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    Gavekal Dragonomics

    CEQ Q3 2013 - Economic Survey

    Watchers of China’s economy could be forgiven for suffering from whiplash after the summer of 2013. The swings between negative and positive sentiment were among the most severe and the most sudden we have ever experienced. These huge swings are in themselves evidence of the great uncertainty over China’s prospects as it tries to navigate a smooth exit from the last few years’ surge of investment and debt. But they also reflect the teething...

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    Gavekal Research

    Winners And Losers In China's Rebalancing

    Investors may have noticed that Asia is having a pretty rough run. Capital is leaving the region and, unlike after the 1997 crisis, it is uncertain whether nations can “export” themselves back to health (see It’s Not A Balance Sheet Problem). Indeed, China has been the region’s key export growth market in recent years, and as we all know, her era of investment-fuelled hyper-growth is giving way to a slower, more balanced growth model. This...

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    Gavekal Dragonomics

    DragonWeek - Reform Advances, Growth Steadies

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    Gavekal Research

    It’s Not A Balance Sheet Problem

    There is a growing fear that emerging markets could be on the cusp of a general crisis of the type seen in the early 1980s or late 1990s. The concern is that too much debt was racked up during an easy money phase and chickens are coming home to roost as the US moves toward a tightening cycle (see Resetting Expectations For Emerging Markets). Attention has understandably focused on those emerging economies with sizeable current account deficits,...

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    Gavekal Research

    5C China: Growth Is In The Air (Maybe)

    Growth is in the air! This is the refrain we are hearing increasingly from Chinese government spokesmen, and there are a number of indicators that give credence to the official sanguinity. Construction starts rebounded strongly in July. A stabilization in the producer price index and steel and iron ore prices suggests destocking is ending. With Europe out of recession and US data improving, exports should provide another tailwind.

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    Gavekal Research

    Good News For Exporters

    One pleasantly surprising China manufacturing survey is not enough to blow away the clouds over the emerging markets. But the unexpected return to expansionary mode for China’s August flash PMI does offer some desperately needed good news—and more so when combined with yesterday’s stronger PMI prints from Europe and the US.

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    Gavekal Dragonomics

    Hard Times In China's Inland Empire

    As Beijing, Shanghai and other eastern cities get increasingly glitzy and developed, the new frontier for China’s growth has been shifting westwards. Many manufacturers are relocating inland, to take advantage of lower labor costs and more land for new facilities. In fact, it is precisely the this lower income base that gives the interior the potential to generate sustained growth as it converges with the rest of the country (see this paper from...

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    Gavekal Research

    Iron Ore Hits The Floor

    As China’s economy slows, the price of iron ore has been sliding. In early 2011, it peaked at US$187 per ton. Since then, bar a brief rally in the final months of 2012, it has been heading downward, and many investors are convinced that weak demand in China and the opening of new mines abroad mean it is only a matter of time before the US$100 threshold is breached. But we think expectations of an extended slump are wrong—and indeed, iron ore...

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    Gavekal Dragonomics

    DragonWeek - Continuing The Credit Crackdown

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    Gavekal Research

    Buy The Lion, Sell The Baby Dragon

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    Gavekal Research

    All Hail China's PPI

    One of the questions we are most often asked about China is: what is the best economic indicator to watch? Like the sober, level-headed analysts we are, we usually reply that you can’t rely on any single number, and instead must make a balanced judgment using a variety of indicators. Though this happens to be true, most people don’t find it a very satisfactory answer.

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    Gavekal Dragonomics

    Trimming The Long Tail

    As China’s economy slows, there is increasing pressure to revamp the nation’s industrial structure into a leaner, meaner manufacturing machine. Obsessed by visions of huge corporate champions bestriding national and global markets, many Chinese planners place the blame for their current woes on low levels of industry concentration—the small market share collectively held by the largest firms. Such thinkers argue that China’s potential is being...

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    Gavekal Dragonomics

    Who Loses In China's Deleveraging?

    After a huge acceleration in credit growth since mid-2012, the tide is now turning for Chinese borrowers. China’s new leaders have made clear their determination to rein in credit growth, swearing off large-scale monetary and fiscal stimulus even as the economy slows. Credit growth has slowed noticeably since May, and a harsh crackdown on interbank borrowers in June reinforced the government’s reduced tolerance for risky lending. While Beijing...

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    Gavekal Dragonomics

    DragonWeek - Mixing Growth And Austerity

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    Gavekal Research

    5C China: Li's Risky Growth Promise

    In comments leaked last week, Chinese Premier Li Keqiang declared that there is a “bottom line” below which the country’s GDP growth will not be allowed to fall. The magic number is 7%, a bit of a comedown from the totemic 8% of the previous decade, but lofty compared to the market’s worst fears. This declaration is understandable as an attempt to reverse weakening business confidence, which if unchecked could send corporate investment and...

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    Gavekal Dragonomics

    Social Housing Makes A Comeback

    After a thoroughly disappointing first half, China’s government now looks increasingly worried about growth. Premier Li Keqiang, who started his tenure in office with much fine rhetoric about the need for structural reform, has recently been talking about the “bottom line” for growth (7%, in case you wondered) and the need to maintain confidence. While the administration says there is still no need for looser monetary or fiscal policy, it has...

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    Gavekal Research

    Game Over For Austerians

    Margaret Thatcher used to say that “There Is No Alternative” to whatever policy she believed in. But there is always an alternative to banging your head against a brick wall—you can stop banging your head against a brick wall. The G20 meeting in Moscow last weekend may have marked such a moment of revelation.

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    Gavekal Research

    Short-Term Japan, Long-Term China

    The weekend news from Asia featured two big items. On Friday night, China’s central bank announced the abolition of all controls on bank lending rates. On Sunday, Japanese PM Shinzo Abe’s coalition won a majority in the upper house of Parliament big enough for Abe to push through major economic reforms, (but too small for him to re-militarize the country). Both of East Asia’s biggest economies seem primed for major structural reforms under new...

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    Fathom China

    Profile: Tencent: Winning At Games

    China’s biggest listed internet company, Tencent Holdings,stands nearly alone in figuring out how to earn money by offering freetechnology. Common online business models like advertising and e-commercecontribute little to Tencent, though they comprise nearly all revenue at itsChinese competitors along with global giants Google, Facebook and Amazon.Instead, Tencent earns billions of dollars selling virtual things, like clothesfor online game...

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    Gavekal Research

    China's Global Impact

    China’s quarterly report on gross domestic product, long the totemic emblem by which it has measured progress, provided the usual confusing panoply of numbers. The headline YoY growth rate of 7.5% showed a modest slowdown from Q1, but was in line with reduced expectations. However, the less-closely-watched QoQ growth rate picked up to an annualized 7% in Q2 from 6.6%. Yet the nominal growth rate of GDP slowed more sharply, to 8% YoY in Q2 from 9...

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    Gavekal Research

    Good Omens

    Two months ago I gave ten reasons for believing that April’s break-out of the S&P 500 from its 13-year trading range “could mark the start of a secular bull market in global equities”. This piece, which came out on May 20, was singularly ill-timed, since equity markets peaked the very next day and then plunged on May 22, after Ben Bernanke’s tapering comments (see Goldilocks And The Ten Bears). Luckily for my credibility, I did end this...

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    Gavekal Dragonomics

    DragonWeek - Targets, Hopes And Expectations

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    Gavekal Research

    Australia And The China Syndrome

    So for the satellite supplier economies to the Chinese juggernaut, is it simply a matter of following the leader? This morning it was announced that China’s economic growth duly slowed to an annual rate of 7.5% in 2Q13 from 7.7% in the previous period. Moreover, the latest credit data shows that China’s credit cycle has decisively turned, implying that last month’s interbank rate spike was no aberration. Dragonomics will publish a detailed look...

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    Gavekal Research

    Fed’s Fire Drill Obscures The Real Risk

    Whenever Alan Greenspan was praised for delivering a clear message on US monetary policy, he liked to reply: “If you think that, you have misunderstood what I said”. Ben Bernanke prefers the opposite approach, trying to explain in painstaking detail the precise conditions and possible timing of monetary tapering. He might do the world economy, and his own reputation, a favor by imitating Greenspan’s obfuscation. The Federal Reserve minutes...

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    Gavekal Dragonomics

    China's Elderly: Who Cares?

    What happens to elderly Chinese when they become too frail, ill or senile to look after themselves? China already has 180m people aged over 60, and this is forecast to grow to 245m by 2020 and 350m by 2030. While old people have traditionally lived with their children, changing work patterns and the sheer size of this demographic shift mean many families are struggling to care for aged relatives. This is producing a growing demand for quality...

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    Gavekal Research

    Counter-Balancing Market Trends?

    Over the past decade, investors needed to come up with one of two ideas to ensure outsized success: “front run the Chinese” or alternatively "front run the Fed".

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    Fathom China

    Profile: Alibaba: Open, Says Ma

    From humble origins, Jack Ma’s Alibaba Group has grown to dominate one of the most dynamic and fastest-growing parts of China’s economy: e-commerce. Ma’s vision of remaking Chinese business through the leveling force of online transactions might have seemed grandiose a decade ago, but Alibaba isnow a household name and shopping online is as commonplace as it is in the US. About 80% of China’s consumer e-commerce transactions pass through its...

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    Gavekal Dragonomics

    China's Missing Consumption

    Many analysts and even government officials routinely claim that Chinese statisticians miss vast swathes of consumer spending, meaning thecountry’s real level of consumption is much higher than official figures show(and, implicitly, that the problem of over-investment much smaller). While the most aggressive of these claims don’t stand up to detailed scrutiny, there are real inconsistencies in China’s consumption figures. In this chartbook,...

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    Gavekal Dragonomics

    DragonWeek - The Cost Of The Credit Crunch

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    Gavekal Dragonomics

    Chartbook: Slow China

    In this presentation, recently delivered to clients at our seminars in the US, Arthur lays out our views on economic growth and structural reform over the next 18 months. To summarize: China’s economy is too reliant on debt-financed infrastructure investment, productivity remains hampered by a bloated state sector, and consumption momentum is not yet self-sustaining. We expect the new government to issue a new urbanization strategy, make...

    0
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    Gavekal Dragonomics

    Small Is Not So Beautiful

    There is a growing disconnect in China’s housing market. Sales have soared in big cities since the final quarter of 2012, but construction growth remains anemic. Developers for now remain reluctant to aggressively expand new construction, preferring instead to sell down their existing inventory. This behavior is consistent with our analysis that the housing market, after more than a decade of undersupply, swung into oversupply in 2012. Around...

    8
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    Gavekal Research

    China: Applaud From The Sidelines

    In many ways we applaud China for forcing a liquidity squeeze on the interbank lending market, which sends a tough message to the country’s often irrepressible speculators, and places the long-term health of the Chinese economic model above the short-term relief of easy credit. However we will be applauding from the sidelines: the adjustment will be hard on investors.

    0
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    Gavekal Dragonomics

    How To Raise China's Return On Capital

    In China, you hear lots of talk about the growth of investment, but very little about the returns on investment. Indeed, China has not had to worry much when about the returns to capital since reforms were launched in 1978, as the economy was then severely undercapitalized after decades of neglect. These enormous capital needs allowed for both rapid investment growth and sustained high returns to investment—a combination that persisted for...

    1
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    Gavekal Research

    Get Ready For A Slower China

    The recent gyrations in the Chinese interbank market underscore that the chief risk to global growth now comes from China. Make no mistake: credit policy will tighten substantially in the coming months, as the government tries to push loan growth from its current rate of 20% down to something much closer to the rate of nominal GDP growth, which is about half that. Moreover, in the last few months of the year the new government will likely start...

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    Gavekal Research

    Never Mind The Fed, Here Comes The PBoC

    China is tightening credit and the People’s Bank of China does not seem minded to offer relief. Today, interbank rates continued to flare up, with the 7-day repo closing at 11.2%, having briefly surged to 25%. Ben Bernanke and the Federal Reserve look gentle by comparison.

    13
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    Gavekal Dragonomics

    DragonWeek - From Oversupply To Undersupply

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    Gavekal Research

    The Incredible Deflating Gas Market

    Emerging markets are taking a pounding with commodity-producing centers worst affected. Everywhere we look we see resource markets that are either over-supplied or have the potential to be so. The old market adage that the best cure for high prices is high prices would seem as relevant as ever. But it isn’t just iron ore and copper stocks which are bulging; LNG prices have plunged almost 25% in the last couple months.

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    Gavekal Dragonomics

    China's Retail Revolution Rolls Online

    Depending on which way you turn when exiting Dragonomics’ office in central Beijing, you will find yourself in wildly different retail settings. Head north and you’ll stroll past a Gome electronics outlet, one of the world’s busiest Apple stores, branches of Uniqlo and Mango, a multiplex cinema, and a Versace flagship. Head east and you’ll experience a more traditional retail experience—a bustling wet market filled with polystyrene boxes of live...

    0
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    Gavekal Research

    The Dog That Didn't Bark

    Emerging and OECD government bond markets have been roiled in recent weeks, but meanwhile, the offshore renminbi bond indices have held up, and the Chinese currency is appreciating. Like the hounds in Silver Blaze, the renminbi bond market is looking like the dog that did not bark; and just as Sherlock Holmes was quick to deduce an important message from the dogs’ silence, perhaps we should listen to the sound of the RMB bond market’s stability?...

    2
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    Gavekal Dragonomics

    Closing China's Credit Gap

    The disconnect between rhetoric and reality in China is finally starting to close. The pro-market rhetoric heard from new Premier Li Keqiang over the past few months has been a welcome relief from the vague platitudes of his predecessor. But this language has also been difficult to square with the fact that credit has been allowed to grow at double the rate of nominal GDP. It has always been more likely that the gap between credit growth and...

    3
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    Gavekal Research

    Asia And The Dollar

    Asian risk assets have been sucked into the volatility vortex since the latest panic started over the end-game for the Federal Reserve's quantitative easing program.

    0
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    Gavekal Dragonomics

    China Economic Quarterly June 2013 - Southeast Asia

    Deng Xiaoping used to say that the foreign policy breakthrough he was most proud of was the full normalization of China’s relations with the countries in Southeast Asia. In the 1980s, Deng’s policies helped China transform itself from a deadly enemy of its southern neighbors to a potential partner. Over the next two decades, China nurtured relationships in its backyard. Yet over the past few years many of these efforts have gone to waste: from...

    0
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    Gavekal Research

    Five Corners (5 June 2013)

    2
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    Gavekal Dragonomics

    CEQ Q2 2013 - Books

    In the opening chapters of China Goes Global: The Partial Power, David Shambaugh describes the cacophony of voices seeking to influence China’s foreign policy. These range from rabid nationalist “nativists” at one end of the spectrum to full-on “globalists,” eager for China to play a responsible role in world governance, at the other. This diversity of views is startling—and salutary reading for anyone who believes that Chinese officials,...

    0
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    Gavekal Dragonomics

    CEQ Q2 2013 - Corporate Subsidies

    Received wisdom holds that state enterprises in China gorge on government subsidies while private companies jostle for scraps. Such thinking needs reexamination. Although small private firms remain starved of both credit and government handouts, big private companies now enjoy large-scale government grants. FathomChina recently examined 50 representative private Chinese firms that are listed on overseas exchanges, and discovered that nearly all...

    0
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    Gavekal Dragonomics

    CEQ Q2 2013 - Indonesia

    Gandaria City is the largest retail mall amid the growing high rises of south Jakarta,but for many years it stood as a half-finished skeleton. Its Indonesian-Chinese developer, Pakuwon Group, racked up huge debts during the Asian Financial Crisis of 1997 and was unable to complete the project. Yet soon after making forays into China during the mid-2000s, the firm suddenly found itself in aposition to finish the massive complex—supported, it is...

    0
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    Gavekal Dragonomics

    CEQ Q2 2013 - Social Media

    Will the internet help to democratize China? China already has more than 500m internet users, nearly half the population. Most of these get online using smartphones—and with the price of a smartphone tumbling below US$100, soon anyone who carries a mobile phone will be online. Within a decade or so, it is quite possible that 1bn people in China will have access to online social media. Many breathless media reports have predicted that China’s...

    0
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    Gavekal Dragonomics

    CEQ Q2 2013 - Chinese Immigration

    How scared should Southeast Asian nations be of the giant on their doorstep? China’s enormous population and military strength are a frightening combination: Tibet, Xinjiang and a large chunk of Mongolia have been Chinese territory for many years. But as China’s regional tentacles grow longer and thicker, the more immediate fear is one of economic vassalage. Ethnic Chinese tycoons rule the roost in the Philippines and Thailand, and control...

    0
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    Gavekal Dragonomics

    CEQ Q2 2013 - Myanmar

    Follow the old Burma Road from Mandalay through the rolling hills to China’s southwest border, and you will catch glimpses of narrow strips of freshly dug farmland, scattered with white marking posts. Underneath the deep-red earth lie twin pipelines, about a meter in diameter, that will carry oil and natural gas 800km from Myanmar’s western coast to the Yunnan border town of Ruili, and then onto the provincial capital of Kunming. From there, an...

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    Gavekal Dragonomics

    CEQ Q2 2013 - Vietnam

    “Follow America and save the country; follow China and save the Party.” This saying, ubiquitous in Vietnam, distills the geopolitical dilemma facing its ruling Communist Party. Forty years after the last American troops left Vietnam, the Party thatwon independence and unified the nation has lost much of its legitimacy. No amount of harking back to the virtues of Ho Chi Minh and his comrades canrestore its élan nor, it seems, root out systemic...

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