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E.g., 26-03-2017
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    Gavekal Dragonomics

    Iron Ore’s Battle Of Attrition Is Over

    China’s iron ore imports jumped in early 2016, finally validating global mining companies’ strategy to gain market share. As low prices continue to force domestic mines to close, iron ore imports still have a few quarters of growth ahead. But with import penetration already over 80%, there is not much market share left for global miners to grab.

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    Gavekal Research

    The Flow Through To EM Equities

    These are strange times for investors with bond yields in big developed markets plumbing new depths on dark concerns about never ending deflation and stagnation. Yet in a clearly related development, US equities are making new highs while corporate- and emerging market-bonds continue to rally.

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    Gavekal Dragonomics

    The Mixed Progress On Excess Capacity

    Domestic coal output has declined sharply this year, but steel production has been flat. This pattern reinforces the point that excess capacity only shuts when forced to by low prices—and steel prices were high because of the stimulus. While both excess capacity sectors will continue to contract, trade tensions are unlikely to vanish quickly.

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    Gavekal Research

    The Growth Trade-Off Gets Harder

    China’s better-than-expected economic data for the second quarter underscore just how effective a jolt of stimulus to housing and construction can be. But housing is already cooling, and the rest of the economy will soon follow suit. The froth in housing prices will continue to limit the government’s ability to pump up growth to meet its targets.

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    Gavekal Research

    The Post-Brexit Rally: Head Fake Or Game-Changer?

    Let’s face it, few expected the rally in global risk assets of the past ten days. Even investors who, like Charles, believed that Brexit was a fundamentally positive development did not expect positivity to erupt quite so suddenly. Yet, here we are, with the Nikkei up 10% since its post-Brexit low, the S&P 500 breaking out to new highs and the Shanghai benchmark above 3,000. Will it last?

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    Gavekal Dragonomics

    The Weak Links In The Financial System

    Where are the risks in the Chinese financial system? Two weak links deserve particular attention: the rapid expansion of small and regional banks with unstable funding, and the increasing complexity of credit creation. Neither threatens an immediate systemic crisis, but they do mean that the risk of ugly financial accidents is rising.

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    Gavekal Research

    A Storm Brews In The South China Sea

    Beijing declared it “null and void,” but the verdict of the international tribunal in The Hague is clear: there is no legal basis for China’s maritime claim over the South China Sea. Beijing now faces a choice: does it find a face-saving way of lowering tensions, or does it risk military conflict by actively asserting its territorial interests? It is quite possible that Beijing does yet not know itself, and will wait to respond to international...

    1
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    Gavekal Dragonomics

    Behind The Jobs Target

    China’s leaders may have missed their GDP growth targets for the last couple of years, but they are still beating their targets for job growth. Yet the statistic used for this target gives a very misleading picture of the labor market. It’s better to instead watch surveys of households and employers, which capture the real, deteriorating trend.

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    Gavekal Research

    The Renminbi Falls; No One Cares

    This week the renminbi slipped to its lowest level against the dollar since 2010. Yet this decline had little impact on global markets, a sharp contrast to the convulsions caused by previous drops. In the absence of a radical shift in currency policy or accelerating capital flight, China’s gradual depreciation is a non-story for most investors.

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    Gavekal Dragonomics

    The Caution Of Chinese Corporations

    China’s rising corporate debt is now driven more by banks pumping out credit than by reckless firm behavior. Chinese companies are increasingly risk-averse: happy to borrow from banks, but preferring to sit on the cash not spend it. This behavior is a big reason why monetary policy is becoming less effective at stimulating demand.

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    Gavekal Dragonomics

    The Natural Gas Glut

    China’s natural gas demand is likely to rise by 7-9% annually for the rest of the decade, half the 15% pace of 2003-14. That is still a pretty decent pace of growth—but well below what the government planned for. Having signed contracts and built pipelines on the basis of ambitious forecasts, China’s challenge is now dealing with a glut of gas.

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    Gavekal Dragonomics

    A Boring Infrastructure Bank

    The creation of the Asian Infrastructure Investment Bank promised to reshape the world’s economic architecture, and greatly worried the US. Yet now that the AIIB is a reality, it is not challenging the existing Bretton Woods institutions. It is on course to resemble them—and cooperate with them. In fact, the AIIB has become just a bit boring.

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    Gavekal Dragonomics

    Macro Update: The Limits Of Stimulus

    In our latest quarterly overview of China’s economy, Chen Long assesses the outlook after the stimulus of early 2016 and the Brexit vote. The property and credit cycles are turning as policymakers grow cautious, though private investment has benefited little. Still, deflation is easing, capital outflows are moderating and exports are improving.

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    Gavekal Dragonomics

    Household Savings: A Permanently High Plateau?

    China’s famously high household savings rate is still stuck in the stratosphere: it has hovered around 37-38% of income since 2008. So have the drivers of savings not changed at all in recent years? Far from it. High savings were mainly caused by China’s massive housing boom, and now that the boom is over, savings rates will be grinding lower.

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    Gavekal Research

    What Does China’s Propaganda Ministry Do All Day?

    When asked to speak about China at big investment conferences, I often kick-off by asking the audience “who here trusts Chinese data?” When no one raises their hand, my follow-up is generally “OK: 0 out of 250! That’s more than usual”. Beyond getting a cheap laugh, the point is to highlight how most foreign investors are suspicious, and often downright fearful, of China. Such distrust may stem from China being one of the few major economies to...

    1
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    Gavekal Dragonomics

    CEQ: The State Sector’s New Clothes

    In this issue of the CEQ, we take a close look at state-owned enterprises, which lie at the heart of Xi Jinping's strategy for restoring China to greatness. The goal of Xi’s recent policies is clear: to strengthen SOEs and make them more effective instruments of macro management at home, and more powerful agents of national interests abroad.

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    Gavekal Dragonomics

    Villains Or Victims? The Role Of SOEs In China’s Economy

    State-owned enterprises are often blamed for China’s excess capacity, but private firms are the bigger culprits. The real problem is that the government now forces SOEs to act as economic stabilizers, at high cost. This makes them an ever-growing liability to the state.

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    Gavekal Dragonomics

    State Enterprise Reform: Missing In Action

    In 2013, the Third Plenum Decision promised bold reform of the SOEs, to diversify their shareholding and improve their financial performance. Nearly three years on, little remains of that agenda beyond a conflicting jumble of vague directives.

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    Gavekal Dragonomics

    Return Of The Line Ministries

    In the 1990s, Zhu Rongji broke up state-owned conglomerates, to spur efficiency through competition. Now Xi Jinping’s SOE reform aims to bring those conglomerates back to life. The effort will be spearheaded by Xiao Yaqing, whose ambition to turn the state aluminum company into a global metals giant foundered, but who is now the bureaucrat in charge of all central SOEs.

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    Gavekal Dragonomics

    Stability Above All

    The government seeks to keep both GDP growth and the exchange rate as steady as possible ahead of the Communist Party Congress scheduled for the fall of 2017. It may succeed, but probably at the cost of further delaying its structural reform program.

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