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    Gavekal Dragonomics

    The Culprits Behind The Housing Correction

    With this year’s correction in the Chinese housing market spreading, the search for the villain of the piece is on. Most market analysts were primed to expect problems in the numerous small, isolated cities that have overbuilt housing and are swimming in excess inventories. Both our own research and much other analysis has shown that smaller cities have serious problems, thanks to an unhappy combination of weak population growth and government-...

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    Gavekal Dragonomics

    A Supply-Side Correction In Property

    The supply side of China’s property market is looking surprisingly weak. Indicators of property developers’ desire to expand future housing supply are turning down: construction starts have fallen outright by more than 20% YoY for each of the first three months of 2014, and land purchases swung to a sharp 17% decline in March from slow growth in earlier months. This deterioration in the supply side looks out of proportion to the more gentle...

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    Gavekal Dragonomics

    The Ammunition Locker Looks Bare

    No sooner had Chinese Premier Li Keqiang declared his goal of 7.5% GDP growth this year than economic data began to undermine his chances of achieving it. The weak readings from most indicators for January and February point were much worse than expectations, and on our models are consistent with GDP growth of 7.2% for the first quarter of 2014—a sharp slowdown from the 7.7% pace in the fourth quarter of 2013. While we can reasonably expect the...

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    Gavekal Dragonomics

    Neither Boom Nor Bust For Housing

    The pattern has become all too predictable: when Chinese house prices rise, the media cries bubble. When prices slow, we are warned of a crash. In recent weeks the crash warnings have been piling up, as housing sales and price growth have decelerated. The more boring truth is that China’s housing market has its cyclical ups and downs. The year 2014 is shaping up to be cooler than the surprisingly torrid 2013. But collapse is not on the horizon,...

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    Gavekal Dragonomics

    What Will It Take To Clean Up Beijing's Smoggy Skies?

    With north China blanketed by soul-sapping smog for the past week, the disastrous state of the nation’s air is likely to be a top subject of corridor conversation at the upcoming National People’s Congress. Air quality is now a big enough concern for Chinese citizens that the government needs at least to seem like it is taking action against it (unless it decides to side with a much-mocked Rear Admiral who went on national television to praise...

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    Gavekal Dragonomics

    Riding The Rails To Reform

    Running railways in China has long been the prerogative of the state. But since mid-2013, officials from Premier Li Keqiang on down have been touting the opening of the rail sector to outside investors—a measure they say symbolizes a new environment favoring the private sector rather than state firms. On the face of it, this is an opportunity that private firms may not find very appealing: the Ministry of Railways could barely stay afloat...

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    Gavekal Dragonomics

    Fast Times In China's Financial Markets

    While most of the Western world was on holiday, the world of Chinese finance kept busy. The past three weeks brought the release of two comprehensive estimates of the nation’s debts (both claiming that the debt problem is far less scary than media reports suggest), another squeeze in money markets which saw short rates jump 100 bp, and a notice allowing local governments to roll over their massive short-term debt in 2014.

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    Gavekal Research

    5C China: Deleveraging vs Growth In 2014

    The big question in China for 2014 is how the tradeoff between deleveraging and growth plays out. Xi Jinping’s government has made clear its seriousness about getting China’s debt under control: the PBC has made deleveraging an explicit policy goal, short rates have risen by about 300bp to around 6% since April, and over the same span broad credit growth has decelerated by several percentage points although it remains well above the rate of...

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    Gavekal Dragonomics

    Tearing Down Mountains, Building Up Castles

    For buildings to go up, some buildings must also come down. As anyone who has walked down a city street in China can attest, the construction boom of the past decade was also accompanied by the destruction of many older buildings. But getting a handle on the precise scale of this activity has always been difficult. Our estimates based on census surveys suggest the volume of housing demolished over 2005-10 was much larger than we and other...

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    Gavekal Dragonomics

    China Economic Quarterly December 2013 - Internet Companies

    In the December issue of the China Economic Quarterly, we examine the state of the Chinese internet, with a focus on the Big Three internet companies: Alibaba, Tencent and Baidu. Despite continued government crackdowns on online discussion, China’s internet is booming: 600m people are online, including approximately 450m using mobile devices, and ecommerce may account for close to 10% of total retail sales in 2013. Nearly all this economic...

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    Gavekal Dragonomics

    CEQ Q4 2013 - Property

    Forecasting future construction volumes is a tricky business, as any calculation must be based on a number of different moving parts. One of those parts is the volume of demolition: the more shoddy old flats that are torn down, the greater the volume of construction needed to replace them. Over the past decade, demolitions proved a significant driver of construction demand, as millions of home owners demanded newer and better apartments. But...

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    Gavekal Dragonomics

    Property After The Plenum

    For ordinary Chinese, high housing prices remain one of their biggest concerns, and for economic analysts, the risk of a construction slowdown one of their biggest worries. For our part, we have argued that China’s housing market is moving into structural oversupply, after a decade of structural undersupply, and that significant adjustments are necessary. So it is surprising that the 60-point reform plan from the Communist Party’s Third Plenum,...

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    Gavekal Research

    5C China: Deleveraging With Chinese Characteristics

    The reform blueprint delivered by China’s leadership has eased some of the doubts about the direction the country is heading (see Xi Jinping Changes The Rules Of The Game). But the plan did not say much about how to manage the economy in the shorter term. And we have argued that for these longer-term reform plans to be successful, they need to be matched with tighter monetary policy and hard budget constraints on state firms and local...

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    Gavekal Dragonomics

    Less Than Meets The Eye

    As China’s growth readings improved over the last few months, Premier Li Keqiang was quick to claim that the recovery was achieved without wasteful government stimulus (see Stability Without Stimulus). In doing so he drew a clear if implicit contrast with the last administration, which presided over two rounds of infrastructure-focused stimulus plans. But is this contrast so stark as Premier Li would have us believe? After all, since June his...

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    Gavekal Dragonomics

    DragonWeek - Passing The Growth Baton

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    Gavekal Research

    5C China: Growth Is Stronger, Time To Step Up Reforms

    China’s third-quarter GDP came in at 7.8% YoY, the fastest pace this year. The main driver of the pickup was expectations. In the first six months, companies ran down inventories on the fear that the new leadership planned painful structural reforms, including further property market curbs and sharp monetary tightening. Then at a conference in July, Premier Li Keqiang, while eschewing a major stimulus, nevertheless offered assurances that growth...

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    Gavekal Dragonomics

    China Housing & Construction Review 2013

    China’s housing market is in transition. After a decade of severe under-supply of housing, the market is now flirting with over-supply thanks to a redoubling of construction volumes. Urbanization is continuing, but its place is likely to slow, and all cities will not benefit equally. Yet housing prices continue to rise, and the government continues to try to restrict many types of purchases. To understand how all these different trends fit...

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    Gavekal Research

    5C China: Investment Kicks The Construction Habit

    In sharp contrast to better than expected industrial output and export growth in August, residential construction is spluttering. Construction starts fell -20% YoY and were largely flat in the 3Q13 period. Sales growth for both apartments and development land also decelerated. Given the importance of property construction to overall Chinese investment spending, the weakness implies one of two things: either the recovery will be short lived, or...

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    Gavekal Dragonomics

    Hard Choices For Housing Policy

    China’s new leadership has tried for a fresh approach on many economic policies this year. But on the key issue of housing, they have opted for continuity. The so-called housing purchase restrictions, the key housing policy of the last administration, have been firmly in place since mid-2010. Applied in most major cities, these measures put penalties on new housing purchases by those households that already own a house. By limiting housing...

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    Gavekal Dragonomics

    CEQ Q3 2013 - Property

    After a thoroughly disappointing first half of the year, China’s government has been busily announcing targeted policies to shore up growth. One of the most important is a new program of slum renovation. This will start work on 3.04m units of new housing in the rest of 2013, and a total of 10m units by 2017. Given that new construction has been extremely weak so far this year, a renewed public-housing push has the potential to make a real...

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