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    Gavekal Research

    A Tough Ask On Trade, Trouble Brewing On Tech

    The story we’ve been telling for the past few months is that the conclusion of the US-China trade deal will reduce global macro risk in 2020, but tech-specific risk will still be an issue because of continued efforts by the US to constrain the rise of China’s technology sector and in particular Huawei. This week’s news buttressed that story: the trade deal was signed; but at the same time several US agencies are on the verge of tightening...

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    Gavekal Research

    Causes And Consequences Of Hong Kong Dollar Strength

    Last summer, as Hong Kong’s police seemed set to run out of tear gas, betting against the Hong Kong dollar peg seemed like a safe bet. It hasn’t exactly worked out that way, and in recent weeks the Hong Kong dollar has strengthened to the strong side of its limited trading band. In this piece, Louis explains why.

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    Gavekal Dragonomics

    Defense Drives US Decoupling

    Although US President Donald Trump has called a truce in his trade war with China, the strategic tensions in the US-China relationship still remain. Therefore, as Lance explains in this piece, the US defense sector is already taking concrete steps to reduce its reliance on China for some products with direct military applications.

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    Gavekal Research

    Audio & Transcript — Gavekal Research Call January 2020

    The past few weeks have seen Chinese policymakers signaling clearly that the campaign of selective easing begun last year will be carried on into 2020 even as growth continues to slow. With trade war risk lowered, and the electronics and auto sector cycles bottoming out, the outlook for equity and bond markets is fairly benign.

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    Gavekal Research

    Ten Bears That Could See Off Goldilocks In 2020

    With interest rates low, and growth that is neither too hot nor too cold, Anatole remains firmly in the “Goldilocks lives on” camp. But while a continued bull run is the most probable outcome for 2020, bears still lurk in the shadows. In this paper Anatole identifies the 10 main macroeconomic, political and sector risks that could derail markets in 2020.

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    Gavekal Dragonomics

    The Mortgage Rate Reset

    China’s central bank is moving forward with its interest-rate reforms, ordering mortgages to be reset based on the new loan prime rate. Rosealea explains that this shift will make monetary policy more transparent and effective by re-linking mortgage rates to official policy rates, but it does not herald a cycle of major cuts in mortgage rates.

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    Gavekal Research

    Strategy Monthly: China's Balancing Act Gets Easier

    In 2019, investors were cowed by the US-China trade war and Chinese policymakers’ efforts to balance growth and financial stability. This year, these factors will weigh less heavily: the US and China are set to ink a trade deal, while China is shifting more toward growth-supporting policies. Such a combination is mildly bullish for both Chinese bonds and equities.

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    Gavekal Research

    What The Trade Deal Won't Change

    President Trump has confirmed he will sign his trade deal with China on January 15, and the PBOC has reinforced its tilt to more dovish policies. This combination of events means the macro factors that drove December’s rally—a receding trade war and a global easing of monetary policy—are still in place for January, if increasingly priced in.

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    Gavekal Research

    The Surprises Of 2019

    As the year draws to a close, Louis has decided to review the key events of 2019 that he either didn’t see coming, or whose ramifications he under estimated. Such events could cast a long shadow in the coming quarters as their impact on markets may not yet be fully digested.

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    Gavekal Research

    Audio — Gavekal Research Call December 2019

    In the final Gavekal Research Conference Call of the year Louis-Vincent Gave, Anatole Kaletsky, Arthur Kroeber and Will Denyer reviewed the current investment environment and outlined their expectations for 2020.

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    Gavekal Research

    Why Aren’t Markets Pricing In Global Reflation?

    Back in October, when the Fed said it would start expanding its balance sheet at the same time as the ECB and BoJ, Louis reasoned that powerful forces were aligning for a global reflation trade. A little over two months later, markets have ripped higher, but the reflation trade has not materialized quite as anticipated. In this paper, Louis examines why not, and asks what conditions will be needed for it to come good in 2020.

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    Gavekal Dragonomics

    Stable Growth Without Undue Stimulus

    China's latest economic figures show continued growth into the end of this year. In this report, Thomas outlines how these data points, combined with the fragile US-China trade truce, might give Chinese policymakers the space they need to achieve their goal of maintaining stable growth without resorting to excessive stimulus.

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    Gavekal Research

    The Trade War’s Uneasy Truce

    The “phase one” US-China trade deal announced last week still has some hoops to pass through before it becomes real: completion of a bilingual legal text and formal signing in January. Still, both sides have incentives to avoid the economic damage from further tariff escalation, so the deal will almost surely come into force. The agreement falls far short of achieving the US goal of forcing China to change its state-led economic system; instead...

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    Gavekal Research

    Is Brexit The Midwife To A New Investment Environment?

    With the confirmation of a conservative victory in the UK election, and a long awaited trade deal between the US and China, the pieces are falling into place for a weakening of the US dollar and a continuation of the global reflation trade. Already, both sterling and the euro have strengthened in response to the reports of a Tory victory.

    1
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    Gavekal Research

    Our 2019 Holiday Reading List

    “So many books,” lamented the late Frank Zappa, “so little time.” For readers wondering which of the 130mn books published since the invention of the printing press they should curl up with over the coming break, hopefully Gavekal’s annual holiday reading picks may help.

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    Gavekal Dragonomics

    Scenarios For 2020

    Beijing has been largely successful in balancing a response to China’s economic slowdown with a need to continue its financial cleanup, but how sustainable is this delicate status quo? In this report, Andrew lays out different scenarios and the likelihood of policymakers being able to maintain their “selective easing” strategy through 2020.

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    Gavekal Dragonomics

    Why The Private Liquidity Crisis Isn't Over

    The multi-year liquidity squeeze for Chinese private-sector firms continues, despite repeated promises from policymakers to resolve the issue. In this report, Thomas explains how Beijing’s tight grip on financial risk has stymied efforts to alleviate China’s beleaguered private sector—and why this lending crunch will persist through 2020.

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    Gavekal Dragonomics

    The Pitfalls Of Beijing’s AI Strategy

    The Chinese government has made artificial intelligence a national development priority and is dedicating huge resources to the task. Yet, as Lance explains in this report, the effort is suffering from mismanagement, wasteful provincial competition and difficulty retaining skilled workers.

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    Gavekal Research

    Is Energy Uninvestible?

    Who would have thought at the time of the September attacks on Saudi that the oil sector would perform so dismally in the weeks after? This has been in line with a longer term underperformance, which has led many investors to dismiss the energy sector as uninvestible. Louis examines some of the arguments underlying this belief, and comes to an intriguing conclusion.

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    Gavekal Research

    The New Champion Of Monetary Conservatism

    The People’s Bank of China and the Bundesbank have never been known to be close. But Yi Gang, the Chinese central bank governor, is starting to sound German in his views on monetary policy. He argues that negative interest rates and quantitative easing have been a failure, and China must stick with conventional policy and positive rates.

    1
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    Gavekal Dragonomics

    The Back Door Is Still Closed

    A slew of new government policies has boosted market expectations for China’s infrastructure spending in 2020. But Rosealea counsels caution: while new measures have opened the “front door” of approved funding a bit wider, more important is that the “back door” of shadow financing remains firmly closed. A big rebound in public works is unlikely.

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    Gavekal Research

    An American Intervention

    After easily passing both houses of Congress, Donald Trump had little choice but to sign bills dictating the US government’s treatment of Hong Kong. Its significance will be determined by Beijing’s response, and for now that is likely to stay focused on achieving an interim trade deal that delivers a roll-back on US import tariffs.

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    Gavekal Research

    Seminar Series Multimedia — Fall 2019

    Partners and analysts present their core ideas for the big economic regions and global markets heading into the year-end and looking forward to 2020.

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    Gavekal Dragonomics

    How To Get Comfortable With Chinese Equities

    The inclusion of Chinese onshore equities in global indexes has catalyzed a wave of interest from global investors. But for foreign investors to really get comfortable with Chinese stocks, Thomas argues, they need to grasp the many issues not addressed by index inclusion such as volatility, leverage, regulatory risk and corporate governance.

    0
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    Gavekal Dragonomics

    The Chinese Consumer In 2019

    In her annual review of the Chinese consumer, Ernan analyzes the trajectory of household spending and unearths thematic opportunities in consumer markets. After 2019’s slowdown, consumption should stabilize in 2020 as the labor market improves. Luxury goods and cosmetics are booming, but overseas tourism and traditional retail are weaker.

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    Gavekal Research

    The Hong Kong People Speak

    The last 15 years has seen pro-government parties in Hong Kong rely on voter apathy and division across the democratic camp to often rule the roost. That changed yesterday, with establishment parties getting thumped in local council elections as voters expressed anger at the government’s handling of violent street protests in the last six months.

    0
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    Gavekal Dragonomics

    The Crackdown On Developer Financing

    China’s financial regulators are squeezing funding for property developers in order to discourage land speculation and cool down property prices. In this piece, Rosealea argues the crackdown has been fairly successful, and does not pose a big risk to construction. Slightly easier demand-side policies will help offset tough supply-side restrictions.

    0
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    Gavekal Research

    The Hong Kong Effect Means A Taiwan Opportunity

    Taiwan's stock market has gained 18.6% year-to-date. This rally will be vulnerable to a heightening of bellicose rhetoric from Beijing prompted by the expected victory of the incumbent China-skeptic Tsai Ing-wen in January’s presidential election. But given the favorable structural and cyclical trends, any sell-off around the election should provide an attractive buying opportunity.

    0
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    Gavekal Research

    Questions On The Changes Of The Past Two Months

    Recent weeks have seen a turn in the investment environment, with global equities outperforming those in the US, cyclicals outperforming growth stocks, a steepening US yield curve and a stall in the US dollar’s rally. Louis recently met with a lot of US clients and outlined his explanation for these shifts. He got some push-back and this report is the product of those deliberations.

    2
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    Gavekal Research

    The Implications Of Hong Kong For China

    Many clients ask how China’s ruling Communist Party, the CCP, will react to what many policymakers in Beijing regard as an intolerable challenge to their authority by protesters in Hong Kong. The answer to this question will have direct implications for the city and its future as China’s international financial center. It will also have implications for the evolution of policy within mainland China itself.

    0
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    Gavekal Research

    There Is A First For Everything

    We live in the 21st century, and if a liquidity injection program by the Federal Reserve doesn’t want to identify as quantitative easing, then we should respect that choice, and call it by whatever name it chooses for itself—even if almost everyone now calls the US$60bn injection “non-QE QE”. However, lost within the debate over naming lies a long list of interesting “firsts”.

    2
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    Gavekal Research

    The Signal In International Liquidity

    Historically, few indicators have been as important for global markets as the amount of US dollar liquidity available outside the US. When this has turned down, trouble has reliably followed. This year, notes Charles, the indicator has again turned negative. But as he explains, all may not be lost.

    5
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    Gavekal Dragonomics

    Defending The Single Market

    Europe’s leaders are promising a more forceful approach to defending the bloc’s interests. But they do not fully subscribe to the view, widely held in the US, that China is a strategic rival and security threat. What they have been able to agree on, as Lance argues, is the need to protect the EU’s single market against Chinese state capitalism.

    0
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    Gavekal Dragonomics

    Handing Off The Slowdown

    China’s data releases for October showed signs that the global downturn in electronics, and the domestic fall in car sales, are starting to fade. But the bad news is that the property and heavy industry complex is weakening. That combination means roughly stable growth for the moment, reassuring policymakers that their cautious stance works.

    0
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    Gavekal Research

    Something Has To Give

    Public support for Hong Kong's protest movement has been re-energized by perceived police brutality, the local government offering no political response to the crisis and Mainland authorities delivering mixed, but slightly sinister messages about their next move. This piece assesses the political forces at play and takes a stab at explaining what comes next.

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    Gavekal Dragonomics

    The Weakening Bite Of US Tech Sanctions

    US sanctions on Chinese technology companies have grown progressively less effective since the US government used them to take down ZTE. Huawei has refused to collapse, and other targeted firms are not too troubled. In this piece, Dan explains why export controls, once the kiss of death, are becoming just another operational challenge.

    1
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    Gavekal Research

    The Hong Kong Conundrum

    When I wrote on the Hong Kong dollar peg back in May, there was no inkling that trust between the police and much of Hong Kong’s population would fully break down. Today, Hong Kongers are saying: “We don’t trust the police to do the right thing, or even speak the truth”. This situation causes many clients to ask: "Why has the peg not broken down?"

    5
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    Gavekal Dragonomics

    The Financing Squeeze Spreads To Corporate Bonds

    The corporate bond market was once promoted as a better way to finance China’s private firms. Instead, as Xiaoxi explains in this piece, it has turned into another source of financial pressure. The corporate bonds of private firms are now maturing faster than they can issue new ones, creating a financing squeeze that could last through 2021.

    0
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    Gavekal Dragonomics

    Autos Are Getting Back On The Road

    China’s industrial slowdown is not just about exports. The deep downturn in auto sales accounts for about half of the slowdown in GDP growth since 2018, Thomas estimates. Things are now starting to look less bad, and the growth drag is heading back toward zero. But autos are still not about to deliver a big boost to growth or commodity demand.

    0
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    Gavekal Research

    Let The Thousand Cuts Begin

    Was it worth the wait? Markets have been expecting the People’s Bank of China to cut policy rates ever since it introduced a new rates framework in August and promised to lower funding costs. On Tuesday, the central bank finally delivered, rolling over its one-year medium-term lending facility at 3.25%, 5bp below the previous rate of 3.3%.

    0
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    Gavekal Research

    The Knowledge Revolution And Its Consequences

    From Hong Kong to Santiago to Paris, this year has seen protestors rage against out-of-touch political elites. But does anything more than anger connect these apparently disparate movements? Louis argues that the upheavals posed by the ongoing “knowledge revolution” may explain the phenomenon, and offers investment advice on how to survive revolutionary times.

    15
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    Gavekal Dragonomics

    Security Rules Are Decoupling Technology

    Presidents Trump and Xi may be edging toward a trade deal, but trust between the US and China has not been restored. As Lance explains in this piece, China’s bureaucracy is ramping up its already-restrictive security rules on technology hardware, software and data flows. This push will ensure some decoupling of China’s tech sector from the US.

    0
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    Gavekal Research

    Behind The Risk-On

    In recent months, economic data has improved or stabilized, and political risks have receded. But now that equity prices on Wall Street have hit new records and US treasury yields have rebounded from the bottom of their post-2011 trading range, it is worth asking if the move to risk-on conditions is a temporary mood swing, or one supported by economic fundamentals.

    0
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    Gavekal Research

    Video: China's Private Financing Woes

    Chinese credit growth picked up in September, which is good news at the margin for private sector liquidity. However, a continued crackdown on shadow finance and private firms’ difficultly rolling over bond obligations will retard capital spending and lead to more bond defaults into next year.

    0
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    Gavekal Dragonomics

    Housing & Construction Review 2019

    China’s property market has held up surprisingly well in 2019, but will that strength last? In her annual chartbook, Rosealea examines key market trends and explains the outlook for 2020. Flexible policy can probably continue to avoid a deep decline in housing sales, but construction activity and materials demand are almost certain to slow.

    0
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    Gavekal Research

    Where Will Growth Come From Now?

    In the spring of 2003 Gavekal posited that China would become the new locomotive of world growth. But now, the days when China could be counted upon to gear up its balance sheet and pull global growth up by its bootstraps are coming to an end. And as global activity slows investors are asking “where will the growth come from"?

    2
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    Gavekal Research

    China-Bashing In A Political Season

    Signs are growing that the US and China will have a mini-deal on trade ready by the time Trump and Xi meet at the mid-November APEC summit. The key questions are whether opposition from US hardliners could derail the deal at the last moment, and whether the campaign to “decouple” the two economies will be knocked back if there is a deal.

    0
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    Gavekal Dragonomics

    The Bills Come Due In Tianjin

    On paper, the northern port city of Tianjin was once the richest place in China. But now its financial center lies empty, its statistics have been exposed as falsified, and the local government and firms are close to running out of cash. In this report, Ernan explains why Tianjin’s long-running problems have finally burst into the open.

    0
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    Gavekal Research

    Three Swing Factors For Chinese Growth

    China’s recent economic figures do not paint a bright picture. Yet some of the problems weighing on growth are moving closer to resolution. So how much of a bounce in the data can we expect from these positive developments? Three possible sources of good news can help answer this question: exports, domestic investment and autos.

    0
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    Gavekal Research

    Video: The End Of The Trend?

    For the past few years, US treasuries, the US dollar and the oil price have all broadly traded in a range. In fact, the only bankable trend for investors has been the outperformance of US equities, without which global stock indexes would still be trading at 2006 levels. However, there are signs that the investment environment is changing.

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