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    Gavekal Dragonomics

    Further Easing For 2022

    China’s Q4 economic data release was presaged by a policy rate cut by the People’s Bank of China as officials work to counteract the country’s mounting economic headwinds. The Dragonomics team believes that China will continue to face downside risks; policymakers are therefore likely to ramp up supportive measures accordingly in the coming months.

    0
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    Gavekal Research

    Investing Through Inflation

    When assessing the impact of inflation on US markets, Charles has long believed that its actual level is irrelevant. Instead, it is necessary to determine whether price growth is accelerating or decelerating. He uses this insight to present a new framework for investing in inflationary times.

    3
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    Gavekal Dragonomics

    Behind The Incredible Export Boom

    Chinese export growth ostensibly continues to outpace the rest of the world this year, but Thomas believes this could in part be due to misleading data. Exporters have been incentivized to reduce their under-invoicing, which has in turn materially inflated China’s export growth over the past three years.

    0
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    Gavekal Dragonomics

    Housing Demand Begins To Stabilize

    Chinese policymakers are scaling back their crackdown on real estate, having signaled a pivot towards prioritizing stable growth. The change in rhetoric has had a visible effect on the housing market, with a particularly sharp pickup in sales volumes in late December. This should lead to a further sequential improvement in sales and prices in Q1.

    0
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    Gavekal Dragonomics

    Covid Containment Evolves

    After a string of outbreaks, China’s Covid strategy is evolving. No longer aiming for zero cases, authorities are focused on quickly containing local outbreaks. This has mostly worked well, and travel will be less restricted over the Lunar New Year holiday. But the harsh lockdown in Xi’an shows what can go wrong if the virus gets out of hand.

    3
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    Gavekal Research

    Implications Of The Kazakhstan Protests

    Violent protests triggered by rising energy prices have rocked Kazakhstan in recent days, prompting President Kassym-Jomart Tokayev to call in the Russian military in an attempt to restore control. Tom examines what the current unrest means for energy prices and the region’s power balance.

    1
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    Gavekal Research

    SWOT Analysis For 2022

    Despite a spate of exogenous shocks in 2021, currency markets largely remained placid, bonds barely sold off and the US equity market continued to scale new heights. This year, however, the global policy backdrop is shifting. Clearly, 2022 will be different from 2021. But how different? Louis analyzes the strengths, weaknesses, opportunities and threats in the new year.

    3
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    Gavekal Research

    Rethinking The International Liquidity Crisis

    In recent weeks Charles has published a series of reports assessing changes in the reserve of value that underpins the global financial system. In this report, he returns to one of his older frameworks for the US-dollar-centered system to see if it still has explanatory power. He concludes that it does, but he is not reassured by the findings.

    7
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    Gavekal Research

    Money Supply, Reconsidered

    Money sits at the heart of the economy and financial markets. At a time when inflation is taking off and the US Federal Reserve is starting to scale back its money printing, investors badly need a single reliable gauge of US money supply—not a dozen or more. In this report, Will offers a new measure of money supply that he believes is suitable for today’s conditions.

    19
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    Gavekal Dragonomics

    Currency Policy Gets More Hands-On

    The People’s Bank of China raised its foreign-exchange reserve-requirement ratio for the second time this year, a clear signal to markets that it wants to cool down currency appreciation. Wei explains that that the central bank is less worried about speculative market action and more concerned that the renminbi is simply getting too strong.

    2
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    Gavekal Dragonomics

    Big Blades, Big Dreams

    China is the largest market for wind power and the biggest producer of wind turbines. Yet turbines cannot easily be exported, and Chinese firms have found themselves mostly confined to the domestic market. In this report, Dan explains why China’s large presence in wind power development does not mean that it will be globally dominant.

    0
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    Gavekal Dragonomics

    After The Squeeze Comes The Consolidation

    The financial woes of China’s property developers are piling up and the government is offering only limited support. In this report, Xiaoxi explains why the tight regulations on developer fundraising will gradually force private firms to transfer assets to state-owned firms—which appears to be exactly what policymakers are hoping for.

    0
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    Gavekal Research

    The Evolving China-Africa Nexus

    China struck a blow in its battle with the United States for global influence last week. As the US and Europe slapped travel bans on African countries over omicron fears, China’s foreign minister was in Africa pledging 1bn Covid vaccines, US$40bn in credit and investment, and greater access to the Chinese domestic market.

    0
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    Gavekal Dragonomics

    Regulatory Risks Remain

    China’s crackdown on internet companies is far from over. The government is pursuing a broader rectification of internet business practices, and regulators have been given tougher enforcement powers and broader reach. Ernan and Thomas explain that while this environment may not be terrible for all internet companies, it is still a risky one.

    2
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    Gavekal Dragonomics

    Property Becomes A Fiscal Burden

    With a downturn in property intensifying China’s economic slowdown, hopes are rising that a pickup in infrastructure investment will help stabilize growth in 2022. But as Wei argues in this piece, the property downturn is becoming a major drag on local-government finances, which will limit their ability to boost public works spending.

    2
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    Gavekal Research

    The New, Yet Forgotten, Inflation Force

    The global economy and global energy markets were transformed by China’s dramatic expansion of the last 20 years. Most of that growth was fueled by coal, which now finds itself in policymakers’ crosshairs—even in China. Louis assesses the world’s energy mix and asks what the macroeconomic implications will be of a pronounced move away from the dirty fuel.

    7
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    Gavekal Dragonomics

    The Next Wave Of Bank Stress

    The downturn in China’s property sector will be a strain on smaller banks, which are less well-capitalized and often more exposed to the real-estate sector than their larger counterparts. In this piece, Xiaoxi explains why regulators are likely to take a hands-off approach to the problem, tolerating bank closures and encouraging bank mergers.

    0
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    Gavekal Research

    Teaching An Old Dog New Tricks

    The US dollar has long been a poor reserve of value. For decades, German bunds did the job. But negative yields mean they no longer fit the bill. That leaves the US equity market as the world’s chosen reserve of value—with far-reaching implications that Charles explores in this landmark paper.

    9
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    Gavekal Research

    India’s Economy Retreats With Modi

    Last week saw India's prime minister Narendra Modi stun political friend and foe alike with a decision to repeal the laws that underpinned his flagship reform of India’s sclerotic agricultural sector. Udith argues that the likely losers from Modi’s U-turn will be the poor, as India’s structural growth prospects have just taken a big knock.

    0
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    Gavekal Dragonomics

    The Stimulus Won't Be Green

    As the sharp downturn in China’s property sector continues to deepen, hopes for the stabilization of economic growth are turning to the prospect of a “green stimulus” via two new lending tools. In this report, Wei explains why the impact of these tools is likely to be negligible, as they are no substitute for an actual relaxation of macro policy.

    0
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    Gavekal Dragonomics

    The Dual Strategy For Semiconductors

    China’s drive for semiconductor sovereignty is entering a new phase, with government and industry converging on a dual strategy to reduce vulnerability to US sanctions. First, create a domestic supply chain for mature chip technology; second, invest in new technologies that could offer a different path to competing with leading-edge products.

    2
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    Gavekal Dragonomics

    Charging The Future

    The world needs more batteries, both to power electric vehicles and store electricity for green power grids. China is in a prime position to meet that demand as it already commands a large majority of both current and planned production capacity. It is therefore probable that Chinese firms will be commanding leading positions in a decade’s time.

    0
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    Gavekal Research

    The Real Yield Mystery

    One of Will’s key calls for 2021 was that real yields on US treasuries would rebound from their deeply negative levels. But despite the news of Fed tapering, real yields have remained stubbornly low. Here, Will examines a number of factors that may be offsetting the expected effect of tapering and concludes investors should be wary a rise in real yields on treasuries.

    9
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    Gavekal Research

    South Korea’s First-Mover Problem

    South Korea's central bank was the first in Asia to raise interest rates this cycle. Yet despite its apparent prudence, the market has focused on Korea’s worsening growth outlook and the BoK’s apparent limited scope to ease monetary policy. Vincent assesses the outlook for one of Asia’s powerhouse economies.

    0
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    Gavekal Dragonomics

    Inflation Is Still Not A Problem

    China reported a record surge in its producer price index, prompting fears that the country is both a victim of the same supply-chain shocks facing the US and an exporter of further inflationary pressures. Thomas explains that while these concerns are unfounded, domestic growth momentum is the real problem.

    0
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    Gavekal Research

    Return Of The Kitsune

    In Japanese folklore, a kitsune is a magical, very wily, nine-tailed fox who wriggles out of tricky situations. It resembles our financial markets, which have a doughty ability to manage “tail risks”. Last year, Louis wrote a series of articles looking at such risks and today returns to that theme in a substantially changed investment context.

    2
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    Gavekal Research

    A Contrarian View On Brazil

    An inverted yield curve usually points to trouble ahead, and Brazil’s just flipped for the first time in five years. Add to that a botched Covid response, blowout fiscal deficits and political risk, and the next year may be one of living dangerously in Brazil. But given attractive valuations, Udith says there are good reasons for investors to take that risk.

    0
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    Gavekal Dragonomics

    Mortgage Easing Begins

    China’s outstanding mortgage loans grew in October, confirming anecdotal reports that banks have been allowed or encouraged to pick up the pace of mortgage lending. Wei and Xiaoxi explain that while more relaxation measures are likely on the way for property developers, it’s too early to say that their financial conditions are improving.

    0
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    Gavekal Dragonomics

    Politics And Policy In Common Prosperity

    It’s now been a year since top leader Xi Jinping first laid out his new goal of achieving “common prosperity,” but how exactly that new slogan translates into government policy still remains rather unclear. As Andrew explains in this piece, that’s because common prosperity is ultimately more of a political campaign than a coherent policy agenda.

    0
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    Gavekal Dragonomics

    A Conservative But Costly Plan

    A major concern of negotiators and activists at this month’s global climate meetings is the size and credibility of China’s decarbonization commitment. However, as Arthur and Rosealea explain there are good reasons to believe that climate goals will play a large role in China’s policy mix in the coming decade—with large risks to economic growth.

    2
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    Gavekal Dragonomics

    The Case Against Easing

    Even though growth has been very disappointing in China, markets are not pricing in more monetary easing from the central bank. In this piece, Wei reviews the arguments currently being made for keeping interest rates on hold—and finds them all wanting. China’s policymakers are indeed being quite conservative, but will still end up cutting rates.

    4
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    Gavekal Research

    The Fed Turns Inflation Risk Manager

    At the start of 2021, not many investors expected the Federal Reserve to close the year by winding down its asset purchases. So why is it now tapering, and what comes next for US monetary policy and markets? In this piece, Will seeks to explain.

    0
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    Gavekal Dragonomics

    The Risks Of The Property Tax Transition

    China’s property market is heading into uncharted territory following a formal authorization for the government to carry out regional pilots of a property tax. The goals of such a tax are clear: reduce speculation and diversify local government revenues. However, Rosealea explains that the transition to this tax will be tricky and not without risk.

    0
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    Gavekal Research

    Decarbonization’s Disruptions

    Media attention at this month’s COP26 climate talks in Glasgow will focus on which promises governments make to combat climate change. Yet this distracts from the substantive questions the world will need to grapple with in the next several years as the promised energy transition moves into gear.

    9
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    Gavekal Dragonomics

    Sticking With Zero Tolerance

    With tight border controls and extensive domestic tracing, China remains one of the few countries in the world still maintaining a zero-tolerance approach towards Covid-19. Ernan explains that officials consider the policy a success relative to the alternative of widespread Covid and will likely keep it in place for at least another year.

    2
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    Gavekal Dragonomics

    Venture Capital After The Tech Rout

    China’s wave of regulatory actions against internet companies has left venture-capital and private-equity investors feeling on edge. While the new policy environment demands a rethink for investors, many believe they can still find promising investments. Of bigger concern is whether new regulations will make it harder to exit their positions.

    3
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    Gavekal Research

    The EU’s Ambitious Roadmap To Net Zero

    Europe has by far the most ambitious decarbonization program among major regions, targeting net zero greenhouse gas emissions by 2050 and a -55% reduction from the 1990 level by the end of this decade. Cedric has examined the European Union's plans for achieving this goal, and in this article outlines the likely impact on key sectors of the economy.

    4
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    Gavekal Research

    Back On The Road Again

    In the last couple of weeks Louis has been on the road, meeting clients face-to-face for the first time in 18 months. In this report, he distills some of the spirit of those conversations, addressing hot button topics from the sharp run-up in energy and commodity prices, through China’s economic slowdown, to the increase in tensions across the Taiwan Strait.

    11
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    Gavekal Dragonomics

    A Decision Rule For Chinese Equities

    For investors trying to buy the dip in Chinese equities, there is one reliable indicator—the government’s macroeconomic policy, as proxied by private-sector credit growth. In this report, Thomas outlines a robust decision rule for asset allocators: when credit growth is accelerating, buy equities; when it’s decelerating, buy government bonds.

    0
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    Gavekal Research

    Ghost Trains And The Chinese Debt Mountain

    Fears about a debt crisis erupting in the world’s most financially vulnerable nations have receded, but there is still uncertainty over how developing economies will manage their debt repayments. The biggest lender to low- and middle-income countries is China, and a new study estimates that debt owed to China has been severely underreported.

    5
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    Gavekal Dragonomics

    Solving The Power Crisis

    To solve China’s power shortages, planners are both liberalizing electricity prices and browbeating mines to produce more coal. In this report, Rosealea explains that while getting through the crisis will require a rebound in coal-fired power, energy price liberalization should support China’s environmental goals in the long run.

    2
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    Gavekal Research

    The Troubling Signal In US Savings

    In recent months, the US net national savings rate—the share of income unconsumed—has ticked lower. It may seem a small concern as the Federal Reserve prepares to taper, but if the rate of genuine savings continues to fall over coming quarters, it will be a danger signal both for asset markets and for US economic growth.

    7
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    Gavekal Research

    Building The Bubble-O-Meter

    Charles is somewhat tired of reading general descriptions of US equities being in a bubble, with little serious empirical backing to support the assertion. In this piece, he sets out to build an objective tool to answer the bubble, or not, question. Spoiler alert: he thinks investors would do well to re-assess their hedges.

    3
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    Gavekal Dragonomics

    The Long Winter For Small Business

    China’s small businesses are having a rough 2021: business conditions have stagnated or deteriorated since the recovery in late 2020. There’s been much debate on the causes of their struggles, but the biggest culprits are the ripple effects from the government’s zero-tolerance Covid policy and its tightening of credit and real-estate policies.

    0
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    Gavekal Dragonomics

    The Sun King

    As the US and Europe pursue more serious green agendas, they are wondering if they can wrest back production of solar power from China. The answer: probably not. China is not just the low-cost producer, but also the technological leader. In this piece, Dan explains why the global deployment of solar energy will depend heavily on China.

    0
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    Gavekal Research

    What, Me Worry?

    There is a growing drumbeat of commentary arguing that today’s shortages of everything from microchips to natural gas must end in an inflationary blowout and a return to the lascivious 1970s. Anatole thinks that today’s shortages are likely to correct relatively quickly, and for investors the coming period is more likely to resemble the 1950s.

    2
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    Gavekal Research

    Fixing Italy

    The results of this weekend's municipal elections in Italy look to have buttressed Mario Draghi’s national unity government, which is half way through an ambitious overhaul of core institutions that have failed the country for decades. With 70% of Italians favoring Draghi’s initiative, and no general election due until mid-2023, the betting is that he gets to finish the job.

    1
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    Gavekal Research

    Q&A: China’s Investibility

    In the last few weeks, as China Evergrande’s financial troubles have deepened, Louis and Gavekal’s China team have fielded a spate of questions from clients about China’s investibility. In this paper, Louis offers a distillation of these conversations, presented in a question-and-answer format.

    16
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    Gavekal Dragonomics

    Developers Need Loans

    How much financial stress can China’s developers take? Thanks to strict financial regulation and slowing sales, every channel of financing for developers is now tightening simultaneously. In this piece, Xiaoxi explains how this puts pressure on policymakers to ease those financing restrictions, and why bank lending is the most likely beneficiary.

    0
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    Gavekal Research

    After The German Election

    The results of this Sunday’s German federal election are unlikely to generate any shocks when markets reopen on Monday. Nonetheless, the precise colors of the coalition that eventually emerges will matter a great deal to investors. Cedric reviews the possible coalition compositions and outlines what they will mean for fiscal policy, European integration and China.

    0
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    Gavekal Dragonomics

    Don’t Call It A Tech Crackdown

    China’s regulatory onslaught against companies like Ant Group, Didi Chuxing and Tencent has been widely referred to as a “tech crackdown.” In this piece, Dan argues that the government’s actions are less a sign that it has turned against tech than they are a rejection of the idea that the consumer internet is the peak of technological achievement.

    6
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    Gavekal Research

    The Anglosphere Doubles Down

    The “Aukus” security partnership sparked a diplomatic explosion when it was unveiled by Australia, the United Kingdom and the United States last week. As the smoke clears, America’s strategy to counter China is becoming clear. But the diplomatic fallout from Aukus also reflects a new reality. How does Europe fit into this brave new world, and how will China respond?

    10
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    Gavekal Dragonomics

    The Reversal In Iron Ore

    Over the past two months, iron ore prices have tumbled as China’s property market slows and local authorities expand restrictions on steel output. In this report, Rosealea explains why falling steel demand should cause prices to continue their decline, eventually settling at around levels of US$70-80/ton.

    0
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    Gavekal Research

    Investing In Today’s Inflationary Environment

    Investing in a topsy-turvy macro environment can feel like a crapshoot. One way to seek order among chaos is to draw lessons from economic history. Louis examines the underlying causes of financial crises since the late 1990s and applies the lessons to consider the way in which the global economy and markets emerge from the pandemic.

    2
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    Gavekal Research

    Going Electric In The Land Of The F-150

    The US government and the auto industry are now pulling in the same direction of decarbonizing transportation. In this piece, Yanmei asks if the emerging government-industry alliance can accelerate vehicle electrification, where the US has fallen behind Europe and China, and whether they can catch up to Tesla and foreign competitors.

    3
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    Gavekal Dragonomics

    No Profits From Payments

    Online payments were one of the first and most prominent victims of China’s regulatory onslaught against internet platforms. In this piece, Xiaoxi explains how a combination of both tighter oversight and the pending launch of the digital renminbi is limiting platforms’ ability to monetize their payments businesses.

    0
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    Gavekal Research

    Winners And Losers In India’s Dying Democracy

    As India’s economy has weakened, so too have its democratic foundations. Since Narendra Modi’s reelection victory in 2019, “the world’s largest democracy” has flirted with despotism. State institutions have been co-opted, freedoms repressed and minorities attacked. But a handful of listed companies—especially those run by tycoons with personal ties to Modi—are thriving.

    15
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    Gavekal Research

    The High Cost Of Free Money, Revisited

    It’s now more than 10 years since Charles published a seminal paper titled The High Cost Of Free Money, in which he argued that free-market capitalism could not function properly without a free-market-determined cost of capital. Today it’s clear that capital markets, at least, can continue to operate, but Charles argues this has created very little new wealth.

    6
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    Gavekal Research

    Covid, Markets And What Happens Next

    Over the last 18 months, Covid developments have been a key driver of financial market performance. Louis contends that this period can be split into four distinct phases. In this piece, he asks whether we are now entering a fifth phase. To do this he weighs up both encouraging and concerning developments within the pandemic and economic policy choices that flow from them.

    6
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    Gavekal Dragonomics

    What Kind Of Easing Cycle?

    It’s been clear for a couple of months now that China has begun a monetary easing cycle. What has been less clear is what kind of easing cycle will happen under the central bank’s new “cross-cyclical” policy framework. The PBOC’s guidance indicates it could start cutting rates this year, but will try to keep credit growth next year roughly flat.

    5
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    Gavekal Dragonomics

    How Markets Multiply Subsidies

    China’s government has vast ambitions for its industrial policy, yet it spends surprisingly little on subsidies and tax breaks. Instead, it relies on domestic capital markets for funding. In this piece, Thomas explains how markets can multiply those initial subsidies into much larger spending in the government’s favored industrial sectors.

    2
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    Gavekal Dragonomics

    How To Create A High-Yield Bond Market

    China’s central bank has now endorsed the creation of a domestic high-yield bond market in an attempt to reverse the increasing exclusion of private-sector borrowers from existing debt markets. In this piece, Xiaoxi outlines how financial regulators are trying to increase both the supply of and demand for high-yield corporate bonds.

    2
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    Gavekal Dragonomics

    Flows Favor A Weaker Renminbi

    The renminbi has been strong in 2021, with the central bank largely tolerating a steady march higher in the trade-weighted CFETS index. But this trend will turn in coming months, as inflows of foreign currency on both the current and capital accounts decline. With the PBOC easing as the Fed prepares to taper, the renminbi will weaken modestly.

    0
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    Gavekal Research

    Who Is Copying Who?

    When China joined the WTO in 2001, western governments hoped that closer economic integration would pull China towards a more democratic system of governance. Yet two decades on, that hasn’t happened. In fact, argues Louis, recent years have seen governments in the West increasingly infringe on individual liberties for the benefit of the common good.

    17
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    Gavekal Research

    China’s Interest In Afghanistan

    The western media have been full of warnings over the last week about how the US loss in Afghanistan is China’s gain, with Beijing poised to step into the vaccuum left by Washington’s withdrawal. But while China is anxious to protect its own security, it has no wish to bury itself in the graveyard of emires and will be extremely circumspect about pouring large investments into such a volataile country.

    2
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    Gavekal Dragonomics

    The Drivers Of The Regulatory Crackdown

    What is driving China’s regulatory crackdown on internet and other companies, and what will happen next? In this piece, Ernan explains how four overlapping political campaigns by top leader Xi Jinping are behind the upheaval of recent months, and how those campaigns will guide the government’s enforcement priorities in coming years.

    4
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    Gavekal Research

    Tapering The Frontier’s Prospects

    On Monday, the International Monetary Fund began disbursing a record US$650bn of its hard currency-like reserve asset to aid stressed sovereign borrowers. Since the plan was first officially mooted in March, financing costs have fallen sharply in frontier economies. The worry now is that this respite reflects the calm before a storm, which will hit when the Federal Reserve dials back its quantitative easing program.

    0
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    Gavekal Dragonomics

    Developers Feel The Squeeze

    The steady drumbeat of tightening on China’s property developers is taking its toll on construction activity. In this report, Rosealea explains why this weakness in construction will not unduly worry policymakers and should even help them achieve their goal of reducing steel production. Developers will therefore continue to feel the squeeze.

    3
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    Gavekal Dragonomics

    Building A Science Superpower

    As China’s global rivalry with the US intensifies, it has focused strongly on improving science and technology. This push is not just about prestige, but also reflects a recognition that it can’t always lag behind the US in creating novel ideas. For this piece, Dan interviewed 22 scientists to evaluate the capabilities of China’s science system.

    2
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    Gavekal Dragonomics

    Loan Demand Becomes A Problem

    China’s restrictions on borrowing by the property sector and local governments are proving so effective that total demand for credit is weakening. It now looks like loan growth could undershoot official expectations in the remaining months of 2021, which is raising pressure on the PBOC to cut reserve requirements or policy rates.

    0
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    Gavekal Dragonomics

    Don't Count On An Infrastructure Boost

    With China’s government sounding more worried about growth, hopes are rising that infrastructure spending will get a boost in coming months. In this piece, Wei explains why new funding for projects will be slow to arrive. More of a boost will come by early 2022, but the upside will still be modest by historical standards.

    0
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    Gavekal Research

    Understanding Asia’s New Monetary Order (Part II)

    Last month, Charles reviewed the efforts China has made to build an alternative to Asia’s US-dollar-based trading system. Today, he peers into the future, and looks at what China is doing, not just to offer an alternative to the US dollar or euro, but to build a new monetary order for Asia.

    3
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    Gavekal Dragonomics

    The Delta Stress Test

    The rapid spread of the Delta variant across China is posing the biggest challenge yet to the government’s zero-tolerance policy toward Covid-19. In this report, Ernan explains why officials are confident in the policy and will likely keep it in place for the indefinite future—at the cost of depressed travel and consumer services.

    8
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    Why Commodities Trump Politics

    On the eve of the pandemic, anger at stagnant incomes, high inequality and failing institutions spurred political protests across Latin America. Then came Covid-19. The political price of these events is coming due as left-wing leaders promise voters redistributive policies. For investors, the worry is of a lurch towards unsustainable public spending.

    0
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    Gavekal Dragonomics

    Another Squeeze For Steelmakers

    Steel futures are on the rise again after several provinces announced plans to cut production. This might sound familiar: prices spiked in April and May following similar announcements. Rosealea writes that this time is different, as slowing construction activity in 2H21 should lower steel demand, making production easier to control.

    1
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    Gavekal Dragonomics

    The Capital Markets Balancing Act

    The pace of financial decoupling between the US and China has quickened, with regulators in both countries tightening requirements for Chinese firms seeking to list in US markets. With the SEC likely to push ahead with the delisting of Chinese firms, Thomas writes that Chinese companies will rely on Hong Kong to access global capital.

    0
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    Behind China’s Corporate Clampdown

    Private education is the latest sector to draw fire from the Chinese authorities. Their action has precipitated an abrupt slide in Hong Kong’s equity indexes as international investors bale out, alarmed at what they see as official caprice. It has also triggered a spate of questions about what lies behind the crackdown, and what the action means for the future of investing in China.

    9
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    Gavekal Dragonomics

    The WMP Countdown

    The clock is ticking for China’s banks to restructure the wealth-management products they have long used to evade financial regulations. Progress has been slow, but regulators have signaled they will not extend the end-2021 deadline again. However, as Xiaoxi argues in this piece, regulators will end up having to grant banks plenty of exceptions.

    5
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    Gavekal Dragonomics

    Class Is Over For Tutoring Firms

    Policymakers launched a massive crackdown against Chinese education companies over the weekend that will likely mean the end of these companies as they are currently structured. In doing so, Ernan writes that China has signaled it is not afraid to simply shut down a large and profitable industry in order to achieve its social and political goals.

    14
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    Did The Equity Rotation And Bond Sell-Off End In May?

    The arrival of Covid-19 vaccines in November sparked a selloff in bonds and significant outperformance of value stocks, at least until mid-May. Having advised a bias to value stocks and keeping duration short in bond portfolios since last November Will was wrong-footed by the market moves of the past two months. Will the new trend last?

    2
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    China’s Afghan Quandary

    For China, the only thing worse than having the United States Army on your border is not having it there at all. When the US completes its withdrawal from Afghanistan this summer, China will have to fill the ensuing power vacuum to stave off terrorism and Islamic extremism at home, as well as protect its Belt and Road Initiative investments.

    0
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    Gavekal Dragonomics

    The PBOC’s Pre-Emptive Strike

    China’s surprising decision this month to cut banks’ reserve requirement ratios has upended the consensus on its policy trajectory and sown confusion in the market. In this piece, Wei explains the move was neither a panicked attempt to jump-start growth, nor a minor technical adjustment, but a pre-emptive start to a different kind of easing cycle.

    2
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    Gavekal Dragonomics

    A Carbon Market's Slow Start

    China launched the world’s biggest carbon market last week to great fanfare. Unfortunately, Rosealea writes that it will not do much to slow China’s CO2 emissions growth, at least not initially. While the market's impact will be small at first, its architecture can be gradually strengthened to achieve more ambitious goals.

    0
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    Rotate Back To Taiwan

    Korea and Taiwan have lately been the twin star performers among East Asia’s equity markets. Over the 12 months to the end of June, MSCI Korea returned 70% in US dollar terms, and Taiwan 69%. Both markets were supercharged by the strongest local export growth in decades. And while shipments were flattered by base effects, there was strong underlying support from the robust demand for East Asia’s exports as developed markets reopened. In addition...

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    Distributional Effects Of A Pandemic

    While business activity in India has rebounded to above 90% of its pre-pandemic level, the economic suffering caused by lockdowns remains acute. Small firms are struggling to survive, millions of households have fallen into poverty, inequality has worsened and employment levels have structurally declined. Yet none of this has shown up in stock benchmarks.

    0
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    Gavekal Dragonomics

    Data Security Is National Security

    With the dramatic punishment of ride-hailing platform Didi Chuxing immediately after its IPO, China’s government has opened a new front in its regulatory crackdown on internet companies: data security. In this piece, Ernan explains why regulators are escalating and what these new concerns mean for Chinese internet platforms.

    4
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    Gavekal Research

    Understanding Asia’s New Monetary Order

    China’s program to dedollarize Asia must overcome two sets of problems: the problems inherent in trade between countries, and problems related to the financial risks posed by the passage of time. In this paper, the first of a major two-part report, Charles examines the progress Asia has made towards replacing the dollar as a reliable means of exchange for intra-regional trade.

    2
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    Gavekal Dragonomics

    Making The Implicit Guarantee Explicit

    To keep access to bond markets amid rising defaults, many of China’s financially stressed local governments are offering stronger support for their companies’ debts—making the implicit guarantee more explicit. This won’t stop all local government financing vehicles from defaulting, but it means the defaults may come from less obvious places.

    0
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    Will Manic Depression Move From Bonds To Equities?

    The retreat of US bond yields over the past quarter was no surprise for Anatole, as he has argued for much of this year that both US policymakers and investors would ultimately look through the "inflation scare". A lower cost of money could cushion the inevitable decline in growth that will occur in 2H21, and the bubble in US growth stocks can keep inflating.

    7
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    Gavekal Research

    Bye-Bye Buba

    The European Central Bank on Thursday jettisoned its longstanding inflation target of “below, but close to 2%” in favor of a symmetrical target centered around the 2% mark. The formal adoption of a symmetrical target is significant, because it acknowledges just how far the ECB has traveled from its origins as the institutional offspring of the Deutsche Bundesbank.

    1
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    Gavekal Research

    Demographics And Prices

    Starting in the early 1980s, the world became increasingly flush with people in their prime working and saving years. That trend, however, has largely run its course and may now be going into reverse. As a result, investors should consider what economic trends have demographic drivers, making them vulnerable to a structural shift occurring.

    9
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    Gavekal Research

    The Inflation Quandary

    Markets seem to be comforting themselves that incipient inflation is, as the Federal Reserve has argued, a transitory phenomenon. Louis is skeptical that this is the case. He sees no evidence of any deflationary shocks that could squeeze price pressure, while at the same time, Western policymakers are doing all in their power to pump up demand.

    1
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    Gavekal Dragonomics

    Another Go At The Property Tax

    After two years of silence, the Chinese government has signaled it is making a new effort to implement a residential property tax by expanding local trials. In this report, Rosealea explains why, against a better economic backdrop and with less organized opposition, the property tax is likely to stick this time around.

    0
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    Gavekal Dragonomics

    Disciplining Deposit Rates

    China is changing the way bank deposit rate ceilings are calculated, the first such change in five years. In this piece, Xiaoxi explains how the change, which will flatten bank deposit yield curves, has some of the same effects as a deposit rate cut: it will reduce cost pressures on banks and widen their margins, although not dramatically.

    3
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    Gavekal Research

    The G7’s Rival To The Belt And Road

    With the launch of “Build Back Better World,” the world’s rich democracies want to take on China’s Belt and Road Initiative. The G7 sees the initiative as a chance to re-energize international development finance. The plan is worthy, but the nuts and bolts of providing such projects in poor countries suggests that China does not face serious competition.

    1
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    Gavekal Dragonomics

    No Need For Passports

    One of the most dramatic shifts within the global consumer market since Covid-19 has been the sudden termination of Chinese overseas tourism. In this report, Ernan explains why Chinese tourists will likely decide to remain grounded even as other countries open their doors, leaving households with extra money to deploy at home.

    3
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    Gavekal Dragonomics

    Decarbonization Is An Industrial Problem

    How achievable are China’s targets of reaching peak carbon emissions before 2030 and a fully carbon-neutral economy by 2060? Rosealea writes that the unusually large share of heavy industry in China’s CO2 emissions will make the 2030 target difficult to achieve, while carbon neutrality will require a massive reorientation of China’s economy.

    3
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    Gavekal Research

    The Peril Facing Northern Europe’s Savings Industry

    Between 1966 and 2012 investors did better in German bonds than US equities on a total return and common currency basis. That changed in 2012, and Germany’s managed savings institutions are now in peril, along with those in other parts of Northern Europe. In this piece, Charles shows how much trouble these institutions face and offers a view on how this exercise concludes.

    5
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    Gavekal Research

    Europe’s Battery Boom

    A few years ago, European carmakers and auto parts firms raised white flags and ceded the market for electric vehicle batteries to mostly Asian competitors. Today, they are back in the fight. If European companies’ development plans come to fruition, writes Cedric, their share of the continent’s manufacturing capacity will rise from 5% in 2020 to 67% by the middle of the decade.

    9
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    Irresistible Force Vs. Immovable Object, Round Two

    US policy on China is now defined by an acute tension between national security and business interests. In this report, Arthur and Dan explain how the Biden administration is navigating this tension, one which will be a permanent feature of the global landscape over the next decade.

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