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E.g., 23-06-2017
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    Gavekal Research

    A Slow Motion Game Changer

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

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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.

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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!

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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...

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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.

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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”...

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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.

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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.

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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.

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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.

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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.

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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.

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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...

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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.

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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.

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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.

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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.

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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...

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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