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    Gavekal Dragonomics

    After The Summer Of Discontent

    The poor economic indicators for August make it obvious why China’s government got ahead of the data release and signal renewed support for growth in early September. That means more incremental policy measures are coming, which will help sentiment. And the drag on growth from the auto sector should also reverse toward the end of 2019.

    0
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    Gavekal Research

    Beijing's Conflicted Easing

    As prospects for a quick resolution of the US-China trade conflict fade, and the data continue to soften, expectations for Chinese growth are getting marked down. As if on cue, the government has sent signals of more decisive policy support for growth. While encouraging, this does not presage a shift in China's macro policy of "selective" easing.

    3
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    Gavekal Dragonomics

    The Dimensions Of Decoupling

    Whatever happens next in the US-China trade conflict, it’s clear that ties between the two nations have undergone a fundamental reset. Some “decoupling” will definitely occur as a result, and indeed has already begun. In this chartbook, Andrew and Lance explore how US-China decoupling could play out in flows of goods, money, people and ideas.

    0
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    Gavekal Research

    Beijing Toughs It Out

    After a month of further escalation in the US-China trade war, China’s strategy for the next stage of the dispute is becoming clear. Its leadership now looks committed to a strategy of toughing out trade tensions. This means the prospect of a US-China trade deal is receding, and therefore that global growth will face further headwinds.

    0
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    Gavekal Dragonomics

    Read My Lips: No Housing Stimulus

    The world’s major economies are seemingly united on the need for a fresh round of stimulus—except for China. And hopes for a more aggressive approach were dashed by the latest Politburo meeting, which declared that China would not boost the housing market to revive growth. In this piece, Andrew explains what’s behind China’s policy stance.

    0
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    Gavekal Dragonomics

    The Fallout From Baoshang Bank

    The takeover of Baoshang Bank in May was China’s biggest bank failure in at least a decade. But the People’s Bank of China managed the ensuing market jitters well, once again proving itself to be an effective financial firefighter. Still, Baoshang’s failure does confirm that the era of rapid, unregulated growth for China’s smaller banks is over.

    1
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    Gavekal Dragonomics

    Two Cheers For Unbalanced Growth

    China’s economy ended the second quarter on a high note, with industry and exports doing better than expected in June. The data reassured markets that the government’s macro policy stance—which has been quite conservative—is justified. But as Andrew argues in this piece, growth is being driven mainly by property, and can slow further.

    0
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    Gavekal Research

    Rebalancing Won't Rescue China

    As China hunkers down for an extended trade conflict with the US, it is sending reassuring signals about its ability to withstand the pressure. Officials argue the economy has “rebalanced” away from external to domestic demand, so it is less vulnerable. In this piece, Andrew explains how this misreads the role of exports in longer-term growth.

    4
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    Gavekal Dragonomics

    Who Wants A New Long March?

    Since the collapse of the US-China trade talks, the public position of both sides has hardened. Top leader Xi Jinping’s call for a “new Long March” was widely taken as a sign he is ready for a protracted standoff with the US. But support for such a stance is not universal, as the surprising public comments of Huawei chairman Ren Zhengfei suggest.

    4
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    Gavekal Dragonomics

    Stabilization At Risk

    China’s economic data for April came in rather worse than the too-good-to-be-true indicators for March. As Andrew explains in this report, the April figures do not actually show a serious deterioration, and property is still holding up. But the stabilization in growth is now under threat from a more protracted trade conflict with the US.

    0
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    Gavekal Dragonomics

    Xi's Pivot To The Private Sector

    The improved economic outlook for China in 2019 owes a lot to an effective stimulus and progress toward a trade deal. But it has also been driven by top leader Xi Jinping’s surprising political pivot from champion of state enterprises to patron of the private sector. In this piece, Andrew examines how sincere Xi’s new stance will prove to be.

    0
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    Gavekal Dragonomics

    That Wasn't So Bad, Actually

    China watchers have been bracing themselves for some ugly economic indicators in January and February. Yet the first official data for 2019 were not actually that bad. As Andrew explains, the economy is clearly slowing, but it’s not going into an uncontrolled dive. The government’s moderate policy response is thus still on track to steady growth.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call March 2019

    In this research conference call, Andrew Batson and Chen Long discussed the improving outlook for the Chinese economy in 2019 and the implications for financial markets. Confirmation that the government is both willing and able to support growth has ignited an equity rally, while expectations of further easing measures still support bonds.

    0
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    Gavekal Research

    Stability, Beijing-Style

    After a decade of rapid growth in debt, China’s government claims to be pursuing a different course. At this year’s legislative session, leaders dialed back growth targets, and pledged to control leverage and instead use fiscal policy to steady growth. Neither pledge can be taken at face value: growth will stabilize this year, but leverage will expand.

    0
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    Gavekal Dragonomics

    Still Waiting For Stimulus

    At the moment it seems there is only one question about China that people care about: when will the government move more aggressively to stimulate growth? With most economic indicators slowing in September, the time when the government will need to change course is getting closer. But, as Andrew explains in this piece, it is not here yet.

    2
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    Gavekal Dragonomics

    The Economy On The Eve Of Trade War

    The number eight is traditionally a lucky number for Chinese. Exporters could be forgiven for not believing in that tradition: 2018 looks like it will join 1998 and 2008 as a year in which exports suffer a major shock. In this piece, Andrew evaluates the state of the economy as the US prepares more tariffs, and how China can manage the impact.

    0
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    Gavekal Dragonomics

    Don't Fixate On Fixed-Asset Investment

    If you believe China’s official statistics on fixed-asset investment, then capital spending is now collapsing across the country. But you probably shouldn’t believe those numbers, for reasons that Andrew explains in this piece. True growth in investment spending will slow in 2018, but much less catastrophically than the headline data suggest.

    2
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    Gavekal Dragonomics

    The End Of Normal Trade

    The US may have backed down from imposing new restrictions on Chinese investment in the US. But it would be wrong to see this as a de-escalation of the US-China trade conflict. In this piece, Andrew argues that the tariffs taking effect Friday will mark the end of two decades of normal US trade with China, and the return of political uncertainty.

    0
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    Gavekal Dragonomics

    China Comes Off The Boil

    Chinese growth surprised on the upside in the early part of the year, but Andrew thinks that a gradual loss of altitude is now unfolding. This is mainly due to slowing property market activity, which increasingly displays late-cycle characteristics. This adjustment should not pose a major risk to other major economies, so long as other global factors do not become disruptive.

    2
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    Gavekal Dragonomics

    Seizing The Moment For Artificial Intelligence

    As the US and China try to position themselves for technological leadership, both are now focusing on artificial intelligence. In this piece, Andrew answers the questions of the moment: What is artificial intelligence anyway? Why does China seem to be doing so well in artificial intelligence? And how should we think about this US-China rivalry?

    1
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    Gavekal Dragonomics

    Keeping Credit Growth On Track

    China’s central bank has tweaked monetary policy to soften the slowdown in credit growth. The RRR cut continues its strategy of managing liquidity to limit the economic impact of the campaign against financial risk. Other data for March still point to a moderate growth slowdown in 2018, particularly given the continued strength in property.

    0
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    Gavekal Dragonomics

    Trade Wars: A China Expert Roundtable

    Last week’s sharp equity market sell-off followed the US effectively threatening China with a trade war. In this report, Arthur, Long and Andrew address China’s capacity to strike back and explore what it means for the relationship between the world’s two biggest economies.

    1
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    Gavekal Dragonomics

    Cold Weather, Hot Data

    China’s first data release of 2018 delivered a couple of surprises, with a big jump in industrial value-added and a pickup in real-estate investment. But neither amounts to a convincing signal that the economy is actually re-accelerating. The most likely outcome is still a moderate growth slowdown driven by a shallow downcycle in property.

    2
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    Gavekal Dragonomics

    The Meaning Of ‘High-Quality’ Growth

    According to Xi Jinping, China’s high-speed growth is over, and it is pursuing “high-quality” growth instead. With today’s publication of official targets for 2018, the real impact of that rhetorical change is getting clearer. In practice, the focus on “quality” will not end pressure to deliver economic growth, nor reduce government intervention.

    0
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    Gavekal Dragonomics

    Reviewing The Risks For 2018

    After a solid performance in 2017, worries about China have broadly receded, and our view is that 2018 should see continuity in economic policy and only a moderate slowdown in growth. In this piece, Andrew assesses the state of four major risks to this sanguine outlook, based on the latest economic data and a flurry of recent policy statements.

    0
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    Gavekal Dragonomics

    The Reconstruction Of The Administrative State

    The clear message from the Communist Party Congress is that Xi Jinping has political primacy for the foreseeable future. But what does Xi want to do with all his power? In this piece, Andrew summarizes three of the more concrete policy trends Xi signaled at the Congress. Behind all three is a drive to strengthen the apparatus of the Party-state.

    0
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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.

    1
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    Gavekal Dragonomics

    The Housing Slowdown Stays Contained

    China’s housing downturn is here: September data showed nationwide property sales declining for the first time since 2015. But the government’s attempt to cool sales and prices while limiting the impact on the real economy is working. While growth will certainly slow further, this manageable slowdown will not require policy to loosen anytime soon.

    0
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    Gavekal Research

    The New Era Of Chinese Socialism

    In his first term, Xi Jinping has been nothing if not ambitious. So it is not surprising that, in a speech to mark the start of his second term, he announced a series of ambitious goals. It is more surprising that, in Xi’s “new era” of Chinese socialism, the pursuit of national greatness will no longer be centered around economic growth.

    2
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    Gavekal Dragonomics

    Straight On Through The Party Congress

    China’s economic data for August confirmed that growth has stepped down a bit in the third quarter. The long-anticipated slowdown is for real, but is also still quite gradual. Andrew argues that policymakers will be comfortable with this situation, and that we should not expect a big change of direction after the Party Congress in October.

    0
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    Gavekal Dragonomics

    Taking Stock Of The Investment Cycle

    Investment drives China’s growth, but the state of the investment cycle is now being obscured rather than revealed by the most closely followed indicator of capital spending, fixed-asset investment. In this piece, Andrew updates his model of monthly real growth in gross fixed capital formation, and draws three conclusions from its signals.

    0
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    Gavekal Dragonomics

    The Regional Bottom Line For Growth

    China’s 2016 stimulus likely provided enough momentum to ensure GDP growth in 2017 will meet the 6.5% target. But on closer examination the stimulus looks as much a rescue operation for troubled regions as a shift in national policy. This interpretation implies that the political drivers of Chinese policymaking are different from what most commentators believe.

    0
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    Gavekal Research

    What Is The Signal In The Renminbi’s Surprising Strength?

    Over the past week and a half, the renminbi has appreciated 1.1% against the US dollar in the onshore market, and 1.5% offshore, where the PBOC has also engineered a spike in short-term interest rates. It seems China wants to send a signal about the renminbi, but markets are having trouble decoding what it is. Andrew outlines three possible strategies the central bank may be following.

    0
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    Gavekal Dragonomics

    Regulatory Stress Is Still Bearable

    The main source of uncertainty in the Chinese economy right now is the financial crackdown launched in March. In this piece, Andrew looks at the April data and finds that the regulatory campaign’s impact has so far been contained. This supports our call that the regulatory stress is a bigger problem for asset markets than for the real economy.

    0
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    Gavekal Dragonomics

    Cyclically Fine, Structurally, Well...

    Optimism about China’s growth is now higher than it has been for years, after the notable recovery in the last couple of quarters. But in this piece, Andrew argues China still can’t escape a further growth slowdown, because its continued reliance on state-driven investment is sapping productivity growth and undermining the private sector.

    0
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    Gavekal Dragonomics

    Equity Is The New Debt

    China’s free-spending local governments have a new way to get money. Raising equity, not just debt, is how many localities are financing the current wave of infrastructure and industrial projects. In this piece, we explain how a new model of government-led funds began as a replacement for local borrowing, but ending up only adding to liabilities.

    0
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    Gavekal Dragonomics

    The State Of The State Sector

    After forty years of market reforms, state-owned enterprises retain an exceptionally large role in China’s economy. Though their financial performance is deteriorating and their debts are growing, SOEs’ share of the economy is rising rather than falling. In this chartbook, Andrew pulls together the data to show the true state of China’s SOEs.

    2
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    Gavekal Dragonomics

    The Ghost Of A Communist Past

    Despite what Beijing thinks, political liberalization wasn’t what brought down the USSR. The economy did. Andrew Batson reviews Chris Miller's The Struggle to Save the Soviet Economy.

    0
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    Gavekal Dragonomics

    CEQ: Healthcare—Crisis Or Opportunity?

    China’s growing economy has brought its people longer lives, but also a new set of health problems. Though the government is trying to improve coverage, change is happening slowly. So there is a growing opportunity for private companies to fill the gap. This issue of China Economic Quarterly investigates the nation’s health problems, and solutions.

    0
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    Gavekal Dragonomics

    Fiscal Stimulus? What Fiscal Stimulus?

    China’s latest budget report reinforces its recent shift toward marginally dialing back economic stimulus. In 2016, the finance ministry raised the deficit to 3% of GDP from 2.4% in 2015; for 2017, it is standing pat, targeting a 3% deficit again. Less publicized but more relevant is the fact that off-budget public works spending is also slowing.

    0
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    Gavekal Research

    Is China Ready For A Trade Shock From Trump?

    China reported an acceleration in its economic growth on Friday, just hours before Donald Trump was sworn in as US president. But growth could take a hit if Trump makes radical changes to tax and trade policy. And while China has plenty of weapons to fight a trade war, those measures are unlikely to completely offset a sudden shock to its exports.

    3
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    Gavekal Dragonomics

    Five Macro Questions For 2017

    For our first China research piece of the new year, we offer a guide to the economic outlook in the form of short answers to some big questions: Will China be as boring as consensus forecast imply? Will the central bank hike interest rates? Will the housing market correct sharply? Will it be a good year for Chinese equities? Will the labor market hold up?

    7
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    Gavekal Dragonomics

    The Risk Avoidance Strategy

    China’s economy has turned in another slate of decent growth data for October. The three drivers of loose credit, recovering construction, and rising commodity prices that have supported the economy are still holding firm. But Andrew cautions that the government’s objective is not exactly growth at all costs, but rather avoiding downside risks.

    0
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    Gavekal Dragonomics

    Andrew Batson: What Next For Chinese Growth?

    Chinese policymakers are set on maintaining economic stability ahead of a crucial Communist Party meeting next year—but while that means stabilizing growth it also means pushing back against a property bubble. In this video interview, Andrew assesses the tactical trade-offs that must be made in support of the strategy of stability.

    0
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    Gavekal Dragonomics

    The Three Pillars Of Stability

    China has now delivered real GDP growth of 6.7% three quarters in a row—a stability that is uncanny even by its standards. Such stability is even more prized than usual by the government, now preoccupied with next year’s Communist Party Congress. In this piece Andrew assesses how much longer the three pillars supporting this stability can hold up.

    0
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    Gavekal Dragonomics

    The Equality Engine Is Stalling

    For all its leaders’ talk of a “new normal,” China has not weaned itself off the “old normal” of housing and investment-led growth. That model was in fact a powerful engine for reducing regional inequality, so it has much political support. The engine has now stalled—but rather than swap in a new one, the government keeps revving the old one.

    0
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    Gavekal Dragonomics

    Is Internet Growth Really Slowing Down?

    Often overlooked in the hype around China’s internet boom is the downturn in some key indicators: growth in internet users and in online retail has slowed. How to reconcile this with an apparently thriving internet economy—can the internet’s growth really be slowing down? The answer is yes, and no; it’s how the internet is growing that’s changing.

    0
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    Gavekal Dragonomics

    The Holding Pattern

    Market worries about China have gone very quiet lately—and this is no accident. In this presentation, Andrew argues that China is in a holding pattern of steady growth and cautious policy ahead of the 2017 Party Congress. While China probably won’t be forced out of the holding pattern, financial stress and structural problems continue to build.

    0
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    Gavekal Research

    What Happens When Growth Disappoints Again?

    The panic over China’s currency in early 2016 feels like ancient history. Since then, worries about the economy have largely receded from market concerns. But China’s business cycle peaked in the first half of the year, is now clearly slowing and will likely fail to reach its growth target in early 2017. How will the world react when this happens?

    0
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    Gavekal Dragonomics

    A Better Indicator Of Investment

    Growth in fixed-asset investment is now the lowest it has been in the 12-year history of the data. But FAI is a very messy indicator, and increasingly inconsistent with the national accounts. Out of frustration, I have built a simple model to track investment growth in national-accounts terms—gross fixed capital formation—on a monthly basis.

    4
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    Gavekal Research

    The Growth Trade-Off Gets Harder

    China’s better-than-expected economic data for the second quarter underscore just how effective a jolt of stimulus to housing and construction can be. But housing is already cooling, and the rest of the economy will soon follow suit. The froth in housing prices will continue to limit the government’s ability to pump up growth to meet its targets.

    0
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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 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

    Capex Lacks All Conviction

    China’s latest debt-driven stimulus has stabilized growth, but the benefits have been narrow: outside infrastructure and real estate, private investment has not picked up at all. Total investment growth will be higher in 2016, but a renewed slowdown of capital spending in 2017 is very likely, as companies adjust to the end of the housing boom.

    0
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    Gavekal Dragonomics

    The Risk In The Service Sector's Rise

    The rising share of services in China’s GDP is often touted as a positive change to a more sustainable structure. But this change is less positive than it appears, since the fastest-growing part of the service sector in recent years has been finance. The rapid financialization of the economy is a process that increases rather than reduces risk.

    0
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    Gavekal Dragonomics

    The Glory Days For Affluent Consumers

    While China’s economy is slowing, growth in some consumer markets is booming. The cause is what we call the “acceleration phenomenon” of rapid growth in affluent households, which is driving surging sales of goods and services they favor. The flipside of the affluent growth story, however, is that more mass-market consumer goods are slowing down.

    0
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    Gavekal Dragonomics

    The Jaws Begin To Close

    China’s growth divergence in 2015 was dramatic. But that divergence is narrowing in 2016, with industry picking up as services slow. While markets have welcomed the stabilization, it’s largely the result of short-term stimulus—and it’s also becoming harder to tell a positive story about the “good” growth drivers of services and consumption.

    1
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    Gavekal Research

    From Black Hole To Muddling-Through

    Over the past few months, sentiment towards China has shifted dramatically. Fears that China was a black hole at the heart of the global financial system have morphed into mild optimism, as growth indicators have stabilized. There remain plenty of longer-term problems, but muddling through rather than collapse is the likely scenario for 2016.

    4
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    Gavekal Research

    The Gavekal Monthly: The Dollar Weakens; Time To Buy Jewels?

    The big change over the last month is that the US dollar is now falling on a year-on-year basis. This weakness reflects a more abundant international supply of dollars as the US trade balance, ex-China and ex-oil, has swung back into the red after six years in surplus. In this edition of The Gavekal Monthly, Louis outlines why, in such a plentiful-dollar environment, investors should consider prioritizing “jewels” over “tools”.

    0
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    Gavekal Research

    The China Factor In The Fed’s Equation

    Janet Yellen yesterday confirmed that uncertainty over the global outlook was why the Federal Reserve scaled back expected interest rate hikes. But just what happened in the world to change her mind? Rather than slightly weaker global growth prospects, market turbulence is the more likely culprit—in particular the stress over China’s currency.

    0
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    Gavekal Dragonomics

    No Worries From China's Rebalancing?

    For a country that gained so much from China’s commodity boom, Australia seems quite sanguine about the bust. Mining investment may be falling, but optimism on tourism is rising. So has Australia already switched from the old commodity-driven to the new consumer-driven China? And will this rebalancing also be painless for the rest of the world?

    0
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    Gavekal Dragonomics

    Five Trends From The Five-Year Plan

    What to make of China’s five-year plan? The 13th and most recent plan has lost some uniqueness: it is now just one of Xi Jinping’s many long-term plans, strategies and initiatives. So figuring out what is new and important can be even more challenging. To cut through the clutter, we highlight five important trends for next five years.

    5
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    Gavekal Dragonomics

    A Turn Too Soon

    The biggest surprise in China’s latest data was the rally in property: housing sales surged and real estate investment picked up in the first two months of 2016. But this improvement is unlikely to be sustained: the turn in property has come far earlier than fundamentals warrant, and suggests the government does not have a firm grip on the market.

    2
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    Gavekal Dragonomics

    Papering Over The Credibility Gap

    The aura of technocratic competence that once surrounded China’s leadership is tarnished these days. A recent burst of transparency from top officials has not done much to change that. The bigger problem is that the government has locked itself into a growth target that is not credible, which makes all economic policy less credible.

    0
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    Gavekal Research

    Is It Supply Side Or Demand Side?

    The signals from Chinese policymakers are mixed. In recent months official rhetoric has taken a harsh turn, with praise for deleveraging and calls for money-losing “zombie” companies to be shut down. At the same time, officials are promising yet more infrastructure spending, and new data show a record surge in bank loans in January. So which is it?

    0
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    Gavekal Research

    Why Is Yen Weakness ‘Good’ But Renminbi Weakness ‘Bad’?

    When the yen falls, global markets think it is A Good Thing, and risk appetite increases. But market moves early in January demonstrated that the opposite applies to China: when the renminbi falls, markets think that is A Bad Thing, and risk appetite vanishes. So why do investors like a weak yen but fear a weak renminbi?

    1
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    Gavekal Dragonomics

    Two Speeds, Both Slower

    China’s “two-speed” economy coasted to a moderate slowdown in 2015, with rapid gains in services helping offset a downturn in industry. But industry will worsen further in 2016, and the recent strength in services will prove to be cyclical. We think this slowdown will be gradual, but are watching risks in the financial sector and the job market.

    0
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    Gavekal Dragonomics

    Five Macro Questions For 2016

    For our first China research piece of the new year, we offer a guide to the economic outlook in the form of short answers to some big questions: Will China derail the global economy? Will the government step up policy easing? Will housing prices collapse? Will industrial profits recover? Will troubled companies lay off more workers?

    3
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    Gavekal Research

    The Cure For Low Prices Is Low Prices

    What is the latest rout in commodity prices telling us? Certainly, China’s demand for many commodities is weak—but everyone knows this. The most important signal is rather on the supply side: low prices are finally pushing commodity producers to cut output. It is this restructuring that will eventually bring stability to commodity prices.

    0
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    Gavekal Dragonomics

    Breaking Down The Services Cycle

    With China’s industrial sector in a deep slowdown, the services sector has been generating most of the good economic news in 2015. But there is no economic law that makes services immune to the business cycle. Services have their own ups and downs, and while that cycle has helped growth this year, it will provide less of a boost in 2016.

    1
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    Gavekal Dragonomics

    Dead Cat Bounce Or Tiger’s Leap?

    With China’s stock market and currency both up from their lows, the “stabilization trade” looks to be firmly in effect. But while this stabilization is definitely warranted, it is mostly markets correcting their over-reaction to the August currency move. It has little to do with any broader stabilization of the real economy, which is still weak.

    5
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    Gavekal Dragonomics

    A Plan For Less Planning?

    China’s leaders have launched their next five-year plan with a big step back from planning, at least of the family variety: henceforth all couples will be allowed to have two children. This is a good thing. But we’re not so sure it is a sign of the “decisive” move away from central planning and toward market mechanisms that reformers have promised.

    0
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    Gavekal Dragonomics

    Hong Kong Seminar: Housing Explains Everything

    What is the best way to sort through the complexities of China’s enormous, continent-sized economy? In this presentation to our seminar in Hong Kong, Andrew argues that if you understand what’s going on in the housing market, then you know pretty much everything you need to know about the Chinese economy.

    0
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    Gavekal Dragonomics

    A Rough Road For Retailers

    Chinese consumers spent plenty of money over the national holiday this month—but growth in retail sales has clearly slowed along with the rest of the economy. On top of this slowdown, structural changes in shopping patterns are wreaking havoc with traditional retailers, who increasingly struggle to benefit from the bright spots in consumption.

    0
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    Gavekal Research

    Can Stimulus Save China?

    Last week the International Monetary Fund confirmed its forecast that China’s growth will slow to 6.3% next year—the weakest rate since 1990, in the aftermath of Beijing’s suppression of the Tiananmen Square protests. In an attempt to counter this slowdown, in recent months the government has rolled out a series of measures designed to stimulate demand. It has cut interest rates, reduced bank reserve requirements, released funds for...

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    The Stimulus Question: Not When But How

    With China’s growth heading below the government’s 7% target, policymakers are once again rolling out supportive measures. But will yet more stimulus be enough to arrest the slide in growth and turn around sentiment? In this piece, Andrew explores the potential impact from two conventional and two unconventional options for further stimulus.

    0
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    Gavekal Research

    The Gavekal Monthly: More Questions Than Answers

    With the Fed having put its rate hike decision on hold, investors face an uncertain environment of weak global growth and inflation, tottering emerging markets and continued worries about China. In this edition of The Gavekal Monthly, Louis-Vincent Gave surveys the crucial questions investors must grapple with and identifies the indicators to monitor in the coming weeks. In addition, we highlight three calls from our analyst team: Joyce...

    0
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    Gavekal Dragonomics

    The Diverging Fortunes Of The Two Chinas

    One of the most important facts about China’s current slowdown is how unevenly distributed it is. There is a huge and growing gap between different sectors and provinces; in economic terms there are effectively “two Chinas.” Understanding this disparity is key to assessing China’s growth prospects, financial risks and global impact.

    0
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    Gavekal Dragonomics

    The Flailing State Of Enterprise Reform

    A decisive move on economic reform would be very helpful in demonstrating that China is still on the right track. Unfortunately the long-awaited plan for state-owned enterprise reform is not such a move. Instead it is an ungainly mishmash of bureaucratic compromises that sets no clear goals and is riven by internal contradictions.

    0
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    Gavekal Dragonomics

    Taking The Pulse Of The Construction Cycle

    China’s housing-driven industrial cycle is stuck in low gear, but has not worsened dramatically. What is getting worse are the parts of the economy that had been doing better earlier in the year: exports, consumer spending and finance. The result will be headline GDP growth that (finally) falls below 7% in the third quarter.

    0
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    Gavekal Dragonomics

    Debating The Data Denialists

    There are growing fears that China’s economic statistics are massively overstating growth, so rather than growing by 6-7%, China is now “really” growing by only 3-4%. These worries are overdone: Chinese statistics have problems, but they do provide a broadly accurate view of the growth trajectory.

    1
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    Gavekal Dragonomics

    The Nationalist Style Of Economic Reform

    China’s leaders are not far-sighted planners calmly executing a long-term strategy, but politicians responding to events and seizing opportunities. Economic reform in China is not going in reverse, but the nationalist shift in politics means reform is scattershot and opportunistic—and that creates risks and increases volatility.

    0
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    Gavekal Dragonomics

    What To Worry About, And What Not To In China

    The unexpected devaluation of the renminbi earlier this month focused international attention on the continuing slowdown in China and triggered increased worries about its problems. In this piece, we detail four areas where fears about economic fragility have been overstated, and four areas where investor concerns are justified.

    3
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    Gavekal Dragonomics

    Expect The Unexpected

    The last couple of months have caused whiplash for China-watchers: first, the government creates huge uncertainty by a massive intervention to prop up the stock market. Next, the government creates huge uncertainty by giving up much of its historic control over the exchange rate. So does the Chinese government love markets or hate them? It is hard to tell a consistent story either way (though that hasn’t stopped people from trying). The one...

    0
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    Gavekal Dragonomics

    The Infrastructure Conundrum

    Officials are once again promising to boost public works to support growth. But infrastructure spending is unlikely to accelerate sharply from its already rapid pace. With little pressure on existing infrastructure, it is harder to justify new rail and power projects. And projects that do get built will be at more risk of making poor returns.

    1
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    Gavekal Dragonomics

    China Update: Weak Imports Are No Mystery

    Something has happened to China’s demand for imports. In the first and second quarters, the country’s goods imports fell by about -15% year-on-year in nominal terms, even as real GDP grew 7%. Clearly some of the decline is due to the drop in prices of raw commodities, which are among China’s biggest imports. But WTO data shows China’s imports in volume terms were down -12% in 1Q, and preliminary figures point to continued volume declines in 2Q....

    0
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    Gavekal Research

    5C China: Weak Imports Are No Mystery

    Something has happened to China’s demand for imports. In the first and second quarters, the country’s goods imports fell by about -15% year-on-year in nominal terms, even as real GDP grew 7%. Clearly some of the decline is due to the drop in prices of raw commodities, which are among China’s biggest imports. But WTO data shows China’s imports in volume terms were down -12% in 1Q, and preliminary figures point to continued volume declines in 2Q....

    0
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    Gavekal Dragonomics

    Five Macro Questions For The Rest Of 2015

    1. Will economic reform make more progress? 2. Will interest rates keep falling? 3. With housing recovering, will construction also rebound? 4. Will investment growth stabilize? 5. Will deflation intensify?

    2
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    Gavekal Research

    5C China: Is Deflation’s Grip Really Easing?

    Over the past few years, China has experienced a huge deflationary shock: nominal GDP growth went from nearly 20% in 2010-11 to around 10% in 2012-13, stepped down further to 8% in 2014, and then reached 5.8% in the first quarter of 2015. So when can we expect this deflationary shock to be over?

    0
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    Gavekal Research

    What Lies Beneath

    As the rout in Chinese shares has deepened—and spread, hitting markets in Hong Kong and beyond—Beijing’s efforts to prop up domestic stock prices have only intensified. After an unprecedented package of market-support measures at the weekend failed to stem declines, even more unprecedented actions followed. On Wednesday, the central bank pledged to help maintain market stability, and Chinese stock regulators banned company officers and major...

    0
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    Gavekal Research

    5C China: Better Manufacturing, Not Just Bigger

    China’s status as the workshop of the world faces no serious challengers. Accounting for nearly 25% of global manufacturing value-added, it is by far the world’s largest single manufacturing economy. But the country’s leaders still seem discontented. China may have quantity, they fret, but it lacks quality. It is not enough for China to be a “big” manufacturer, they say, it must also be a “strong” one. With a spate of new industrial policies...

    0
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    Gavekal Dragonomics

    The Capital Spending Downshift

    Easier monetary policy and targeted stimulus may stabilize China’s economy, but anyone hoping for a rebound in capital spending growth is sure to be disappointed. Real gross fixed capital formation rose a meager 6.6% in 2014, the slowest pace since 1999 and far below the 15% average in 2002-11. It is likely that investment growth will fall a bit further this year. One reason is that even after rate cuts, China’s real cost of capital is still...

    0
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    Gavekal Research

    A Question Of When, Not If

    The cacophony emanating from China can be disorientating. On the one hand, China’s domestic stock markets are in the throes of a vigorous bull run. Locally-listed equities are up 140% in the last 12 months, with repeated government support measures and rising openness to international fund flows sustaining the momentum. On the other hand, China’s economic growth continues to slow, while the geopolitical drumbeat is increasingly daunting. With...

    0
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    Gavekal Dragonomics

    Making Sense Of China’s Reform Strategy

    Since coming to power in late 2012, Xi Jinping has delivered one surprise after another. Simple labels of reformer or conservative are an increasingly difficult fit. Instead, we should take Xi at his word: he is mainly a nationalist pursuing a dream of national revival.

    0
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    Gavekal Research

    5C China: No Mourning For The Death Of Outsourcing

    What is China doing about the loss of a big driver of export growth? Back in the days when total exports were growing at a 20%-plus annual rate, up to half of that growth came from the outsourcing of manufacturing assembly to China (we use processing trade, a customs arrangement used by many outsourcing factories, as a proxy). But the outsourcing boom of the 1990s and 2000s has faded lately. Since 2012, processing trade has essentially stopped...

    0
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    Gavekal Dragonomics

    The Short Tale Of Iron Ore's Long Fall

    Commodity prices boom when supply is slow to respond to surging demand, and collapse when supply finally catches up. The iron ore market is clearly in the second phase now, with global supply surging just as Chinese demand slows. In this piece we outline the fundamentals for iron ore, which mean that prices will remain lower for longer.

    0
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    London Seminar March 2015 - Anatole, François, Andrew & Charles

    We held our main spring seminar in London on March 17 with Anatole, François, Andrew and Charles offering their views of the global economic pulse and recent market and central bank developments.

    0
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    Gavekal Research

    Let's Watch That Movie Again

    The beginning of the year can be a sleepy time for China watchers, what with the short daylight hours, long holidays and a dearth of economic data releases. In this season, even the most earnest reader of tea leaves can be forgiven for dozing off for a bit. But if you fell asleep watching the China economy channel, you didn’t miss much: it was just playing reruns.

    0
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    Gavekal Research

    The New Normal Will Not Be 7% Growth

    How far have China’s famously growth-obsessed leaders really dialed back their growth expectations? We fear not quite enough. China has given up on pursuing 10% growth, but still wants to keep growth of at least 7%. We do not think this is possible, for at least three reasons: history, housing and leverage.

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