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E.g., 25-06-2018
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    Gavekal Research

    The Trouble With Trade Retaliation

    When this week US president Donald Trump threatened to slap tariffs on an additional US$200bn of imports from China, on top of the US$50bn already targeted, the Chinese government immediately promised to retaliate in full proportion. The trouble is that retaliating will be a lot more difficult and painful than Beijing’s counter-threats make it sound.

    1
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    Gavekal Dragonomics

    Easing Won’t Help Chinese Equities

    When the White House rattled global markets earlier this week with its threat markedly to escalate the international trade war, mainland Chinese stock markets were hit the worst. That is not surprising, considering that the US administration’s threats were targeted specifically at imports from China. However, the fall in Chinese markets was so severe, and the subsequent recovery so anemic, in part because investors’ heightened fears over trade...

    0
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    Gavekal Dragonomics

    The Restructuring Of Retail

    China’s rapid shift to online shopping is emptying malls and forcing retailers to close hundreds of stores. But at the same time, the big internet companies are investing billions to seek new growth from brick-and-mortar stores. In this piece, Ernan explains how Chinese retail is restructuring and where the growth opportunities are.

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    Gavekal Research

    The Empire Strikes Back?

    Over the last 70 years the global population has tripled. Yet in defiance of every Malthusian theory out there, the average citizen of the world has never known such a high level of material comfort as today. To start with the obvious, the world has almost entirely eradicated the famines that plagued entire regions just a few generations ago (this isn’t to deny the humanitarian catastrophes unfolding today in Yemen or Syria, but these are caused...

    0
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    Gavekal Dragonomics

    Trade War Escalates. What’s Next?

    With the imposition of tariffs on US$34bn of imports from China last Friday, the US has expanded the trade war it launched two weeks earlier with steel and aluminum tariffs, mostly on friendly countries. More are likely to come by the end of the year: additional tariffs on China, and possibly levies on imports of cars and car parts (which again would mainly hurt US allies). It is possible that the US could pull out of Nafta. How worried should...

    1
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    Gavekal Dragonomics

    Parsing The Slowdown In Credit Growth

    China’s credit growth slowed to a new low in May, but the deceleration in real economic activity remains a moderate one—although sharp contrasts are now appearing among different indicators. In this piece, Chen Long explains why credit growth is likely to continue to slow, and how that will affect different parts of the economy.

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    Gavekal Dragonomics

    The 5G Dream Will Not Be Denied

    Now that the US has backed away from putting crippling sanctions on Chinese telecom-equipment firm ZTE, China looks well-placed to achieve its dreams for 5G, the next wave of mobile technology. Huawei and ZTE may be effectively blocked from the US market, but they are well-placed to grab a significant share of the global market for 5G.

    0
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    Gavekal Research

    Video: When To Buy US Bonds

    With 10-year US treasury yields having failed so far to climb significantly above the 3% mark, investors are asking whether it is time to buy US long bonds. In this short video interview, Will presents a simple framework for approaching the bond market. With the yield curve flat by historical standards, and yields far below their natural ceiling set by returns on invested capital, investors should steer clear of long bonds.

    0
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    Gavekal Dragonomics

    Is A Crisis Brewing Over Taiwan?

    Ominous clouds are gathering over Taiwan, as China steps up displays of military force and its campaign of international isolation. Could this escalate into a replay of the 1995-6 Taiwan Strait crisis, or something even worse? In this piece, Yanmei assesses the rising risks, but argues that military conflict is still a remote possibility.

    0
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    Gavekal Dragonomics

    Marshals Over Markets: China Tightens Cybersecurity

    Our first DeepChina report takes a close look at Beijing's efforts to exert tighter control over the internet, the flow of commercial data, and the security of its technological infrastructure. China ia nor alone in toughening regulation, but its efforts are far more expansive, and raise more serious concerns for multinational firms.

    0
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    Gavekal Dragonomics

    China Comes Off The Boil

    Chinese growth surprised on the upside in the early part of the year, but Andrew thinks that a gradual loss of altitude is now unfolding. This is mainly due to slowing property market activity, which increasingly displays late-cycle characteristics. This adjustment should not pose a major risk to other major economies, so long as other global factors do not become disruptive.

    2
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    Gavekal Dragonomics

    Property Tightening Is Back

    Chinese government policy for the property market is turning tighter, a shift that will weigh on housing sales and construction activity in the rest of 2018. But Rosealea cautions against overreacting, arguing that the downcycle in property is still likely to be a shallow one, and that policy will loosen again once market conditions weaken.

    2
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    Gavekal Dragonomics

    Urbanization Without Migration

    The story of China’s urbanization has long been the migration of people from the country to the cities. Not anymore: as Ernan explains, rural migration has slowed sharply, and is being replaced by the reclassification of rural areas into urban ones. Policymakers now prefer this “local urbanization,” even though it delivers less income growth.

    0
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    Gavekal Research

    A Structural Change, Or A Return To The Mean?

    Chinese government bond prices have markedly outperformed treasuries for more than a year. This trend could be explained merely by cyclical factors, or that the Chinese fixed income market is going through a structural rerating, driven in part by the internationalization of the renminbi and the inclusion of Chinese government bonds in major benchmarks.

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    Gavekal Dragonomics

    An Attractive But Troublesome Market

    From June 1, China’s domestically-listed A-shares will be included in the MSCI Emerging Markets index, bringing the onshore market to the attention of many global investors for the first time. In this piece, Thomas examines recent developments in the A-share market, and outlines the promises and pitfalls of investing under China’s “regulatory firestorm”.

    0
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    Gavekal Research

    Video: The Hong Kong Peg Under Pressure

    The Hong Kong Monetary Authority has again been intervening in the foreign exchange market after it stepped in last month when the Hong Kong dollar fell to its weakest in 35 years. So far the HKMA has bought HKD62bn, selling almost US$8bn to defend the Hong Kong dollar’s peg to the US dollar. In this video interview, Tom Holland explains what’s going on, and why there is zero risk Hong Kong will be forced to devalue its currency.

    0
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    Gavekal Dragonomics

    Bond Yields Have Further To Fall

    After a sharp decline in March and April, Chinese onshore bond yields have bounced back over the past three weeks. But based on the latest economic data and policy signals, Chen Long thinks that bond yields have further to fall. Growth is continuing to slow, and the central bank seems comfortable with a slightly more accommodative stance.

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  • Gavekal Dragonomics

    What’s Really At Stake In The US-China Rivalry

    It is still possible that the US and China will strike a deal to avert threatened tariffs. But as Arthur argues in this piece, any deal will be mostly cosmetic. The tension between the two is not mainly about trade, but about China’s challenge to US global dominance. The US will almost certainly keep trying to counter China’s efforts to gain power.

    1
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    Gavekal Research

    Next On The US-China Telenovela: Investment Curbs

    An unusually large group of senior American officials has landed in Beijing for two days of talks on the trade and technology dispute embroiling the US and China. There is no reason to think the mission will achieve much. And if it does manage to cobble together a temporary deal to forestall the tariffs the two countries have threatened against one another, it will do nothing to delay the next act in the drama: proposed restrictions on Chinese...

    0
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    Gavekal Dragonomics

    Seizing The Moment For Artificial Intelligence

    As the US and China try to position themselves for technological leadership, both are now focusing on artificial intelligence. In this piece, Andrew answers the questions of the moment: What is artificial intelligence anyway? Why does China seem to be doing so well in artificial intelligence? And how should we think about this US-China rivalry?

    1
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    Gavekal Research

    Strategy Monthly: Living With US-China Strategic Rivalry

    A gaggle of US cabinet officials are in Beijing this week for talks aimed at lowering the temperature on US-China trade relations. While there may be an agreement to temporarily delay the huge tariffs each side has threatened to impose on the other, there is no chance of bridging the real rift between the two countries, which arises from China's technological and geopolitical ambitions. A trio of aggressive strategies launched by Xi Jinping...

    0
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    Gavekal Dragonomics

    Punishing People, Not Institutions

    The strategy behind China’s financial overhaul is becoming clear. It is helping banks by allowing an extended transition to a new set of rules. But prosecutions of executives are also ramping up. This is the opposite of what some Western countries did after the 2008 crisis: people, not institutions, are paying the price for financial risk-taking.

    0
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    Gavekal Research

    The Upcoming Monetary War, With Gold As An Arbiter

    When President Trump was recently asked if he was starting a war in traded goods with China, he countered that the US had lost that struggle 20 years ago. As the US retains a comparative advantage in technology, such arguments have led some to conclude that the world’s two biggest economies will fight their next economic battle in this new theater. That may be true, but for me the real fight will be less about trade than a struggle for dominance...

    0
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    Gavekal Research

    Still Bond Bears

    Matching its 2013 peak, the world’s most-watched interest rate—the US 10-year treasury yield—yesterday touched 3%. Concerns are now high that it will soon move higher, perhaps much higher. For perspective, the US 10-year hit 3.75% in 2011, 4% in 2010 and 5% in 2007. In this cycle, we think yields will break above 3% and then march upwards. In short, we remain bond bears and continue to recommend keeping duration short. Today, we want to...

    0
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    Gavekal Dragonomics

    Dangerous Dealing Along The Belt And Road

    In countries involved with China’s Belt-and-Road Initiative, there is a growing realization of the risks to signing up for the scheme. As debt has mounted and fears of economic dependence have increased, a backlash has begun. But as Tom explains, the lure of easy Chinese capital is a dangerous habit that many countries will struggle to kick.

    0
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    Gavekal Research

    Emerging Markets And Energy

    We all know, don’t we, what defining characteristics the emerging markets have in common? Of course we do. Emerging markets are developing countries on course to become advanced economies, typically with the assistance of powerful demographic tailwinds. But although they enjoy rapid growth over the long term, their institutional architecture is still under construction. As a result, emerging equity markets are more volatile than those of the...

    0
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    Gavekal Dragonomics

    New Jobless Rate, Same Old Problems

    China has moved to rid itself of a longstanding statistical embarrassment, replacing its discredited unemployment data with a new survey based on international standards. But as Ernan explains, the old problems have not gone away: the new jobless rate is still implausibly low and stable, and likely still subject to political manipulation.

    0
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    Gavekal Research

    A First Step Towards Easing

    The Chinese central bank is no longer in full policy tightening mode. That’s good news for Chinese bank shares. Shortly after government statisticians released economic data for the first quarter on Tuesday, the People’s Bank Of China announced a 100bp reduction in bank reserve requirement ratios. For big banks, this reduces the proportion of their deposits they are required to lodge as reserves at the central bank from 17% to 16%. In gross...

    0
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    Gavekal Dragonomics

    Keeping Credit Growth On Track

    China’s central bank has tweaked monetary policy to soften the slowdown in credit growth. The RRR cut continues its strategy of managing liquidity to limit the economic impact of the campaign against financial risk. Other data for March still point to a moderate growth slowdown in 2018, particularly given the continued strength in property.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call April 2018

    During yesterday’s monthly call, Arthur Kroeber addressed rising geoeconomic and geopolitical tensions between the world’s two biggest economies. He argued that US moves against China ran far deeper than trade tariffs as actors across the political spectrum in Washington were intent on changing China’s basic economic model, something that Beijing will likely fiercely resist. Much of his focus was on the tech sector, which is front-and-center of...

    0
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    Gavekal Research

    Hong Kong Seminar — April 2018

    At Gavekal’s seminar in Hong Kong this week, Arthur Kroeber, Rosealea Yao and Nick Andrews presented their latest views on the brewing trade war between the US and China, Chinese growth and the property market outlook, and how to capture European growth.

    0
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    Gavekal Dragonomics

    The Changing Language On Leverage

    China’s policymakers have for the first time called for reducing the total debt-to-GDP ratio. This shift has raised worries that monetary policy could get tougher, on top of the tightening of financial regulation that is already underway. In this piece, Long explains that no shift in policy is imminent; if anything, easing is getting more likely.

    0
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    Gavekal Dragonomics

    What Inflation Means For Margins

    As China’s producer price inflation cools and its consumer price inflation picks up, one might expect corporate margins to be fattening, as cost pressures wane and pricing power strengthens. In fact, the opposite is true: margins have been fat, and are now getting tighter. In this piece, Thomas explains how inflation really affects margins.

    0
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    Gavekal Research

    After Constructive Engagement

    Separating signal from noise in the ongoing US-China trade dispute continues to be a thankless task. Trade war fears rose late last week thanks to an offhand threat from President Donald Trump to impose tariffs on another US$100bn of imports from China. They ebbed early this week when Trump reversed course and said a deal was likely soon, and Chinese president Xi Jinping delivered a speech promising a reduction in automobile tariffs and market...

    0
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    Gavekal Research

    Reasons To Buy The Dip

    After spending many years as Gavekal’s equity permabull, I joined Charles and Louis last December in warning of the risks to what was then a roaring, and accelerating, bull market. But my way of thinking about these risks was rooted in a different analytical framework, and so I have come to a different conclusion about how investors should respond to this latest sell-off (for Louis’ take, see Following Yesterday’s Pullback). With the lows of mid...

    0
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    Gavekal Dragonomics

    Video: Making Sense Of China's New Era

    In this lively presentation from our recent London seminar, Tom Miller outlines the dramatic political changes that have been taking place in China. He explains what Xi Jinping’s new status means for economic policy and governance, and how the links between the Communist Party and the state are being strengthened.

    0
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    Gavekal Dragonomics

    How Steel Survived The Battle For Blue Skies

    It’s been a wild winter for China’s steel industry, with huge swings in output and prices. The main culprit is the aggressive official campaign to reduce air pollution—and the industry’s creative responses to it. Their back-and-forth has not hurt underlying growth much, but the resulting volatility in steel prices is not going away.

    1
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    Gavekal Research

    Ready For A Further P/E Derating

    I see but through a glass darkly. Sometimes, however there are glimmers of light. Four months ago, in early December, I examined the signals being broadcast by the various investment rules I have long followed and concluded that: “While global markets have been stable for the past 18 months, we may soon be entering a period of greater instability.”

    6
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    Gavekal Research

    Following Yesterday’s Pullback

    Two weeks ago I looked back at Enron’s collapse in 2001 and asked whether a crash-and-burn at Tesla or Uber would be this cycle’s catalyst for a fundamental re-assessment of business models. But perhaps my sights were set too low, as this roll-over was triggered not by a cash-burning profligate flaming out, but by turmoil engulfing the Facebook gorilla, and by extension the likes of Google and Snap, which rely on “the user being the product”.

    2
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    Gavekal Research

    Strategy Monthly: Navigating In Choppy Waters

    With its latest sell-off, the S&P 500 capped two months of volatility by moving officially into correction territory: down -10% from its January high, and below its 200-day moving average for the first time in two years. Is this the end of the long US equity bull market? In this edition of our Strategy Monthly, we offer three perspectives on how investors should position themselves in these more volatile times.

    0
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    Gavekal Research

    Can EMs Survive A Trade War And Keep Thriving?

    A US-China trade war would disrupt trade, likely drive up inflation and potentially spark a general risk-off move in markets. This scenario would be pretty terrible for emerging markets, but Joyce reckons it is a tail risk and the general outlook remains decent. In this chartbook, she reviews EMs' vulnerability to a trade bust and explains why profits should drive a maturing cycle that increasingly favors commodity-focused markets outside...

    0
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    Gavekal Dragonomics

    Macro Update: Centralization Amid Conflict

    In our latest chartbook, Chen Long outlines a relatively positive cyclical economic picture for China, with steady macro policy, strengthening financial regulation, and further political centralization. The risks to this outlook are tightening property policies, a local government funding squeeze and the looming threat of a US-China trade conflict.

    5
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    Gavekal Research

    On Protectionism

    As the US toughens up its negotiating stance on trade, it seems that ghosts from the Great Depression haunt the land. The men of Davos can be heard to intone gravely that President Donald Trump is aping Herbert Hoover, and as in the 1930s, the global economy may go into a tailspin. I am struck that our cherished elites have discovered a form of government intervention that they do not like, especially given their support for so many other “...

    2
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    Gavekal Dragonomics

    The Pain Of Power Producers

    The rebound in commodity prices since 2016 has been a boon for much of China’s industrial sector—but coal-burning power plants have been big losers. Coal prices cannot go much higher without causing serious financial distress. This means that policy should now be shifting to favor power producers, by ensuring coal prices do not climb further.

    1
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    Gavekal Dragonomics

    Trade Wars: A China Expert Roundtable

    Last week’s sharp equity market sell-off followed the US effectively threatening China with a trade war. In this report, Arthur, Long and Andrew address China’s capacity to strike back and explore what it means for the relationship between the world’s two biggest economies.

    1
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    Gavekal Research

    Farewell My Lovely Bull Market

    No doubt market pundits will go on discussing the trigger of last week’s sell-off in equity markets and debating its implications ad nauseam. But whatever the proximate cause of the latest risk-off, it is looking increasingly as if the uncomplicated, low volatility bull-market-in-everything that prevailed through much of last year is now no more than a pleasant memory. With markets apparently intent on retesting the lows set in early February,...

    2
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    Gavekal Research

    Trade Wars: Advantage China

    In the US-China trade war, China is skillfully playing Go while the US is playing tic-tac-toe, badly. Arthur analyses the announcement of US$60bn worth of tariffs by the US on Chinese imports and finds the US flailing without a firm strategy. But behind the news, a dangerous consensus has emerged among America’s elites which holds that China’s rise comes at the US’s expense, and must be checked.

    2
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    Gavekal Research

    London Seminar — March 2018

    In our seminar in London this week Charles pondered the investment consequences of the US moving back into an inflationary period. Tom discussed Chinese politics in light of Xi Jinping’s elevation. Cedric presented on how investors can best benefit from the diversity of the European economy. Anatole explained why the long-running global bull market is likely to continue, but also where the risks are buried.

    0
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    Gavekal Dragonomics

    Beyond Anti-Corruption

    China’s legislature has approved the creation of a national “supervision” system, an arm of government equal to the executive, legislative and judicial branches that is charged with overseeing the vast public sector. As Yanmei explains, the new system transforms Xi Jinping’s signature anti-corruption crusade into something even more ambitious.

    2
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    Gavekal Research

    The New Economic Team

    China’s top economic team for the next five years was released this morning, and the theme seems to be “steady as she goes”, with a vote of confidence for experts in their fields. Chen Long has looked at the list, which includes a new PBOC governor, and offers his take on what this means for financial policy in the years ahead.

    2
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