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    Gavekal Research

    Everything Just Changed

    There are moments in history when the impossible becomes inevitable without ever passing through improbable. The period after the Lehman Brothers bankruptcy was such a time. Last night’s unexpected repudiation by British voters of 40 years of European Union membership is another. The outcome of the referendum is a shock fully comparable to the Lehman collapse. Rarely, if ever, has a G7 currency fallen by -10% in a single trading session, as the...

    6
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    Gavekal Research

    Europe: Ready To Be Reborn From Its Own Ashes?

    Over the past decade, global investors would have been wise to largely ignore eurozone equities. Their underperformance has not been constant, but intermittent policy-driven rallies have become weaker and shallower. Eurozone stocks outperformed for two years after Mario Draghi’s 2012 promise to do “whatever it takes” to save the euro, yet by the time the European Central Bank got around to launching its asset-buying program in 2015 the benefit...

    1
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    Gavekal Research

    Tax Receipts And US Recessions

    When kicking-off two days of Congressional testimony yesterday, Janet Yellen acted to sooth market nerves by declaring the US economy to be in reasonable health, while sounding sufficiently concerned about apparent labor market weakness to hose down worries of an imminent rate raise. To my mind, this is all noise for the simple reason that the question is no longer whether the US faces a recession in the future but more precisely if such a...

    4
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    Gavekal Dragonomics

    Household Savings: A Permanently High Plateau?

    China’s famously high household savings rate is still stuck in the stratosphere: it has hovered around 37-38% of income since 2008. So have the drivers of savings not changed at all in recent years? Far from it. High savings were mainly caused by China’s massive housing boom, and now that the boom is over, savings rates will be grinding lower.

    0
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    Gavekal Research

    Never Mind The Brexit, Look At Eurozone Mid-Caps

    Recent releases of hard and soft macro-economic data point to a cyclical eurozone recovery whose domestic drivers are increasingly robust. On the back of stronger consumption and investment, GDP growth was just revised up to 0.6% QoQ for 1Q16. Unemployment continues to fall and, after a weak start to the year, economic sentiment indicators have rebounded—the ZEW released yesterday for June leapt to 20.2 from 16.8 in May. This improvement is...

    3
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    Gavekal Research

    Brexit Tail Wags The Dog

    If anyone still doubted the claim expressed here on May 25 that politics is now driving global financial markets far more than economics (see The Brexit Vote As Harbinger Of A Populist Age, Or Not), those doubts should have been dispelled by Monday’s trading. From the moment that currency trading started in the New Zealand morning, through the Nikkei and Hang Seng openings in Asia, to the main forex business in London and finally the stock...

    0
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    Gavekal Research

    What Does China’s Propaganda Ministry Do All Day?

    When asked to speak about China at big investment conferences, I often kick-off by asking the audience “who here trusts Chinese data?” When no one raises their hand, my follow-up is generally “OK: 0 out of 250! That’s more than usual”. Beyond getting a cheap laugh, the point is to highlight how most foreign investors are suspicious, and often downright fearful, of China. Such distrust may stem from China being one of the few major economies to...

    1
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    Gavekal Dragonomics

    CEQ: The State Sector’s New Clothes

    In this issue of the CEQ, we take a close look at state-owned enterprises, which lie at the heart of Xi Jinping's strategy for restoring China to greatness. The goal of Xi’s recent policies is clear: to strengthen SOEs and make them more effective instruments of macro management at home, and more powerful agents of national interests abroad.

    0
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    Gavekal Dragonomics

    Villains Or Victims? The Role Of SOEs In China’s Economy

    State-owned enterprises are often blamed for China’s excess capacity, but private firms are the bigger culprits. The real problem is that the government now forces SOEs to act as economic stabilizers, at high cost. This makes them an ever-growing liability to the state.

    0
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    Gavekal Dragonomics

    State Enterprise Reform: Missing In Action

    In 2013, the Third Plenum Decision promised bold reform of the SOEs, to diversify their shareholding and improve their financial performance. Nearly three years on, little remains of that agenda beyond a conflicting jumble of vague directives.

    0
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    Gavekal Dragonomics

    Return Of The Line Ministries

    In the 1990s, Zhu Rongji broke up state-owned conglomerates, to spur efficiency through competition. Now Xi Jinping’s SOE reform aims to bring those conglomerates back to life. The effort will be spearheaded by Xiao Yaqing, whose ambition to turn the state aluminum company into a global metals giant foundered, but who is now the bureaucrat in charge of all central SOEs.

    0
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    Gavekal Dragonomics

    Stability Above All

    The government seeks to keep both GDP growth and the exchange rate as steady as possible ahead of the Communist Party Congress scheduled for the fall of 2017. It may succeed, but probably at the cost of further delaying its structural reform program.

    0
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    Gavekal Dragonomics

    The Future Of China’s Oil Demand

    China’s demand for oil—unlike its need for other commodities—will continue to grow, thanks mainly to greater use of automobiles. Imports, though, will be more volatile, and determined largely by how fast the country tries to fill its strategic reserves, and how quickly refiners adapt to changing consumption patterns.

    0
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    Gavekal Dragonomics

    The Long March To Europe

    China’s investment in Europe is surging, as Chinese firms step up their M&A efforts and put more money into infrastructure ventures. European authorities must do a more active job of weighing the economic benefits of this investment against the political risks.

    0
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    Gavekal Dragonomics

    Hope And Hard Work On A Shanghai Street

    Accounts of economies are often bloodless affairs, so it is a relief when a writer comes along who can bring to life the people buried beneath the GDP statistics. Rob Schmitz has done just this in a small gem of a book that illuminates China’s economic transformations through portraits of the residents of his neighborhood.

    0
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    Gavekal Dragonomics

    Making Sense Of The Economic Policy Mess

    Xi Jinping’s economic policy seems like a mass of confusion. This is only because he has been coy about stating his true aim: to make the state sector as strong as possible.

    0
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    Gavekal Research

    India’s Reform Agenda After Rajan

    Over the weekend, Reserve Bank of India governor Raghuram Rajan announced he will not seek an extension of his three-year term, which ends in September. His unexpected decision will dampen sentiment in the near term, as it follows—and was perhaps even precipitated by—a high decibel campaign seeking his ouster by members of India’s ruling BJP. However, fears that the hard-won credibility of the RBI under Rajan will be undermined by the...

    2
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    Gavekal Research

    Japan As Safe Haven

    Global markets are in a risk-off mood as investors scramble to find a sure thing in an uncertain world. The populist surge in Europe and the US is ending long held “certainties” about the developed democracies, while next week’s Brexit vote could set in train the European Union’s break-up. Ironically, as investors scramble for stable ground, Japan is proving an island of calm, at least for those with an eye to capital preservation. The yen has...

    0
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    Gavekal Research

    Beyond Brexit, A More Hawkish Fed

    After the Federal Open Market Committee yesterday revised down both its growth forecast and its projection for the future trajectory of US interest rates, market expectations of rate hikes have collapsed. Fed fund futures are now pricing the probability of a July rate hike at just 6%, down from 16% immediately before the FOMC’s meeting. In reaction, the yield on 10-year treasuries has dipped further below the 1.6% mark to 1.56%, the lowest since...

    0
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    Gavekal Research

    Populism And A New Financial Crisis

    The febrile behavior of financial markets ahead of Britain’s EU referendum shows that the voting on June 23 will influence economic and political conditions around the world far more profoundly than Britain’s share of 4% in global GDP might suggest. This outsize impact has at least three explanations.

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