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    Gavekal Research

    Reading Trump’s Trade Signals

    Donald Trump came into office six months ago today promising to rip up the rules of global trade in order to put America’s narrow interests first and cut its trade deficit. So far, though, his administration’s trade policies have been more smoke than substance. Global trade volume has accelerated smartly since the US election. Threats of a trade war with the main target, China, fizzled in the face of US business interests, Beijing’s ability to...

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    Gavekal Dragonomics

    Reasserting Control Over Outbound Investment

    The flow of cross-border M&A from China is reviving as the crackdown on capital flight eases. But as Yanmei argues, the flow of deals is unlikely to repeat the stunning growth surge in 2016, as the government has now reasserted its control over outward direct investment. This environment will likely be friendlier to state firms than private ones.

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    Gavekal Research

    Video: New Investment Opportunities In China

    China’s onshore financial markets are opening up. Admittedly, neither last month’s inclusion of Chinese A-shares in MSCI’s benchmark indexes, nor this month’s opening of the Bond Connect scheme, will change the world immediately. But together they signal that Beijing is serious about opening its capital markets to foreign investors.

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    Gavekal Research

    Signs China’s Tightening Has Peaked

    Official statements following the conclusion of Beijing’s National Financial Work Conference signal that the recent tightening cycle has now peaked and that market interest rates are likely to fall from current levels, argues Chen Long. The story remains that while Chinese reflation has peaked, the ensuing slowdown will be moderate and gradual.

    0
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    Gavekal Dragonomics

    The Regional Bottom Line For Growth

    China’s 2016 stimulus likely provided enough momentum to ensure GDP growth in 2017 will meet the 6.5% target. But on closer examination the stimulus looks as much a rescue operation for troubled regions as a shift in national policy. This interpretation implies that the political drivers of Chinese policymaking are different from what most commentators believe.

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    Gavekal Research

    Audio & Transcript — Gavekal Research July Call

    Recent efforts to open up China's stock and bond markets have granted deeper access for foreign investors. In Tuesday's conference call Thomas Gatley outlined what MSCI's decision to include A-shares in its indexes means for investors, while Chen Long argued that the next great bond bull market may happen in China.

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    Gavekal Research

    The Wile E. Coyote Moment

    Sometimes financial markets can look a lot like Wile E. Coyote. So intent was the old Looney Tunes character on chasing the Road Runner, that he somehow never realized when he had shot over the cliff’s edge. For a few moments he would continue in thin air, legs a blur, supported by momentum and incomprehension. Only when he looked down... In much the same way, financial markets often continue their trend after the underlying conditions change,...

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    Gavekal Dragonomics

    The Peak In Home Appliances

    When you buy a house, you also buy things to go in it—yet the rebound in housing sales over the past 18 months has not done much for sales of major home appliances. As Ernan explains in this piece, Chinese demand for washing machines, refrigerators and televisions has now more or less peaked. The main exception is the humble air conditioner.

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    Gavekal Dragonomics

    Government Becomes A Home Buyer

    It’s no secret that managing the housing market is a core part of China’s economic policy. But as Rosealea explains in this piece, government’s role in supporting housing sales is now even greater than most realize. The government is buying millions of unsold housing units directly from developers, and the scale of the program is only increasing.

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    Gavekal Research

    Should Investors Chase Defense Stocks?

    Aside from health care, the other “Trump trade” that has worked wonders since November 9 has been defense stocks. After all, with the Dow Jones sector index up some 22% in the period, what’s not to like? On taking office, Donald Trump cranked up military spending, and during his state visit to Saudi Arabia in May secured weapon sales worth US$110bn. On Friday—just hours before Xi Jinping took the stage in Hong Kong to celebrate the 20th...

    3
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    Gavekal Research

    Trump And Xi: The End Of The Bromance?

    Last week Washington soured its relationship with China by imposing sanctions on some Chinese companies and individuals that do business with North Korea and announcing a big arms sale package for Taiwan. Rumors also continue to percolate that Trump is preparing for more aggressive trade action. Arthur discusses whether it is time to worry.

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    Gavekal Research

    Strategy Monthly: The China Markets Opportunity

    The doors to China’s capital markets are opening wider, with MSCI adding A-shares to its indexes, and the Bond Connect program launching in Hong Kong. In this Strategy Monthly, Thomas Gatley and Chen Long explain how foreign investors should position themselves in Chinese bonds and equities in light of these new market-opening measures.

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    Gavekal Dragonomics

    Macro Update: Surviving The Financial Crackdown

    In our latest quarterly chartbook, Chen Long assesses the effects of Chinese regulators’ surprising crackdown on the financial sector. Interbank rates and bond yields have jumped, but credit growth has slowed only modestly. While growth has clearly peaked and will slow further in the rest of 2017, a gradual slowdown still looks quite achievable.

    0
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    Gavekal Research

    A Change In The Investment Environment?

    A couple of weeks ago, Louis asked if the downside breakout in bond yields (touching 2.10%) could foster a stable investment environment. At the time he foresaw three possible scenarios. After yesterday's hawkish pronouncements by multiple central banks, he is not so sure and is focusing on a narrower range of possibilities which may herald a new investment environment.

    0
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    Gavekal Dragonomics

    Empty Promises Of SOE Reform

    At the close of 2016, Xi Jinping’s government vowed to speed up economic reform, and declared “breakthroughs” would be made in overhauling state-owned enterprises. Half a year on, these bold claims have not been matched by actions. The numerous reform trials can give the impression of activity, but real change remains a distant prospect.

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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

    The Central Pillar For Housing Sales

    China’s housing market is proving quite resilient this year, with sales growth perking up in May. In this piece, Rosealea argues the current sales recovery is broad-based: growth is strong in both central and coastal provinces. While restrictions on speculative purchases are spreading to some smaller cities, this should have only a moderate impact.

    0
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    Gavekal Dragonomics

    The Retreat From Steady Employment

    China’s troubled industrial sector shed 2.3mn jobs in 2016—but these losses were swamped by millions more new jobs created in services. The real issue in the labor market today is not how many jobs are being destroyed, but the quality of the jobs being created. Most new jobs are in small businesses that offer lower wages and less security.

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    Gavekal Research

    Back To Sanity In Japan

    I know, or I believe I know, that over thelong term equity returns follow one thing only: corporate earnings. As an example, look at Japan. If I rebase both the Topix price index and corporate earnings to 100 in 1978, I find that today the market is at at 385, and earnings are at... 385. Spot on!

    3
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    Gavekal Dragonomics

    The Regulatory Storm

    The past few months saw a flurry of regulatory measures to tackle risks in the financial system. Beijing is trying to avoid a credit crunch, but the effect on the economy will depend on how far these measures are implemented.

    0
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    Gavekal Dragonomics

    US-China Power Shift: Not So Fast

    Do Donald Trump’s miscues ensure the eclipse of Pax Americana by a rising China? Not yet.

    0
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    Gavekal Dragonomics

    The Belt And Road To Leadership

    China’s Belt and Road Initiative elicits widespread skepticism and concern, while the Regional Comprehensive Economic Partnership is often seen as a poor cousin of the aborted Trans-Pacific Partnership. But they are currently the only credible plans for greater Asian integration.

    0
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    Gavekal Dragonomics

    The Export Upgrade Challenge

    Shifting China’s industrial production from low-margin assembly to high-value, technology-intensive goods has long been the Holy Grail for planners. Export data show a lot of progress, but also an enduringly high reliance on foreign components, technology and management.

    0
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    Gavekal Dragonomics

    Still Holding High Mao’s Banner

    Within China’s increasingly restrictive political landscape, neo-Maoists continue to thrive. Tolerated for now as Xi’s ideological allies, they could turn into his fiercest opposition should he surprisingly uphold his Third Plenum pledge to give a “decisive role” to the market.

    0
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    Gavekal Dragonomics

    The East Is Rising … Isn’t It?

    Will the Asia-Pacific region will shape global politics and economics in the 21st Century, as the West’s centuries-long domination of world affairs draws to a close, or will unseen threats in Asia, from economic stagnation to political unrest and growing military tensions, throw a spanner in the works? Tom Miller reviews two books that each present their case.

    0
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    Gavekal Dragonomics

    After The Pivot, It’s Bye-Bye Asia

    With the costs and risks of confronting China growing by the day, the most likely scenario for the Asia-Pacific is one of steadily dwindling US influence. This is good news for Beijing and its claim to regional leadership.

    0
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    Gavekal Dragonomics

    High-Speed Rail Blues

    While China’s trade with Southeast Asia flourishes, a lack of experience has left its investment in the region lagging far behind. For now, Southeast Asian countries will continue to work with Japanese, EU and US institutions—regardless of how attractive China’s initial bids are.

    0
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    Gavekal Dragonomics

    CEQ: China In The Asia-Pacific

    China is attempting to become Asia’s new leader. The high costs of confronting it mean that the US’s regional influence is likely to dwindle. But widespread distrust of China means that many countries will continue to prefer investment from the EU, US and Japan. This issue of China Economic Quarterly investigates China’s role in the Asia-Pacific.

    0
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    Gavekal Research

    EMs And A Chill Trade Wind

    The Asian trade cycle, having perked up notably since mid-2016, shows worrying signs of rolling over. Korean export growth in May halved from a month earlier, while Taiwan has seen the same measure steadily slow since February. Today, China reported a reduction in export growth to single digit levels, while import demand growth for May fell to 15% YoY, compared to 38% in February. To an extent, this can all be explained by flattering base...

    1
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    Gavekal Research

    Figuring Out Where The Ball Will Be

    Rugby players fall into one of two categories: the forwards, who typically go where the ball is (and in the process put their heads in places most sane people wouldn’t put their feet), and the backs, who try to go where the ball will be, which enables them to look good and keep their kit clean, but earns them the scorn of the forwards. Peter FitzSimons, the first Aussie to play for a French club (Brive), once remarked: “Come the revolution, the...

    2
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    Gavekal Research

    What Is The Signal In The Renminbi’s Surprising Strength?

    Over the past week and a half, the renminbi has appreciated 1.1% against the US dollar in the onshore market, and 1.5% offshore, where the PBOC has also engineered a spike in short-term interest rates. It seems China wants to send a signal about the renminbi, but markets are having trouble decoding what it is. Andrew outlines three possible strategies the central bank may be following.

    0
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    Gavekal Dragonomics

    Leadership Scenarios For The Party Congress

    The key event in China’s political calendar is now just a few months away. The 19th Party Congress will reveal who will join top leader Xi Jinping in the ruling Politburo Standing Committee, and in the process provide clues to China’s political future. In this piece, Yanmei outlines different possible scenarios and explains their implications.

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    Gavekal Research

    Decoding The HK Dollar’s Signals

    When Moody’s downgraded China’s credit rating this week, it also downgraded Hong Kong. Although Hong Kong is fiscally autonomous, and has seen no rapid build-up in leverage comparable to the mainland, Moody’s still downgraded the territory from Aa1 to Aa2. In explanation, the agency cited Hong Kong’s “tightening economic, financial and political linkages with the mainland,” which it warned “risk introducing more direct contagion channels”...

    0
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    Gavekal Dragonomics

    Beijing’s Non-Capital Idea

    China wants to build a new satellite city to take over Beijing’s “non-capital functions,” and their associated workers. In this piece, Tom Miller examines the Xiong’an New Area and the government’s grand plans to cap Beijing’s population and spread wealth to surrounding regions. He finds the economic benefits are unlikely to outweigh the costs.

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    Gavekal Research

    Don’t Buy The Smartphone Hype

    As Apple prepares to launch its anniversary iPhone and Samsung unveils models that don’t blow up, technology equities in the US and Asia have soared on hopes for a new smartphone cycle. After 2016 saw high-end smartphone sales fall, investors are betting that consumers respond to gee-whizz gadgetry by replacing their devices more often. We are not so sure.

    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

    The Great Corn Crash

    China’s “supply-side reform” measures have helped drive a recovery in prices of industrial commodities. In agricultural commodities, the name is the same, but the results are very different: the price of corn fell 44% from its peak after the government removed price supports. Now that prices have adjusted, quantities will follow: imports will fall.

    0
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    Gavekal Dragonomics

    Regulatory Stress Is Still Bearable

    The main source of uncertainty in the Chinese economy right now is the financial crackdown launched in March. In this piece, Andrew looks at the April data and finds that the regulatory campaign’s impact has so far been contained. This supports our call that the regulatory stress is a bigger problem for asset markets than for the real economy.

    0
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    Gavekal Dragonomics

    Where The Rubber Meets The (Belt And) Road

    Ahead of next week’s Belt and Road Forum in Beijing, Tom Miller provides an update on the progress of Xi Jinping’s signature foreign policy. More than three years after its launch, China’s Belt and Road Initiative is starting to deliver useful infrastructure, and is clearly boosting construction volumes and stimulating new investment.

    0
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    Gavekal Dragonomics

    More Dollar Weakness Is Good News For The Renminbi

    The renminbi has had a surprisingly good year, thanks in large part to the weakness of the US dollar. In this piece, Chen Long argues that dollar weakness will likely continue—and with it a benign environment for capital flows and China’s currency policy. Even a rise in the renminbi is a prospect that can no longer be dismissed out of hand.

    0
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    Gavekal Research

    The Upside Of The Commodity Downside

    Once again, commodity prices are taking a beating. Since Wednesday the price of Brent blend crude oil has slumped by 7%. Over the last two months copper has slipped 8%, and iron ore futures traded in China are down a precipitous 30%. Coming on top of data that showed the US economy grew by a meager annualized 0.7% in the first quarter, and the recent tightening in China’s credit conditions, the latest slide in commodity prices has been...

    2
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    Gavekal Dragonomics

    Cyclically Fine, Structurally, Well...

    Optimism about China’s growth is now higher than it has been for years, after the notable recovery in the last couple of quarters. But in this piece, Andrew argues China still can’t escape a further growth slowdown, because its continued reliance on state-driven investment is sapping productivity growth and undermining the private sector.

    0
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    Gavekal Dragonomics

    How Long Can The Construction Rebound Last?

    Chinese growth prospects look quite good in 2017, thanks to the recovery in construction, but how long can it last? In this piece, Rosealea unpacks the inventory dynamics behind the rebound. Given the strong start to 2017, it now looks like low inventories can support growth in construction not just in 2017, but also well into 2018.

    0
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    Gavekal Dragonomics

    Riding Out The Regulatory Storm

    Chinese financial officials are stirring up a regulatory storm with their new crackdown on various forms of speculation, arbitrage and risky behavior. Though much is still unclear, the campaign is likely to lead to tighter liquidity and slower credit growth. But the more immediate risk is its impact on the domestic equity and bond markets.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call On The French And UK Elections

    In a special Gavekal Research Conference Call following the results of the first round of the French presidential election, Charles Gave and Cedric Gemehl presented their analysis of Marine Le Pen and Emmanuel Macron’s prospects in the second round in two weeks. Anatole Kaletsky presented his view of British politics and the future of the Brexit process following Theresa May calling for a snap election in June.

    0
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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.

    0
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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.

    0
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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...

    0
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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.

    0
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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 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.

    0
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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.

    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

    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.

    0
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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.

    0
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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.

    3
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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.

    0
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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.

    2
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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

    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.

    0
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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.

    0
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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.

    0
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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.

    0
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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...

    0
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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.

    0
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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.

    0
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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.

    0
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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.

    0
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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.

    0
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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.

    0
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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.

    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 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.

    2
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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.

    2
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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.

    2
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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.

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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.

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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.

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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...

    2
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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.

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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

    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.

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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.

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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.

    1
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    Gavekal Research

    Audio & Transcript — Gavekal Research January Call

    Charles Gave argued that Donald Trump’s protectionist policy could lead to a breakdown of the post-1971 fiat money system that is based on a US dollar standard. Will Denyer deconstructed the likely workings of a new trade taxation regime in the US and explained what that means for currencies. Arthur Kroeber outlined the likely Chinese response to a US trade broadside and argued that Beijing was decently well placed to weather the attack.

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    Gavekal Research

    Video: A Coming US-China Trade War?

    In this video interview Arthur explains how a US-China trade war may play out and the implication for capital outflows from China

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    Gavekal Research

    Trump's China Choice: Trade War Or New Deal?

    Once Donald Trump occupies the White House he is sure to launch salvos at China in the form of new tariffs, anti-dumping actions and the labeling of China as a currency manipulator. It is tough to predict exactly what these actions will entail going forward. What is certain is that the long-running US consensus on how to handle China has broken down.

    1
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    Gavekal Research

    Video: The Dissonance In US-China Relations

    Once Donald Trump occupies the White House he is sure to take aim at China in the form of new tariffs, anti-dumping actions and the labeling of the country as a currency manipulator. What is unclear is whether such actions reflect a tough negotiating stance, or instead a fundamental shift in the strategic equation. In this video interview, Arthur explains why the mixed messages coming out of Washington have the potential to spark a dangerous...

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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.

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