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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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

    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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    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.

    0
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    Gavekal Research

    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.

    0
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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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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    Gavekal Research

    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.

    0
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    Gavekal Research

    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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    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.

    0
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    Gavekal Research

    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.

    0
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    Gavekal Research

    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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    Gavekal Dragonomics

    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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    Gavekal Dragonomics

    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.

    3
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    Gavekal Research

    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.

    0
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    Gavekal Research

    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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    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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    Gavekal Research

    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 Research

    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?

    0
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    Gavekal Dragonomics

    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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    Gavekal Research

    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.

    0
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    Gavekal Research

    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.

    0
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    Gavekal Research

    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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    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.

    0
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    Gavekal Research

    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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    Gavekal Research

    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.

    0
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    Gavekal Research

    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.

    2
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    Gavekal Research

    Strategy Monthly: A Simple Guide To US Asset Allocation

    We synthesize four years of work on asset allocation and present a model portfolio built around analysis of the cost of and return on capital; the real rate of return on equities, bonds and cash; and the ideal duration of fixed-income holdings. Today we recommend that US portfolios hold 75% in equities, 25% in cash, and shun bonds.

    0
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    Gavekal Dragonomics

    An Overdue Tax Cut For Households

    Facing trade conflict with the US and a slowdown in credit growth, China is under pressure to use fiscal policy more aggressively to support the economy. On Friday, the National People’s Congress delivered on at least part of the solution, passing a large cut in personal income taxes. In this piece, Ernan explains the impact of this tax cut.

    0
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