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    Gavekal Research

    China: Still Off Course

    We began 2016 thinking that China’s policymakers had learned some lessons from last year; obviously, last week’s mayhem proved us wrong. But the real problem with the missteps on the currency and the stock market is not that collapse is imminent. Rather, it is that the leadership is not setting a clear course toward a more market-driven economy.

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    Gavekal Research

    The Day One Carnage

    “Well, that was an oddly timed report,” one of our long-suffering clients remarked yesterday, with justice. Right after we pressed send on our outlook for the year ahead, assuring readers that China fears and commodity prices would not play as big a role in markets in 2016 as they did last year, the Shanghai index collapsed by -7%, and oil prices had a volatile ride thanks to growing tensions between Iran and Saudi Arabia. Have we been proved...

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    Gavekal Research

    Forget About Oil And China, Look To The US In 2016

    On the whole, 2015 was a year for investors to forget. US bond and equity prices were both flat, equity gains in Europe were mostly wiped out (for US dollar investors) by the fall of the euro, and commodity plays and high-yield issues crumbled. China sparked a brief panic after a clumsy intervention to cushion a stock-market collapse and an unexpected currency devaluation, but by the end of the year the Shanghai index was still up nearly 5% in...

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    Gavekal Research

    New Economic Realities

    As we close the book on 2015, it is worth sifting through our research to find the patterns that are likely to influence events in 2016 and beyond. Three stand out.

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    Gavekal Research

    The Clash Over Fossil Fuels

    Over the weekend in Paris, the leaders of 195 nations announced a landmark deal to address climate change that its more optimistic supporters say heralds “the end of the fossil fuel era.” But both market action and many government policies point in the opposite direction. Crude oil prices continue to tumble towards the US$30 mark, and coal prices have also collapsed—both moves that reflect abundant global supplies of fossil fuels. The Paris...

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    Gavekal Research

    China’s New Exchange Rate Policy

    It looks, at long last, as if China is serious about having a largely market-driven exchange rate. After Tuesday’s surprise move, which saw the People’s Bank of China push the daily fixing of the renminbi against the US dollar down by -1.9% and declare that future fixings would be determined by the previous day’s closing spot rate, the central bank followed through today. Wednesday’s fixing, at CNY6.33, closely matched the prior day’s close, and...

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    Gavekal Research

    Thinking Big About China

    There are two big facts about China today. One: its economy is slowing, and will almost certainly continue to do so for the next couple of years. Two: under its forceful president Xi Jinping, it is making a big push on many fronts to increase its influence around the world. The question is which of these facts deserves more attention.

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    Gavekal Dragonomics

    China: More Pain Than Gain

    China is in for a rough year. The economy is in its most fragile state since 1998, at the nadir of the Asian financial crisis. Gross domestic product grew at an annualized rate of just 6.1% in the last quarter of 2014, and most key indicators suggest that the first half of 2015 is unlikely to be much better. Industrial profits are weakening sharply, which is likely to dampen wage growth and consumption—the two bright spots over the last couple...

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    Gavekal Research

    The Inexorable Decline Of China's Housing Market

    Since the turn of the century, China’s booming housing market has been one of the most important drivers of the global economy. Between 2000 and 2013, annual housing completions tripled. Largely because of the demand from housing and related infrastructure, Chinese steel use quadrupled. Prices of iron ore and many other commodities soared.

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    Gavekal Research

    Europe: A Republic Of Voices

    Another year, another eurozone crisis. Perhaps crisis is too strong a word, but the economic news from Europe over the summer has been consistently disappointing. In his speech at the Jackson Hole central bank conference a couple of weeks ago, European Central Bank chief Mario Draghi sounded the alarm, demanding that European governments adopt more active fiscal policies to push up aggregate demand and boost growth. His call stoked expectations...

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    Gavekal Research

    Beijing's Misguided Antitrust Game

    Is Xi Jinping’s China friendly to private enterprise? The answer seems to be yes, if you are a Chinese private company, and no if you’re a foreign one.

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    Gavekal Research

    Breaking The Bad News Cycle

    Alarm bells have been ringing over China for a while, and there have been plenty of Quasimodos to sound them. With a poorly-understood “shadow financing” system that accounts for 20% of total credit, an overbuilt real estate market, deficit-ridden local governments and under-capitalized banks, China’s financial system has been looking shaky. Financial stress, along with the relative tightness of central bank policy since last May, helps explain...

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    Gavekal Research

    No, The Renminbi Is Not Tanking

    Markets were taken off-guard by a sudden depreciation of the renminbi in the past week. Are we seeing the end of the era of RMB appreciation against the dollar, as some analysts now argue? Or are we simply seeing a move engineered by the People’s Bank of China (PBC) to take the edge off speculative inflows driven by the perception that the renminbi was a one-way bet? The second explanation is obviously the right one.

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    Gavekal Research

    EM Carnage: Is It All China's Fault?

    With emerging markets in free-fall, it is worth considering how much of the damage results from China’s continuing monetary tightening and investment slowdown. After all, much of the last decade’s EM boom came from commodity exports to resource-hungry China. So now that China seems determined to crack down on credit growth and stem the tide of infrastructure spending, it seems logical that emerging markets should suffer. And if Chinese...

    1
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    Gavekal Research

    The Sun Hasn't Set On Asia

    People in markets, nervous folks, always need something to worry about. In 2012 the big anxiety was whether Europe would fall apart; in 2013 it was whether the Federal Reserve would start cutting back on its asset purchases. Now that Europe has crept from despair to stagnation and the Fed has anchored expectations that it will steadily reduce its asset buying while holding rates near zero, the anxiety-vane is likely to spin towards Asia.

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    Gavekal Research

    Xi's China Flexes Its Muscles

    Having celebrated Chinese leader Xi Jinping’s bold economic reform agenda, we must now take stock of a less appealing element of the new regime: a more determined and muscular effort to throw China’s weight around Asia. Beijing’s declaration on Saturday of a new “air defense identification zone” (ADIZ) covering a huge swathe of the East China Sea and including the disputed Senkaku Islands, came as an unwelcome surprise to Japan and the United...

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    Gavekal Research

    How Can Chinese Assets Boom?

    Some clients have taken us to task for translating our positive call on China’s economic reform agenda into a positive call on Chinese risk assets. Over the next year or two, structural reform means slashing broad credit growth from the current 19% down to the very low teens, accepting a lower GDP growth rate, and reining in the excesses that have pumped up the property market, construction and materials demand. Even if we accept that all these...

    1
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    Gavekal Research

    China Changes Course

    China has turned around. The reform plan unveiled by Communist Party chief Xi Jinping last Friday represents a decisive shift away from the increasingly statist policies of the previous government, and towards a far more market-oriented organization of China’s economy. Worries about whether Xi is strong enough to impose his reformist vision over entrenched opposition from state owned enterprises and local governments will soon disappear. All...

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    Gavekal Dragonomics

    Time To Stop Worrying About Shibor

    Once again all eyes are on the China interbank market, as a modest spike in rates has raised fears of monetary tightening in what is still by a wide margin the world’s fastest growing major economy. We have three things to say on this subject.

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    Gavekal Research

    A Big Purge In China?

    This morning the South China Morning Post, Hong Kong’s English-language daily, reported that the Communist Party has launched a corruption investigation against Zhou Yongkang, a recently retired member of China’s top leadership body and a patron of Bo Xilai, the senior official who recently stood trial for corruption and will probably be handed a lengthy prison sentence. If confirmed, it is huge news, because it would show China’s new president...

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