easier for younger, fast-growing firms to list—though full deregulation of IPOs is not on the agenda.

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    Gavekal Research

    A Qualified Positive For Chinese Banks

    The Hong Kong-listed H-shares of mainland Chinese financials are the best performing segment of one of the world’s strongest markets year-to-date. So far this year, the H-share index is up 12% in US dollar terms, driven largely by gains in the stocks of China’s big banks and insurers. So it is natural for investors to sit up and take notice on reports that China’s big four financial regulators have drafted a joint proposal to tighten their...

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    Gavekal Research

    Hong Kong Seminar — February 2017

    Gavekal’s global macroeconomic seminar in Hong Kong in February featured Anatole Kaletsky, Will Denyer and Louis-Vincent Gave. They presented on the global investment outlook under a Trump presidency, the decline in US productivity, and the sustainability of the "Trumpflation" rally.

    0
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    Gavekal Dragonomics

    Three Risks To The Monetary Policy Outlook

    China’s central bank is striking a hawkish tone by pledging to curb speculation and leverage, but its actual tightening has been marginal and gradual. What might shift its stance to something tougher? In this piece, Chen Long evaluates three things that could push the PBOC to tighten more: inflation, financial risk, and the politics of growth.

    0
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    Gavekal Dragonomics

    The Secret Ingredient In Corporate Deleveraging

    Debt is rising rapidly in China, yet the debt-to-equity ratios of large public companies have still fallen. The secret of this deleveraging is that regulators allowed firms to raise lots of new equity through private placements. But regulators are now setting a higher bar for those deals, so this deleveraging formula won’t work as well in 2017.

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    Gavekal Research

    Audio & Transcript — Gavekal Research February Call

    In Gavekal Research’s February conference call, Louis-Vincent Gave delves into the unexpected origins of the reflation trade in order to assess its future prospects. And Arthur Kroeber unpicks the combative rhetoric emanating from Washington to gauge the probability of heightened trade friction between the United States and China.

    0
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    Gavekal Research

    The EM Reflation Trade Is Past Its Best

    The emerging market reflation trade has been on fire. This week Dr. Copper broke out of his six-year downward trend, adding fuel to the reflationary flames. As a result, while the relative performance of cyclical stocks has moderated in developed markets during February, EM cyclicals have continued their bullish run. Their strong performance has helped to lift the MSCI EM index by 10% year-to-date in US dollar terms to reach a 19-month high. But...

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    Gavekal Research

    Mapping China’s Asian Dream

    China’s effort to build a regional sphere of influence is upending Asian geopolitics and through huge infrastructure building, quite literally changing the geography. As such, China’s pursuit of empire is an epochal undertaken which investors need to properly factor into their macro understanding of the region. This is why Gavekal’s Tom Miller wrote a book on the topic and as Louis explains in this piece, it is a tome he really wanted to write...

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    Gavekal Dragonomics

    Containing Capital Outflows

    China’s balance of payments show that 2016 was another big year for capital outflows, which accelerated in the second half. But Chen Long argues this pickup will not continue into 2017. Current outflows are not large enough to stop the central bank from pursuing its exchange-rate policy, which can be sustained for another couple of years.

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    Gavekal Dragonomics

    Brace For US-China Trade Conflict

    Is Donald Trump backing down from his threat to get tough on China trade? It might seem so: after three weeks of rapid policy moves, his promised anti-China trade action is still missing. But it will not stay missing for long. Some US move against China trade looks inevitable in coming months, though the costs will be high and the benefits unclear.

    0
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    Gavekal Dragonomics

    The Downside Of Dividends

    Dividends were long an afterthought for Chinese listed companies—but no more: most large firms now pay out more than 30% of their earnings to shareholders. Yet this change has been wrought by heavy-handed regulation, rather than improving governance. The resulting system distorts the signals to investors and the incentives of company managers.

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    Gavekal Dragonomics

    Is It Finally Time For The Property Tax?

    After more than a decade of debate, could China finally be ready to start imposing a property tax? In this piece, Rosealea argues that political will and technical preparations point to progress toward a tax in 2017. While some fear the impact on prices, the gradual rollout of a narrowly focused tax should be mostly a non-event for markets.

    0
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    Gavekal Dragonomics

    The Lost Promise Of Urbanization

    China’s government has been ramping up its focus on urbanization and rural land issues, promoting new policies as breakthroughs that will keep driving growth for decades to come. But for all the rhetoric, the new policies are not fundamentally liberalizing. And the incentives they create could slow rather than accelerate rural-urban migration.

    0
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    Gavekal Research

    Drawing Meaning From 2016, And A Roadmap For 2017

    Having experienced a rough 2016, the temptation for most investors is to clean the slate and start again. Unfortunately, life in financial markets does not allow for such neat endings. In one of his biggest reports in years, Louis argues that after such a complex and tumultuous year, it is essential for investors to draw a breath and derive some understanding of what just happened. Only then should they try to sketch out future scenarios.

    0
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    Gavekal Dragonomics

    The Investment Backlash Begins

    Xi Jinping’s passionate defense of the globalized economy at Davos last week was, in reality, a sign that Beijing knows the tide is turning against it. The surge of Chinese outward direct investment in recent years has already sparked a backlash, and the political momentum for more restrictions on Chinese investment now looks unstoppable.

    3
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    Gavekal Research

    Is China Ready For A Trade Shock From Trump?

    China reported an acceleration in its economic growth on Friday, just hours before Donald Trump was sworn in as US president. But growth could take a hit if Trump makes radical changes to tax and trade policy. And while China has plenty of weapons to fight a trade war, those measures are unlikely to completely offset a sudden shock to its exports.

    3
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    Gavekal Dragonomics

    Dodging A Bullet In The Interbank Market

    In late December, China’s interbank market experienced its greatest turbulence since 2013. Though it was resolved quickly, the mini-crisis still offers some important lessons. Beijing’s technocrats did show good crisis management skills—but it’s also clear that weak links in the domestic financial system will continue to test those skills.

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