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E.g., 27-09-2020
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    Gavekal Dragonomics

    A Booming Recovery

    China’s economic recovery continues to boom ahead, with retail sales turning positive and exports continuing to outperform. In this Quick Take, Thomas, Rosealea and Wei explain why this momentum is likely to continue for several more months but might dampen towards the end of the year as credit tightens and the property market is reined in.

    7
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    Gavekal Dragonomics

    Red Lines For Real Estate

    China’s central bank and housing ministry are putting together new restrictions on the leverage of major real-estate developers by drawing three “red lines” for the firms. In this report, Rosealea explains why regulators are targeting individual developers, as well as why she feels these red lines will have limited macro impact.

    2
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    Gavekal Dragonomics

    The Experiment With Sectoral Monetary Policy

    Central banks usually concern themselves with the economy in the aggregate. The People’s Bank of China is now experimenting with a disaggregated approach, minimizing changes in overall policy and instead directing the flow of credit to specific sectors. In this piece, Wei considers whether this experiment can work, and where rates are headed.

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    Gavekal Dragonomics

    Understanding Dual Circulation

    Top leader Xi Jinping is now promoting a new slogan—dubbed “dual circulation”—to manage China's significant dependencies on the global economy. In this report, Gilliam explains how this does not mean the country is turning inward, but rather trying to gain more control over its long-term growth without losing its role as an international hub.

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    Gavekal Dragonomics

    Another Leg Up For Growth

    After plateauing in Q2, China’s economic activity is stepping up in Q3, powered by demand in housing, infrastructure and exports, and a lessening drag in consumer services. In this Quick Take, Thomas, Rosealea and Wei explain how these factors will assist the country as it continues down its path back to economic normalcy.

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    Gavekal Dragonomics

    Construction’s Surprising Resilience

    After a robust recovery in construction following the Covid-19 lockdown, the big question now is whether this growth rate is sustainable. Using a rolling sum of construction starts, Rosealea posits that construction should slow only moderately in the second half, providing room for steel demand to continue growing for the rest of 2020.

    2
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    Gavekal Dragonomics

    The Marginal Impact Of Housing Renovation

    The State Council recently announced a nationwide target to renovate 39,000 antiquated residential compounds in 2020, improving accommodation for 7mn total households. In this Quick Take, Rosealea explains how the target will provide space for local governments to further tighten property policy without upsetting China’s economic recovery.

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    Gavekal Dragonomics

    The Recovery Tapers Off

    Although Q2 GDP growth rebounded strongly after Q1’s significant contraction, sequential growth slowed considerably into June. In this Quick Take, Thomas, Rosealea, Wei and Xiaoxi report on why despite this latest rebound it will be difficult for the country to maintain its upward momentum as it moves into Q3.

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    Gavekal Research

    Have Equities Become A Bubble?

    Two weeks ago, Louis proposed three possible explanations for the exceptional performance of equity markets in the second quarter, one of which was that investors have taken leave of their senses. In this, the second paper of a three-part series, Louis asks if equity markets are in a bubble. And if so—crucially—what sort of bubble is it?

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    Gavekal Dragonomics

    The Uneven Rebound In Consumption

    The recovery of consumption in China is coming, but it will be an uneven one. In this piece, Thomas explains how the combination of recent negative surprises on public-health restrictions with positive surprises on jobs and income will shape the trajectories of different consumption categories, from food to autos to electronics.

    0
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    Gavekal Dragonomics

    The Beginnings Of A Plateau

    China’s economic data for May continued April’s wider recovery; however, Thomas, Rosealea and Xiaoxi argue that this upward momentum is losing steam. Weak external demand, tapering industrial production and Beijing’s aversion to further monetary easing all support the idea that China’s post-Covid bounceback is starting to plateau.

    2
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    Gavekal Dragonomics

    The Property Balancing Act

    Local governments are balancing between encouraging housing construction and containing excess housing inventory. Although they have struck a balance so far, Rosealea argues that the growing vacancies in lower-tier cities coupled with depressed household consumption render current policies unsustainable in the long run.

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    Gavekal Dragonomics

    A Property Rebound In May

    Property sales are quickly recovering from their Covid-19 crash, with upward momentum that should continue for several months to come. However, Rosealea argues there are growing risks that China’s property market will start overheating, forcing policymakers to step in and leading to a downwards drift by July/August at the earliest.

    0
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    Gavekal Dragonomics

    April’s Fitful Recovery

    China released economic data for April showing a continued recovery in industry and investment as well as a surprising recovery in exports. In this Quick Take, Thomas argues that with exports headed for a substantial decline, this upwards trajectory is likely to plateau in May.

    0
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    Gavekal Research

    The Kitsune Market (Part II)

    Last week, Louis introduced the Kitsune, Japan’s mythical nine-tailed fox, and outlined four tail risks which could upend investment after Covid-19. Today he examines two more important tail risks: that the pandemic might not prove deflationary but inflationary, and the risk that the market’s “don’t fight the Fed” mentality could collapse under the weight of its own contradictions.

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    Gavekal Research

    The Kitsune Market

    The Kitsune, the mythical Japanese fox which portends a change of fortune, has nine tails. Inspired by the unnatural conditions in markets, Louis has identified nine tail risks which could upend the investment world over the short to medium term. In the first installment of a two-part series, he outlines four tail risks that investors should consider hedging against.

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    Gavekal Dragonomics

    Steel Prices Signal Stability

    Steel prices have stabilized after falling around 10% from their peak, reflecting a relatively rapid recovery in construction activity from the Covid-19 lockdowns. In this piece, Rosealea argues that the steel market is signaling a stabilization in China’s domestic demand from improving housing sales and a boost to infrastructure spending.

    0
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    Gavekal Research

    New Concerns For A New World

    We are in uncharted policy territory. Never before have we seen the kind of GDP contractions now being projected for most OECD countries, and never before have investors had to deal with such extremes of uncertainty. Against this backdrop, Louis attempts to answer 10 of the most burning questions posed by clients about the shape of the post-Covid-19 world.

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    Gavekal Dragonomics

    Getting Out Of Lockdown

    China is starting to get out of its strict Covid-19 lockdown, but its economy will not get fully back to normal until the outbreaks in other countries also get under control. In this piece, Andrew and the team dig into the data to piece together the economy’s trajectory for March and April: a narrowing decline rather than a fast rebound.

    5
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    Gavekal Research

    How Long For The Costly Cure?

    Is the cure worse than the disease? This question is already being asked about the economic lockdowns being imposed in response to Covid-19. It will be asked a lot more in the coming weeks as the economic pain gets worse. The short answer is that the cure is costly, but needed; and well-designed policies can enable a transition to a much lower-cost approach by mid-May if not earlier.

    7
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    Gavekal Research

    Lockdowns Loom; What’s The Exit Strategy?

    We are heading into another difficult week. Covid-19 case numbers and fatalities outside China continue to grow rapidly. Social lockdowns are spreading to more US states and European countries. In the short run, fiscal support is on the way. Longer term, governments will have to start asking the uncomfortable question of when the economic pain outweighs the public health gain.

    1
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    Gavekal Research

    The Conditions Needed For A Bottom

    Financial markets are now in full-blown panic mode. For investors, the key question is: What will it take for markets to form a bottom, and when will this happen? No one can answer with any precision. However, it is possible to discern the broad conditions needed to allow the markets to find a bottom. We are nowhere near them yet.

    0
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    Gavekal Dragonomics

    Limited Help For Struggling SMEs

    Chinese policymakers have announced a wide range of monetary and fiscal measures intended to help the smaller firms hit hardest by the Covid-19 outbreak. The helpfulness of these measures will likely only be marginal; however, Thomas, Xiaoxi and Wei are cautiously optimistic that most SMEs can still weather the ongoing crisis.

    0
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    Gavekal Dragonomics

    The Next Infrastructure Stimulus

    As size of China’s growth shock from the coronavirus shutdown becomes clear, yet another infrastructure stimulus looks to be on the way. In this piece, Wei assesses the scale of the possible boost. The most likely outcome is that public-works spending accelerates to 8-9% in 2020 from just 3.3%, a nice boost but still well below historical peaks.

    0
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    Gavekal Research

    Far From Priced In

    Asian markets switched to risk-off mode Monday as investors reacted to further coronavirus news outside of China. Yet in onshore markets, investors are optimistic that the economy will quickly normalize as the spread of the virus comes under control, and that the central bank will provide policy easing. Neither belief looks well-founded at the moment.

    0
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    Gavekal Research

    Time And Risk

    The financial world is organized around two axes: time and risk. If some authority manipulates the time axis, the effect will be to compromise the risk axis. This is not an abstract formulation. It has the potential to threaten portfolios and the solvency of major institutions.

    1
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    Gavekal Research

    Q&A On The Coronavirus Situation

    Louis spent last week meeting with clients in the US and discussions centered on the coronavirus situation. His starting point is that the Chinese authorities now have every incentive to overstate, rather than understate, the severity of the viral outbreak. He explores the impact on growth in the rest of the world and asset price movements.

    1
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    Gavekal Research

    The Risk Of Falling Behind The Epidemic Curve

    China’s government was slow off the mark in responding to the initial outbreak of the new coronavirus. Although the government is now fully mobilized to fight the outbreak, it risks falling behind the curve again—this time in responding to the economic damage wrought by its extended shutdown of normal life and business activity.

    4
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    Gavekal Dragonomics

    The Lingering Impact On Property

    While the 2003 SARS outbreak had only a transitory impact on China’s housing market, the 2020 coronavirus episode is proving to be much more serious. In this piece, Rosealea argues that the big hit to housing sales will leave developers short of cash and limit their ability to keep projects going. This points to a lingering drag on construction.

    0
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    Gavekal Research

    Back To Work, Not Back To Normal

    China’s businesses are starting to get back to work, but the economy is still very far from normal. On Monday, the extended holiday declared by the government to help contain the coronavirus outbreak came to an end (except in Hubei province). But most businesses still face great difficulty in resuming their normal activities.

    0
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    Gavekal Research

    A Quant View Of The Virus

    There is now enough data on the spread of Covid-19 to permit a useful quantitative analysis of its likely evolution. In this paper, Didier notes that while the spread of the virus continues to accelerate, the “jolt” of that acceleration is now slowing. This suggests the outbreak is likely to peak by early March.

    11
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    Gavekal Dragonomics

    The Long And Short Of Covid-19

    There is now enough information available to begin to make useful judgments about both the short term and long term impact of the Covid-19 outbreak. In this extensive analysis, Arthur examines the health risks posed by the virus, its economic impact, and likely political fallout.

    5
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    Gavekal Research

    How Sturdy Are The Zeitgeist's Five Pillars?

    The investment zeitgeist can be thought of as a set of assumptions that investors hold about structural growth drivers, key prices and policy approaches. An investment manager should understand what makes up the zeitgeist and how it is changing. Louis outlines five foundational pillars that he considers integral to the current situation.

    4
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    Gavekal Dragonomics

    The Year Of Many Targets

    2020 is a big year for China’s central planners. Beijing has set a wide range of targets to be achieved by the year’s end, and the policies enacted to meet these objectives have had far-reaching effects. In this report, the Dragonomics team examines seven such targets, the policies implemented to reach them, and the consequences for China’s economy.

    0
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    Gavekal Dragonomics

    The Mortgage Rate Reset

    China’s central bank is moving forward with its interest-rate reforms, ordering mortgages to be reset based on the new loan prime rate. Rosealea explains that this shift will make monetary policy more transparent and effective by re-linking mortgage rates to official policy rates, but it does not herald a cycle of major cuts in mortgage rates.

    0
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    Gavekal Research

    Is Brexit The Midwife To A New Investment Environment?

    With the confirmation of a conservative victory in the UK election, and a long awaited trade deal between the US and China, the pieces are falling into place for a weakening of the US dollar and a continuation of the global reflation trade. Already, both sterling and the euro have strengthened in response to the reports of a Tory victory.

    1
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    Gavekal Research

    Our 2019 Holiday Reading List

    “So many books,” lamented the late Frank Zappa, “so little time.” For readers wondering which of the 130mn books published since the invention of the printing press they should curl up with over the coming break, hopefully Gavekal’s annual holiday reading picks may help.

    0
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    Gavekal Dragonomics

    The Crackdown On Developer Financing

    China’s financial regulators are squeezing funding for property developers in order to discourage land speculation and cool down property prices. In this piece, Rosealea argues the crackdown has been fairly successful, and does not pose a big risk to construction. Slightly easier demand-side policies will help offset tough supply-side restrictions.

    0
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    Gavekal Research

    Questions On The Changes Of The Past Two Months

    Recent weeks have seen a turn in the investment environment, with global equities outperforming those in the US, cyclicals outperforming growth stocks, a steepening US yield curve and a stall in the US dollar’s rally. Louis recently met with a lot of US clients and outlined his explanation for these shifts. He got some push-back and this report is the product of those deliberations.

    2
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    Gavekal Dragonomics

    The Financing Squeeze Spreads To Corporate Bonds

    The corporate bond market was once promoted as a better way to finance China’s private firms. Instead, as Xiaoxi explains in this piece, it has turned into another source of financial pressure. The corporate bonds of private firms are now maturing faster than they can issue new ones, creating a financing squeeze that could last through 2021.

    0
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    Gavekal Dragonomics

    Housing & Construction Review 2019

    China’s property market has held up surprisingly well in 2019, but will that strength last? In her annual chartbook, Rosealea examines key market trends and explains the outlook for 2020. Flexible policy can probably continue to avoid a deep decline in housing sales, but construction activity and materials demand are almost certain to slow.

    0
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    Gavekal Dragonomics

    The Bills Come Due In Tianjin

    On paper, the northern port city of Tianjin was once the richest place in China. But now its financial center lies empty, its statistics have been exposed as falsified, and the local government and firms are close to running out of cash. In this report, Ernan explains why Tianjin’s long-running problems have finally burst into the open.

    0
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    Gavekal Research

    The Age Of Range Trading

    It is a Gavekal adage that 10-year treasury yields, crude oil prices and the US dollar exchange rate are “master prices” that have an outsized impact on economic activity and financial markets. Yet as Louis notes, in recent years, these three prices have shown little by way of a structural trend. In this piece, he seeks to understand the meaning from this range-trading phenomenon.

    6
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    Gavekal Dragonomics

    This Old House

    China’s government has launched a new program to renovate older residential compounds, which some are touting as a massive new investment stimulus. As Rosealea explains in this piece, such hopes are misplaced. But the new spending will help cushion the impact of the cutbacks of the subsidies delivered through the slum redevelopment program.

    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 Research

    The Surge In Anti-Fragile Assets

    The latest round of data releases appears to confirm fears that the world is facing another synchronous global downturn. If so, it will be different from other slowdowns, in that it will not have been caused by rising interest rates or higher energy prices. What’s more, it will be setting in when there is little prospect of a globally coordinated response, when monetary policy appears to have lost traction, and when asset prices are looking...

    3
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    Gavekal Research

    Hong Kong Q&A (Part II)

    The success of Hong Kong’s protesters in shutting down the city’s airport on Monday, talk from Beijing of “terrorism”, and the apparent massing of mainland paramilitary forces across the border from Hong Kong have led to a deluge of questions from clients about what is likely to happen next, and the potential investment implications. In this paper, Louis attempts answers some of the most frequent questions.

    7
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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 Research

    China’s Hong Kong Gambit

    Following more violent protests in Hong Kong, Beijing reiterated its support for the city’s embattled chief executive in a first-ever press briefing on Hong Kong’s affairs. While the conflict shows no signs of resolution, the example set by Paris shows that Hong Kong can be both a dependable financial center and a hotbed of political dissent.

    0
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    Gavekal Dragonomics

    Housing Policy Turns Cautious

    Housing policy in China has taken a cautious turn, with policymakers more concerned about potential overheating in prices than worried about a downturn in sales and construction. In this piece, Rosealea explains how this shift is playing out through cuts in housing subsidies and changes to local policies, and evaluates the risks to the market.

    0
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