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    Gavekal Dragonomics

    After The Crash In Car Sales

    Is the long boom in China’s car market finally over? In this piece, Ernan takes stock of the prospects for auto sales after 2018’s historic decline. Since that drop was caused by expiring stimulus policies, sales can stabilize and recover. Future growth, however, is likely to be much slower than the industry has become accustomed to.

    0
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    Gavekal Research

    Thirty Years Later: Tiananmen's Long Shadow

    On Monday we published a piece from Louis in which he assessed the three economic fronts where the US and China are doing battle. In this second part of the series, Louis steps back and considers the chief monetary priorities that China has settled on since the tumultuous events at Tiananmen Square almost 30 years ago.

    1
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    Gavekal Dragonomics

    The Long Arm Of US Export Controls

    While investors eye the progress of US-China talks to avert tariff hikes, the US is mobilizing on another front. In this piece, Dan explains how the US is preparing for more aggressive use of export controls to disentangle the US and Chinese tech sectors. This can certainly hurt Chinese firms, but will also affect US and other tech companies.

    2
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    Gavekal Research

    Three Separate Battlefronts In The Unfolding Cold War

    As the clash between China and the US intensifies, Louis notes the primacy that Mao Zedong’s guerrilla tactics would have had in forming the current Chinese leadership’s political consciousness and setting a template for the way they handle conflict. As such, he sees the struggle between the two superpowers playing out on three distinct fronts.

    19
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    Gavekal Research

    The Global Car Industry Catches Chinese Flu

    If the auto industry is a bellwether of global economic health, then much of the world is looking sick. The second half of 2018 was painful for carmakers in all the major auto markets, and 2019 is shaping up to be as bad. Is this just a passing malady that carmakers will soon shrug off, or a chronic condition they will have to manage for years to come?

    3
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    Gavekal Dragonomics

    It’s Not 2015 All Over Again

    The profits of China’s industrial sector are turning down—but as Thomas argues in this piece, a repeat of the traumatic downturn of 2014-15 is not in the cards for 2019. Heavy industry will hold up better this time around, but consumer-facing sectors will do worse. This downcycle will be more broad-based, but less severe, than the last one.

    0
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    Gavekal Dragonomics

    The Large Print Giveth, The Small Print Taketh Away

    China’s government has made a cut in personal-income taxes, rushed out in August 2018, a centerpiece of its response to a slowing economy. Additional tax deductions were unveiled in January, but as Ernan explains, the new details are not that bullish for consumer spending. Enforcement is tightening, and some tax breaks will be phased out.

    0
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    Gavekal Dragonomics

    The Long Plateau In Housing Demand

    While many forecasters had expected China’s steel demand to enter long-term decline as housing construction peaks, in fact it has stayed surprisingly strong. In this piece, Rosealea revisits her housing model, and finds it is consistent with recent trends. Construction should peak in 2020-22, so steel demand can stay elevated for a few more years.

    0
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    Gavekal Research

    The Recession Of 2019: Revisited

    Six months ago Charles posited the idea of a global recession starting in and around March 2019. He revisits that idea in this piece and concludes that there is clear evidence of the global system suffering a marked slowdown. Here, he seeks to identify the source of the problem by a process of elimination (spoiler alert, the problem isn’t China).

    4
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    Gavekal Research

    A Huawei-Scale Problem

    The charges that US prosecutors have now filed against telecom equipment supplier Huawei are similar to those thrown at two other Chinese tech firms last year. The eventual outcome is likely to be similar: the imposition of export controls that will threaten Huawei’s survival and force it to accede to a restrictive deal with the US government.

    0
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    Gavekal Research

    Favor Local Bonds Over EM Equities

    After a dismal year for emerging market assets in 2018, emerging markets have started 2019 on a positive note, with equities rising 6.5% and local currency bonds up 3% year-to-date. On Friday, Louis looked at shifts in the US dollar, long term US interest rates, credit spreads and the oil price, and concluded they favor emerging market assets through the rest of 2019. Broadly I agree, but I would take a slightly more nuanced stance. The shifts...

    0
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    Gavekal Research

    The Four Prices That Matter

    It is Gavekal’s longstanding mission to develop simple principles that investors can use to navigate complicated financial markets. In this vein, one of our core tenets is that four prices matter more than all others, and together these determine the level of global economic activity and of investor risk appetite. Let us see where they stand as we head deeper into 2019.

    12
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    Gavekal Dragonomics

    The Next Liquidity Squeeze On Private Firms

    China’s private firms suffered a big liquidity squeeze in 2018 as regulators cracked down on shadow financing. But in 2019 they must also contend with the threat of another liquidity squeeze: state-owned enterprises hoarding cash and delaying payments. Unless officials force them to stop, SOEs could squeeze another RMB1trn from private firms.

    1
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    Gavekal Dragonomics

    Not Out Of The Woods Yet

    China’s growth in the fourth quarter slowed to 6.4%. There were some bright spots, notably the resilience of the property market. However, the export sector was weak, and the removal of policy constraints on industry gave a mixed picture. All in all, Beijing’s policy measures so far have at best only cushioned the impact of the slowdown.

    7
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    Gavekal Research

    Trump's Next Trade Target

    Just when the risk from trade politics seemed to be dying down, it’s getting complicated again. Trade talks between the United States and China are in full swing, but just as important are imminent negotiations between the US and the European Union, which are clouded by the US threat to impose tariffs on cars and car parts.

    0
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    Gavekal Dragonomics

    The Incredible Shrinking Current Account

    China once had the world’s largest current-account surplus, but that surplus headed rapidly toward zero in 2018. In this piece, Chen Long unpacks the structural and cyclical factors behind this shift. He doubts China is headed for a persistent current-account deficit just yet, but thinks the smaller surplus will make the currency more volatile.

    6
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    Gavekal Dragonomics

    It's Not All Bad News In Property

    China’s property market keeps delivering bad news: declines in housing sales, land sales and prices have deepened in recent months. But Rosealea sees some positive signs in easing local government policies, lower bank funding costs, and strong momentum in construction. In this piece, she explains why she is not joining the property-market bears.

    0
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    Gavekal Dragonomics

    Video: China In 2019

    Washington and Beijing will likely find some kind of accommodation on trade and China’s economy will suffer a tough first quarter that sees the authorities adopt a range of counter-cyclical measures. In this video interview, Arthur outlines our key China views for 2019 and offers investment recommendations for the renminbi, bonds and the Chinese equity market.

    0
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    Gavekal Research

    The Big Questions For 2019

    The last quarter of 2018 proved to be something of a horror show for most investors and despite this year starting with a firmer tone, the investment landscape looks to have changed in a fairly profound way. In this report, Louis considers the major shifts in the investment environment and asks whether these conditions will persist through 2019.

    3
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    Gavekal Dragonomics

    A Cold Winter In China's Job Market

    China’s job market was an early casualty of the US-China trade conflict, with industrial layoffs accelerating to a pace last seen in 2015-6. But Ernan argues that the situation is worse this time, as service-sector employers are being squeezed by tighter regulations. The weaker job market means a worsening outlook for household spending in 2019.

    0
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    Gavekal Research

    Strategy Monthly: The Hope-Vs-Despair Smackdown Of 2019

    The massive sell-off in December left global equities on the precipice of a real bear market. Hope and despair are finely poised, but we find a bit more reason for hope. The US and China will both slow, but the US should avoid recession and Chinese growth should stay above 6%. Political and trade-war risk is lower, and liquidity pressures will ease. US equities and EM assets, especially local-currency bonds, both promise positive returns.

    0
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    Gavekal Research

    What To Watch In Chinese A-Shares

    Chinese A-shares were the world’s worst-performing major equity market in 2018. For the market to rally in 2019, three factors will need to show signs of clarity and improvement: China’s macro policy direction, liquidity squeezes in the bond and equity markets, and the trade war with the US.

    0
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    Gavekal Dragonomics

    More Than RRR Cuts Needed To Stabilize Growth

    After the central bank's latest cut in bank reserve requirements, the key question is not whether Beijing will continue to loosen policy, but when its measures will begin to have a visible impact. In this piece, Chen Long argues that it will take several more months of easing before the economy and stock market begin to feel the benefit.

    0
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    Gavekal Research

    This Century's Suez Crisis

    China’s “Belt and Road” initiative is a clear bid by Beijing to challenge the incumbent imperial power: the US. And in an age when the highest-value commodities are not physical goods, but the binary digits zipping around the world at the speed of light, the battleground of this struggle for dominance will be telecommunication networks.

    7
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    Gavekal Dragonomics

    China And The US Still Hold The Keys To Markets' Fate

    In 2018 liquidity tightening in the US and China combined with trade war fears to make a miserable year for markets. In 2019 the same forces will be at work but the outcomes may differ. The key questions are: can the US and China work out a trade deal? How bad is the Chinese slowdown and how will Beijing respond? And how much will the Fed tighten?

    4
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    Gavekal Research

    The Market Weighing-Machine

    If there is one useful conclusion for investors from the crazy year that has just ended, maybe it is this: as they say in Hollywood, “Nobody knows anything.” The equity market predicted a boom while the bond market predicted recession, and then reversed positions. The consolation for investors should be that the market is a voting machine in the short term, but a weighing machine in the long term.

    2
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    Gavekal Dragonomics

    Why China Can Succeed In Tech

    Technology is at the heart of the US-China trade conflict. The US fears that China will challenge its technological leadership, and those fears are not without foundation. In this piece, Dan argues that China is in fact likely to succeed in many of its technological goals—but because of successful companies rather than big government plans.

    0
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    Gavekal Research

    Getting Out Of The Liquidity Squeeze

    With the Trump-Xi summit, compromise between Rome and Brussels, and the oil price down, all the ingredients should have been in the mix for a Santa Claus rally. Instead it's been an ugly few weeks in the markets, which strongly suggests no let up yet in this year's liquidity squeeze. In this detailed report, Louis looks back at recent history to determine what forces might bring the squeeze to an end next year, and therefore what asset...

    0
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    Gavekal Research

    A New Risk-Reward Equation In EMs

    US markets have come back to earth with a bump on a reassessment of risk and growth prospects. As a result, investors are betting on a less hawkish Federal Reserve and a weaker US dollar, both of which are a boon to hard-pressed emerging markets. The question is: do investors gain more from a more favorable US dollar liquidity environment than they lose from a growth picture clouded by a slowing China and unresolved trade tensions?

    4
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    Gavekal Dragonomics

    2019 Will Get Off To A Rocky Start

    China’s growth data continue to disappoint, as Beijing’s easing policies have not still gotten traction. In this piece, Chen Long explains his outlook for 2019: more easing is coming, but it will take a while for those policy changes to deliver a stabilization in growth. That means there will likely be more bad economic news through early 2019.

    8
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    Gavekal Research

    Our 2018 Holiday Reading List

    “Books,” wrote Anthony Powell, “do furnish a room.” As author of the million-word, 12-volume A Dance To The Music of Time, Powell was something of an authority on the subject. But it is unlikely even his library was as eclectically furnished as Gavekal’s. If anything, our 2018 holiday reading list is even more varied than those of recent years. Sure, we’ve read and reviewed the economic and financial heavyweights: Barry Eichengreen on currencies...

    1
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call December 2018

    In the final Gavekal Research Conference Call of the year, Louis-Vincent Gave, Anatole Kaletsky and Charles Gave shared their perspectives on a year which has been challenging for all asset classes, and offered their thoughts on what could be in store for investors in 2019.

    0
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    Gavekal Research

    Understanding The Next Bear Market

    My career in financial markets began in January 1971, which means I’ve seen a few bull and bear markets. A common trait of bear markets is that as the big decline starts, most investors have no idea why asset prices are falling. At some point, perhaps much later, the root cause of the marauding bear becomes clear and this revelation triggers the final phase of the sell-off. Hence, in light of the recent pull-backs, readers may like to consider...

    6
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    Gavekal Dragonomics

    The Supply-Chain Migration Begins

    The US-China trade conflict has changed the equation for multinational companies’ supply chains in China. Higher tariffs and increased uncertainty are pushing some firms to invest more in other locations. But Dan argues that most firms have strong reasons to stay in China, so the shift in supply chains will be more of a trickle than a flood.

    0
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    Gavekal Dragonomics

    Steel Prices Have Overshot

    Chinese steel prices suffered their biggest decline in two years in November, falling about 20% over the course of the month. That correction was driven by a combination of a big increase in supply along with worries about future demand. In this piece, Rosealea argues that both problems will be short-lived, and that steel prices can rebound.

    0
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    Gavekal Research

    What Huawei To Go

    The arrest last Saturday in Vancouver airport of the CFO of Chinese telecoms giant Huawei at the request of US prosecutors will have major consequences for investors beyond the short term market volatility it contributed to this week. Reaching a permanent US-China agreement is now much more complicated, and the arrest shows the US can use more than tariffs against China.

    0
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    Gavekal Research

    Strategy Monthly: Three Questions For The Year Ahead

    This has been a miserable year across most asset classes, with markets roiled by tighter US dollar liquidity. Looking into 2019, Louis sees the investment environment being dictated by whether the US dollar liquidity situation really is easing, the overall US policy and the possibility for the “Chimerica” relationship to rupture.

    0
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    Gavekal Research

    The Evolving Trade War

    There is little doubt that the US president is surrounded by advisers who see China as a genuine threat to the long term economic health and geopolitical strength of the United States. But, it is likely that Donald Trump’s most immediate concerns are more down to earth. Specifically, in order to be re-elected in 2020, Trump needs once again to carry states such as Ohio, Michigan and Wisconsin. And it is unlikely that he will be able to win the...

    5
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    Gavekal Research

    Trade, Earnings And The Chinese Equity Market

    Yesterday’s plunge in US equities was partly attributed to fears that the trade war with China is far from settled. A similar mood is taking hold in China: news of the trade truce spurred a rally in Chinese equities on Monday, but gains softened on Tuesday. However, other factors are also weighing on investors in the Shanghai and Shenzhen markets.

    1
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    Gavekal Dragonomics

    Paying For Industrial Policy

    China’s ambitious goals to lead in the technologies of the future are backed by huge resources. Since late 2014, there has been an explosion in state-backed funds targeting high technology. Our latest in-depth DeepChina report digs into these government guidance funds to find out how they work, and how successful they will be.

    0
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    Gavekal Research

    The Next Target Of Trump’s Firepower

    In today’s Daily, Arthur Kroeber offered his analysis of the weekend’s Trump-Xi summit in Buenos Aires. In this short report, Louis takes a slightly different tack, reviewing the series of tumultuous events in recent weeks. His conclusion is that few investors’ portfolios are well positioned for the probable outcome.

    0
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    Gavekal Research

    The Durability Of The Trump-Xi Rally

    The Trump-Xi showdown at the G-20 has produced a truce, and Asian equity markets rallied in response. But Arthur is skeptical of the durability of the rally, as the structural nature of the US-China rivalry was not addressed by the deal, and hardliners in Washington are likely to keep ratcheting up the pressure on Beijing.

    0
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    Gavekal Dragonomics

    Germany Is Rethinking But Not Rejecting China

    As the US-China trade conflict drags on, both sides are looking to Europe, particularly Germany, for support. Germany does share US concerns about China’s protectionism and expansionism. But it still sees China as an economic boon and is committed to engagement. Berlin is therefore unlikely to fully take the side of either Beijing or Washington.

    0
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    Gavekal Research

    EMs Need More Than A Bear Hug

    Having fallen -25% since late January, emerging market equities have been this year’s train crash of an investment. The good news is that EM equity valuations are at multi-year lows in both absolute and relative terms, begging the question: what could catalyze a rebound in oversold EM assets?

    3
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    Gavekal Dragonomics

    The Chinese Consumer In 2018

    In our annual review of the economic performance of the Chinese consumer, Ernan examines the key issues affecting households. This chartbook covers the reasons for the decline in car sales, the rising burden of household debt, the effects of the income-tax cut, the prospects for consumption upgrading—and where all these trends are headed in 2019.

    0
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    Gavekal Dragonomics

    The Chinese Internet Ventures Abroad

    Chinese internet companies are now the only credible challengers to the global hegemony of US internet companies. In this piece, Dan explains that, although they may not directly challenge Google or Facebook, the Chinese firms are pushing abroad and are well on their way to becoming a formidable presence in developing countries.

    0
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    Gavekal Research

    Don't Bet On Détente

    Yesterday my colleague Anatole Kaletsky explained his optimism ahead of the meeting between presidents Donald Trump and Xi Jinping in Buenos Aires later this month. He thinks the chances of at least a tariff cease-fire are pretty good, and investors should buy Chinese and emerging-market assets. I remain skeptical.

    2
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    Gavekal Research

    Reasons To Believe In Détente

    Should we take seriously President Donald Trump’s prediction of “a deal” at his summit with President Xi Jinping on November 30? Nobody can be sure—not even Trump himself—since the outcome may depend on whether Peter Navarro or Steven Mnuchin manages to catch his attention before Air Force One lands in Buenos Aires next week. There are, however, four reasons which I have discussed here before to justify continuing to increase long positions in...

    0
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    Gavekal Research

    Countering The Belt And Road

    In its escalating rivalry with China, the US has a new target: the Belt and Road Initiative. But both the US and Europe are struggling to redefine the way they win friends and influence people with development finance. Tom argues that the somewhat quieter middle way being pursued by Japan is delivering it both influence and profits.

    3
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    Gavekal Research

    The Uphill Struggle For Equities

    Last week saw the MSCI World turn in its sixth negative week in eight, while the only sector to record gains over the last two months has been utilities; cyclical sectors like materials, industrials, IT, energy and consumer discretionary have mostly entered correction territory. That begs the question: Is this a dip to buy, or will the environment remain harsh?

    5
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    Gavekal Dragonomics

    Housing & Construction Review 2018

    China’s property market has had a record-breaking run, but where is it headed next? In this concise chartbook, Rosealea delivers her annual overview of the key drivers of housing sales and construction activity and explains the outlook for 2019. An overdue correction in sales is coming, but construction should hold up relatively well.

    0
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    Gavekal Dragonomics

    Solving The Private Sector's Liquidity Crisis

    China’s leaders are now falling over themselves to show love for the private sector. This political rhetoric has a practical purpose: easing the financial stress on private firms that is freezing up the corporate bond market and driving down stock prices. In this piece, Thomas examines the tools for solving the private sector’s liquidity crisis.

    0
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    Video: The Battle For Chinese Tech

    China imports more semiconductors than it does crude oil, highlighting its dependence on foreign technology and know-how. The US recognizes this weakness and is intent on squeezing China’s tech sector before it is able to produce the most advanced chips at home and in scale. For this reason, tech sits at the heart of the US-China tensions.

    0
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    Gavekal Research

    China's Data Will Get Worse Before It Gets Better

    The latest round of data releases painted a mixed picture of Chinese economic activity in October. Most notably, credit growth was weak. Given that without an acceleration in credit growth there will be no broad pick-up in overall economic growth, this indicates that Beijing will loosen policy further over the coming months. But how far and how fast?

    2
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    Gavekal Dragonomics

    The Next Wave Of SOE Consolidation

    Chinese officials are making another call to renew reform of state-owned enterprises. But a return to privatization is far away: the most concrete aspect of SOE reform is the guided restructuring of central-government-controlled firms. In this piece, Yanmei explains how big SOEs are using M&A in different ways to achieve consolidation.

    0
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    London Seminar — October 2018

    At Gavekal’s seminar in London last month Charles Gave and Anatole Kaletsky presented on whether the world is breaking up into three different monetary zones, and whether this is a correction to, or an end to, the long-running global bull market. Micahel Clendenin of Gavekal RedTech explained how they conduct research on the Chinese technology and internet sector.

    0
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    Hong Kong Seminar — November 2018

    At Gavekal’s seminar in Hong Kong this week, Yanmei Xie, Arthur Kroeber and Will Denyer presented their latest views on China's economy, trade war, and how to approach asset allocation in the US.

    0
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    Gavekal Dragonomics

    The Many Misjudgments Of Supply-Side Reform

    Supply-side reform, Xi Jinping’s signature policy of cutting excess capacity in steel, coal and other industries, is widely considered a success. Yet Rosealea’s extensive review finds that this campaign was marred by repeated misjudgments that caused undesired spikes in prices. The justifications for continuing the policy are now wearing thin.

    0
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    Handicapping The Trump-Xi Summit

    As the US prepares to wrap up its Congressional election season, Donald Trump’s administration is sending mixed signals on its China policy. The outcome of the upcoming G-20 meeting between Donald Trump and Xi Jinping is now basically a coin-flip. Either way, argues Arthur, US pressure on China’s technology sector is likely to intensify.

    1
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    Gavekal Dragonomics

    Pledged Shares Put Private Firms In Peril

    China’s bear market has created a crisis for hundreds of listed companies whose shareholders had pledged shares as collateral for bank loans, and now face the threat of margin calls. In this piece, Thomas explains the share-pledging crisis and how it is reshuffling corporate ownership, as state entities and others move to rescue distressed firms.

    0
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    No Renminbi Line In The Sand

    The renminbi has jumped over the last two days after the central bank signaled it would squeeze offshore liquidity. However, argue Long and Tom, it would be wrong to interpret this as a sign the PBOC will defend a line in the sand at 7. Embracing flexibility makes more sense as an exchange rate policy. The PBOC is just aiming to smooth volatility.

    0
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    Strategy Monthly: Yes, We're Still In A Bull Market

    Anatole and Will believe that continued exposure to US equities makes sense, since underlying corporate profitability remains strong. So long as one avoids the most rate-sensitive sectors, US portfolios should be 70-75% in stocks, with the rest mainly in cash. Moreover, they argue that the period of EM underperformance is now done, and emerging markets are poised for a significant rally.

    0
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    Has Oil Set Its High For This Cycle?

    With the price of WTI crude oil now back below its 200-day moving average, Louis puts himself in the shoes of Turkish president Recep Tayyip Erdogan and imagines what sort of leverage he could exert over Donald Trump, what this means for the enforcement of sanctions against Iran, and what that implies for the oil price going forward.

    4
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    First Blood In The Long Tech War

    Washington has opened a new front in the US-China economic cold war by slapping controls on exports of all “commodities, software and technology” to Chinese chipmaker Fujian Jinhua Integrated Circuit. The breath of the national security justification cited for this action escalates the US-China confrontation over technology to a new level.

    5
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    Gavekal Research

    Beijing Seminar — October 2018

    At Gavekal’s seminar in Beijing last week, Louis-Vincent Gave, Udith Sikand and Chen Long presented their latest views on the turn in global markets, the prospects for emerging markets in the quarters ahead, and on China's policy priorities as it faces down the US in a prolonged rivalry.

    0
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    Gavekal Dragonomics

    The Policy Constraint From Property

    The hot property market is one of the major constraints on Chinese policymakers’ freedom to stimulate: surging prices and construction do not need more juice. In this piece, Rosealea explains why more decisive stimulus is very unlikely before the property market weakens significantly, and even then will not be as large as in previous cycles.

    1
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    Gavekal Dragonomics

    On The Front Lines Of The Trade War

    There now seems to be little chance that the trade frictions between the US and China will be resolved anytime soon. So how are Chinese exporters dealing with the prospect of a steep rise in tariffs come January? Our analysts report from the Canton Fair on how exporters are coping now, and their strategies for the future.

    1
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    Gavekal Research

    World Trade And A Troubling Signal

    As Donald Trump has ramped up tariffs on US imports from China, investors have understandably grown anxious about the impact on world trade. Few significant effects have shown up in the data so far. Nevertheless the outlook is alarming—although not necessarily in the way many might think.

    5
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    Gavekal Dragonomics

    Still Waiting For Stimulus

    At the moment it seems there is only one question about China that people care about: when will the government move more aggressively to stimulate growth? With most economic indicators slowing in September, the time when the government will need to change course is getting closer. But, as Andrew explains in this piece, it is not here yet.

    2
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    Gavekal Research

    Video: Why China Is Unlikely To Fold

    To many outside observers, China’s economy looks like a house of cards that is vulnerable to collapse should the US push a little harder in its trade actions. Louis is not convinced that this market-focused analysis of China’s situation properly reflects its vulnerability. He thinks the leadership is dug in for a long struggle against Washington.

    0
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    Gavekal Dragonomics

    More Loans For The Private Sector

    China’s central bank is trying a new strategy to help private companies get access to credit. Rather than just push small-business lending, it is encouraging lending to all private firms, including larger ones. In this piece, Thomas explains why the old strategy wasn’t working, and why the new one is more likely to help the private sector.

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    A Better Class Of Bear Market

    Although China’s A-shares are the world’s worst performing major market this year, this bear market is turning out to be a very different animal from that of 2015. Authorities are taking a very different strategy: rather than trying to prop up prices, regulators have focused on making technical changes to improve the way the market functions.

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    Six Impossible Things Before Breakfast

    Louis investigates six of the most incongruous sets of relationships that have held sway this year and offers alternative explanations. In particular, he focuses on the strange case of China’s response to US trade hostility and argues that understanding Beijing’s game plan may hold the key to whether the long US bull market in equities can stay the course.

    4
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    Hidden Leverage In Hong Kong

    Last month, for the first time in 12 years, Hong Kong banks raised their prime lending rates. This increase, coming at a time when the Hong Kong government has pledged to boost housing supply, has prompted fears that rising mortgage rates and falling home prices could expose a dangerous accumulation of hidden leverage in the local property market.

    1
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    Bonds' Failure To Rally

    Given all the bad news for markets this year, one would be forgiven for thinking that US treasuries and German bunds would have been a good investment. But even as emerging markets have sold off and the US dollar has risen against almost every emerging market currency out there, US treasuries (and to a lesser extent bunds) have been an absolute dog of an investment.

    4
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    Audio & Transcript — Gavekal Research Call October 2018

    In this month’s Research Conference Call Louis-Vincent Gave examined the present bad tidings from markets and asked whether the global bull market faces a denouement. Anatole Kaletsky argued that this sell-off will likely prove to be a temporary setback for emerging markets and that the global bull market may have further to run. However, he warned that the outcome will depend heavily on where the oil price goes from here.

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    Gavekal Dragonomics

    Building The Northern Powerhouse

    After a decade of splurging on infrastructure projects, China’s local governments are now having to cut back. But Beijing has continued to pour money into centrally supported initiatives, particularly Xi Jinping’s pet project for developing the region surrounding Beijing. In this piece, Tom reports on how this northern megaproject is progressing.

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    The EM Value Question

    After a grim seven-month sell-off, it is natural to ask whether emerging markets now offer attractive value. Since its January peak, the MSCI emerging markets index has fallen -22%. The corollary has been a deep derating, which has left EM equities trading below their long term mean P/E ratios. However, a healthy dose of caution is warranted.

    5
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    Beijing Is Aiming At Stabilization, Not Stimulus

    Chinese authorities are stepping up the pace of monetary easing, and are prepared to tolerate greater exchange rate volatility as a consequence. But, as Chen Long explains in this piece, Beijing’s easing measures are aimed at stabilizing the domestic economy, not stimulating activity in response to a trade-war-induced slump.

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    Strategy Monthly: Are We Still In A Bull Market?

    At the start of the year, markets seemed poised for a rotation out of US equities into non-US assets. In fact, US equities and cash are the only assets to have delivered positive returns this year. Louis examines the reasons why and concludes that portfolio managers should stay defensive, while looking for buying opportunities in oversold emerging markets, and in European assets in non-euro countries such as the UK, Sweden and Switzerland.

    0
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    How Demographics Are Shaping China's Future

    Where is China heading as it undergoes demographic change of unprecedented speed and scale? In this chartbook, Ernan offers a comprehensive guide to the unfolding transformation of the nation’s population, focusing on changes in family-planning policy, the implications of an aging society, and the shifting patterns of migration.

    0
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    Catching Up In Chips

    Technology is at the heart of China’s trade conflict with the US, and no technology is more critical than semiconductors. So as the US moves to block its access to technology, China is doubling down on its drive to build up a domestic semiconductor industry. In this piece, Dan lays out the reasons why China’s drive will eventually succeed.

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    The Art Of (Trade) War

    Donald Trump’s trade war against China demonstrates that the Washington consensus is dead and buried. This suggests that the world will split into three monetary zones, each with its own anchor currency and risk-free asset class. As a result, the close relationship between the renminbi and the US dollar is a thing of the past and China’s vast current account surplus will become unsustainable. Charles examines what all this means for investment...

    2
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    Gavekal Dragonomics

    Macro Update: Staying Calm In The Trade War

    Where does China stand as the trade conflict with the US mounts? While stock markets have tanked, the economy has not. In this concise chartbook, Chen Long presents the major macro and market indicators to explain why growth is holding up and why the government is not yet unleashing a major stimulus.

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    Does Beijing Really Manage The RMB Against A Basket?

    Possibly the only easy thing about studying China is that Chinese policymakers tend to “say what they do and do what they say”. Take the Chinese exchange rate as an example. From 1998 to 2005, the renminbi’s exchange rate was fixed at CNY8.28 to the US dollar. Then, in 2005, investors were told that the renminbi would be allowed to appreciate gradually and with a controlled daily volatility. When the financial crisis hit, the Chinese exchange...

    4
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    Back To A Three-Figure Oil Price

    Oil broke higher on Monday, with the price of Brent decisively breaching US$80/bbl, a level it had repeatedly tested since early May, when the US administration announced it would reimpose sanctions on Iranian exports. The immediate trigger for the break-out was the decision at the weekend by the Opec cartel plus Russia not to increase their formal output target in the near term. At first glance, the market response might appear an over-reaction...

    5
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    Gavekal Dragonomics

    The Backlash Against The War On Air Pollution

    Steel prices are high thanks to a tough government plan to reduce smog by shutting down metals production—but the rise in prices has recently started to reverse as uncertainty over these policies increases. Rosealea reports on the steel industry’s new pushback against strict output curbs, and why these controls are likely to become more flexible.

    3
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    The Dissolution Of Chimerica

    The economies of the US and China are by far the world’s largest. Such has been their importance and dependence that the composite phrase “Chimerica” emerged to describe both the integration of supply chains and corporate profitability as well as cultural connections. Today, the single most important question may be: is the foundation on which this Chimerica pillar rested now crumbling?

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    The China Inc. Annual Report 2018

    In this chartbook, Thomas outlines the key trends in the fundamentals of China’s corporate sector. Growth in sales and profits has stayed stronger for longer, but is driven mainly by high materials prices. A rebound in capex is starting to fade. Deleveraging continues but more slowly, and may not last much longer as profits cool and debt rises.

    0
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    Gavekal Dragonomics

    Pragmatism Will Prevail On Iranian Oil

    The US is preparing to re-impose sanctions on Iran, threatening to punish any country that continues to buy its oil. China has struck a defiant tone, and many analysts expect Chinese oil companies to ignore the US sanctions. But in this piece, Yanmei argues that Chinese importers have little choice but to sharply reduce their purchases from Iran.

    0
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    Digging In For A War Of Attrition

    Donald Trump’s administration has upped the ante in its trade war with China, imposing tariffs on an additional US$200bn of Chinese imports. The tariffs will take effect on September 24 at a rate of 10%, rising to 25% at the beginning of 2019 unless some kind of a deal can be worked out with Beijing. The chances of a deal are vanishingly small.

    3
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    Gavekal Dragonomics

    The Economy On The Eve Of Trade War

    The number eight is traditionally a lucky number for Chinese. Exporters could be forgiven for not believing in that tradition: 2018 looks like it will join 1998 and 2008 as a year in which exports suffer a major shock. In this piece, Andrew evaluates the state of the economy as the US prepares more tariffs, and how China can manage the impact.

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    Audio & Transcript — Gavekal Research Call September 2018

    In this month’s research call, Will Denyer explains why he is still recommending a 75% equity exposure in a dedicated US portfolio. His call is based on an asset allocation method with three key components, namely, Wicksellian spreads, relative valuation tools, and a duration tool which shows how to divide a fixed income portfolio between bonds and cash.

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    Gavekal Dragonomics

    A New Tool For Infrastructure Funding

    China’s government is worried about slowing growth, but also does not want to give up on financial de-risking. To balance these priorities, it has devised a new tool: “special-purpose” bonds issued by local governments. In this piece, Chen Long explains how this new way of funding infrastructure will work, and how much stimulus it can deliver.

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    Asia And The Emergence Of A New Monetary Zone

    Having broadly developed as an integrated whole over the last 30 years, Charles thinks the world economy is now splitting into three big groups—North America, Europe and Asia. In this piece he considers Asia whose economies are increasingly coalescing around the renminbi and suggests a new-fangled balanced portfolio approach for maximizing risk-adjusted returns.

    3
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    Why The US Cannot Win A Trade War

    The US has made a fundamental policy mistake in pursuing a trade war against China. A Keynesian macroeconomic analysis shows that the US will likely be worst affected by the conflict, while China should escape unscathed and several other emerging markets could be clear gainers. This sell-off may be an ideal opportunity to "buy the dip" in EMs

    7
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    The Exit From A Liquidity Squeeze

    If it walks like a duck and quacks like a duck, then it probably is a duck. By the same token, if central bank reserves are shrinking, the US dollar is rising, and emerging market currencies are cratering, we probably face a liquidity squeeze. None of this should be surprising, as the drains on US dollar liquidity have come from all directions this year.

    7
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    Gavekal Dragonomics

    The Property Slowdown That Wasn't

    While China’s government is talking tough about containing its frothy property market, the market does not appear to be listening. Housing sales are still growing, price rises are accelerating and construction activity is robust. In this piece, Rosealea explains why property has outperformed, and updates her outlook for the rest of 2018.

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    On Getting It Wrong

    Louis went into 2018 with a set of assumptions about how growth and markets around the world would play out. It hasn’t exactly worked out as expected and in this mea culpa he seeks to understand how he got it wrong and what comes next. He concludes that a key driver of the changed investment environment was not so much the strength of the US dollar but China’s decision to allow a renminbi devaluation.

    10
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    Gavekal Dragonomics

    Choosing The Trajectory For Household Debt

    Regulators and investors are getting more concerned about China’s household debt after its sharp rise in recent years. In this piece, Chen Long breaks down the rise in leverage and explores the policy options. It would be plausible and prudent for China to now slow the buildup of household debt—but this may not mesh with the easing of policy.

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