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E.g., 26-06-2017
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    Gavekal Research

    A Slow Motion Game Changer

    After three years of teasing, MSCI has agreed to include Chinese domestically-listed stocks, or A-shares, in its main equity indexes. Yet, hopes that MSCI inclusion will quickly spur huge capital inflows and a sustained domestic bull market, are almost certainly wide of the mark.

    0
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    Gavekal Dragonomics

    Corporate Deleveraging Is Ending, Not Beginning

    The recent financial crackdown may give the impression that “China is finally getting serious about corporate deleveraging.” This impression is wrong: while leverage is already declining, this is likely to stop in 2017. Worries about zombie companies have also faded as rising profits and falling rates make it easier to service corporate debt.

    6
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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.

    2
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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.

    0
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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.

    0
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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.

    0
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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.

    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.

    3
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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.

    3
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    Gavekal Dragonomics

    After Reflation, Profits Still Decent

    The stimulus-driven rebound in housing sales and commodity prices lifted the profits of China’s industrial firms in 2016. With the cycle turning, profit growth is certain to weaken in 2017. But for most manufacturers—outside the volatile commodity complex—the end of reflation should see only a gradual slowdown and still decent profit growth.

    0
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    Gavekal Dragonomics

    Five Macro Questions For 2017

    For our first China research piece of the new year, we offer a guide to the economic outlook in the form of short answers to some big questions: Will China be as boring as consensus forecast imply? Will the central bank hike interest rates? Will the housing market correct sharply? Will it be a good year for Chinese equities? Will the labor market hold up?

    7
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    Gavekal Dragonomics

    Don't Blame The Property Speculators

    Is a love of speculation sapping firms’ appetite for real investment? As Chinese companies slow spending on fixed assets, they are buying more investment properties—sparking concern about a “hollowing out” of the economy. Thomas says the blame is misplaced; property speculation is an effect not a cause of firms slowing capex as the economy cools.

    0
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    Gavekal Dragonomics

    A Good Quarter For Corporate China

    China’s listed firms have finished reporting Q3 earnings, and they turned in a good quarter. Net profits at the median nonfinancial firm rose 14% YoY, picking up from 9% in Q2, while sales growth accelerated to 10% from 6%. Both industrial and consumer sectors did well. In this piece, Thomas analyzes the latest key trends in corporate earnings.

    0
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    Gavekal Dragonomics

    The Squeeze On Capex Loosens

    After slowing for years, fixed-asset investment in manufacturing and mining is showing signs of steadying as stimulus policies stabilize demand for their products. Manufacturing FAI could even recover modestly to 6-8% real growth next year. But firms’ caution after years of growth disappointment is unlikely to suddenly turn to exuberance.

    3
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    Gavekal Dragonomics

    The Big Fish Eat The Little Fish

    China’s housing sales may have plateaued, but the largest real-estate companies still have plenty of room to grow by consolidating an enormous and fragmented market. A multiyear boom in M&A has strengthened the market position of the largest developers, who are still easily raising huge sums from capital markets that can fund future deals.

    0
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    Gavekal Research

    A New—But Pricey—Market

    The last big barrier to investment in onshore Chinese equities is to be dismantled. Yesterday China’s cabinet approved the Shenzhen-Hong Kong Connect scheme. When the new link goes live, international investors will have free access to 80% of China’s onshore market capitalization, though the Shenzhen-listed stocks have eye-watering valuations.

    0
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    Gavekal Dragonomics

    Car Sales: Plenty Of Gas In The Tank

    With heavy industry in the doldrums and the golden age of housing long gone, it’s getting harder to spot areas of sustained growth in China’s economy. An important bright spot is the automotive sector: while the recent breakneck pace of car sales will slow, the value of new car sales is likely to keep growing faster than GDP for the next decade.

    0
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    Gavekal Dragonomics

    Profits Follow Housing Up, And Down

    China’s industrial profits bounced back to 6.2% growth in the first half, a stronger than expected recovery. The drivers are a boom in metals driven by the housing rebound, and continued gains in consumer sectors. But the metals boom is a temporary one, so after a couple more quarters of gains, a renewed down-cycle is likely in early 2017.

    0
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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.

    0
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    Gavekal Research

    A-Shares: The Food Is Terrible, And Such Small Portions

    The decision by MSCI not to include China’s onshore A-share market in its Emerging Markets index should have come as no surprise. Despite real progress, there are still regulatory roadblocks to inclusion that have yet to be dismantled. In any case, the resulting fund flows into the A-share market would be smaller than many observers expect.

    0
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