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    Gavekal Dragonomics

    The China Inc. Annual Report 2018

    In this chartbook, Thomas outlines the key trends in the fundamentals of China’s corporate sector. Growth in sales and profits has stayed stronger for longer, but is driven mainly by high materials prices. A rebound in capex is starting to fade. Deleveraging continues but more slowly, and may not last much longer as profits cool and debt rises.

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    Gavekal Dragonomics

    The True Value Of SOE Interest Rate Subsidies

    There is a widespread belief that implicit government guarantees allow Chinese state-owned enterprises to command preferential access to credit at below-market interest rates. In this paper, Thomas digs deeply into the corporate data to determine the true magnitude of this interest rate subsidy, and its importance to SOE profitability.

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    Gavekal Dragonomics

    The Retail Sales Data Enigma, Explained

    This technical note explains why the retail sales growth numbers reported by the National Bureau of Statistics are so much higher than the growth rates one can calculate by comparing this year's sales values with last year's. This is not an effort to cover up bad economic performance by fudging statistics, but the opposite.

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    Gavekal Dragonomics

    Softening Up On SOE Deleveraging

    China this year ordered central SOEs to bring down their asset-liability ratio down by 2pp by 2020. That might sound like a modest change, but it means doing much more deleveraging in the next two years than in the last two. With policymakers now starting to ease policy, this aggressive hard target for deleveraging will likely become a soft one.

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    Gavekal Dragonomics

    The Biggest Winners In Real Estate

    China’s real-estate developers are getting hammered in stock and credit markets. But the largest of these firms are well-placed to ride out current strains, and are the main beneficiaries of accelerating consolidation and government policy. As the Chinese property market matures, the winners are likely to be a small group of the largest companies.

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    Gavekal Dragonomics

    Policy Headwinds For Chinese Stocks

    Chinese equities have finally had a few solid trading sessions after their steep decline in the latter half of June. But the CSI 300 index is still down -14% year-to-date, and betting on a rebound from here looks unwise. A confluence of factors has been pushing down the market—tougher financial regulation, weak data, a falling currency, and the trade conflict with the US. And none of these factors is turning positive, especially with the US...

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    Gavekal Dragonomics

    An Attractive But Troublesome Market

    From June 1, China’s domestically-listed A-shares will be included in the MSCI Emerging Markets index, bringing the onshore market to the attention of many global investors for the first time. In this piece, Thomas examines recent developments in the A-share market, and outlines the promises and pitfalls of investing under China’s “regulatory firestorm”.

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    Gavekal Dragonomics

    What Inflation Means For Margins

    As China’s producer price inflation cools and its consumer price inflation picks up, one might expect corporate margins to be fattening, as cost pressures wane and pricing power strengthens. In fact, the opposite is true: margins have been fat, and are now getting tighter. In this piece, Thomas explains how inflation really affects margins.

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    Gavekal Dragonomics

    How Steel Survived The Battle For Blue Skies

    It’s been a wild winter for China’s steel industry, with huge swings in output and prices. The main culprit is the aggressive official campaign to reduce air pollution—and the industry’s creative responses to it. Their back-and-forth has not hurt underlying growth much, but the resulting volatility in steel prices is not going away.

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    Gavekal Dragonomics

    The Pain Of Power Producers

    The rebound in commodity prices since 2016 has been a boon for much of China’s industrial sector—but coal-burning power plants have been big losers. Coal prices cannot go much higher without causing serious financial distress. This means that policy should now be shifting to favor power producers, by ensuring coal prices do not climb further.

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    Gavekal Research

    Chinese Equities: Marching To A Different Drum

    Though onshore Chinese stocks did not escape the rout of global markets in recent weeks, the real trigger for the meltdown onshore was heightened investor anxiety over Beijing’s financial regulations. Thomas and Ernan reckon that after the dust settles, benign fundamentals and attractive valuations should set the market back on its upward track.

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    Gavekal Dragonomics

    Mixed Consequences From The Profit Boom

    2017 was a great year for China’s industrial sector, with profits up 21%, but the gains were highly concentrated in mining, metals and materials. This pattern has a mix of important consequences, as Thomas explains in this piece: it’s good news for financial risk, less good news for households, and bad news for corporate investment.

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    Gavekal Dragonomics

    The Working-Capital Heist

    Amid the ups and downs of China's recent investment cycles, one trend has stayed constant: the slowdown in private-sector investment. In this piece, Thomas shows that a key problem is state firms routinely delaying payments to their private suppliers, forcing them to hold huge reserves of working capital that can’t be productively invested.

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    Gavekal Dragonomics

    The Deleveraging Progress Report

    Can China manage corporate deleveraging without a credit crunch? Leverage ratios improved in 2015 and 2016, but progress has been more mixed in 2017, as companies borrowed more but raised less new equity. In 2018, Thomas expects stable or modestly deteriorating leverage ratios, with slowing growth somewhat offset by recovering equity issuance.

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    Gavekal Dragonomics

    From Tianjin, Affordable Luxuries

    The surging population of affluent Chinese households is a key global market for all kinds of luxury goods. Foreign brands have done well in this boom, but the market is getting more competitive as local firms up their game. Thomas and Ernan report from Tianjin on two very different companies that are both succeeding in high-end niche markets.

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    Gavekal Dragonomics

    Unmixing The Signals Of The Industrial Cycle

    China’s business cycle indicators are sending mixed signals in 2017: PMI surveys show a steady acceleration, even though housing is cooling, while the official indicator of industrial value-added has been strangely volatile. In this piece, we clear up the confusion, and show that industry is indeed tracking the gradual slowdown in construction.

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    Gavekal Dragonomics

    The Expanding Universe Of Private Companies

    In 2017, China is on track to host a record-setting number of IPOs, mostly by private firms. Big state firms may still dominate stock market indexes, but they are no longer the only option for investors. The number of Chinese private firms large and liquid enough to be of interest to investors is ten times larger than it was just five years ago.

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    Gavekal Dragonomics

    The New Economy Takes The Baton

    Second-quarter earnings for Chinese listed companies showed heavy industry still enjoying strong profit growth, but the more important trend is the consistent rise in profits in the “new economy.” As industrial reflation gradually cools, Thomas argues, these consumer, healthcare, and technology firms are set to outperform.

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    Gavekal Dragonomics

    The China Inc. Annual Report 2017

    This chartbook outlines the recent core trends in China’s corporate sector. There has been a major rebound in revenues and profits, but most firms are using this to repair balance sheets rather than boost capex. So leverage is down and debt servicing ability is up. But the profit cycle is now likely at its peak, as is firms’ ability to deleverage.

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    Gavekal Dragonomics

    Profits Heading Down But Not Out

    The profits of China’s industrial sector handily beat expectations in the first half of 2017, rising 22% YoY. In this piece, Thomas surveys the profit cycle’s path over the next 12 months, which mirrors that for the overall economy: a slowdown in the rest of 2017 and into 2018, but quite a gradual one with little risk of a profit recession.

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