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    Gavekal Research

    The Dissonance In Markets

    Perhaps the biggest challenge confronting investors today is the disconnect between financial markets and economic data. Indeed, despite weak readings from the growth locomotives of the global economy (China and the US), recent weeks have seen bonds selling off, commodities going on a tear, and deep cyclical equities experiencing huge rebounds. In short, while economic data is pointing towards a mediocre global growth outlook, markets are...

    1
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    Gavekal Research

    5C China: Why The Crude Buying Spree?

    China’s economic growth may be slowing, but its appetite for oil imports is undiminished. In the first quarter of 2015, China imported a record 589mn barrels of crude, up 7.5% from the first quarter of 2014. Last month alone, China imported 222mn barrels of oil, overtaking the US, which imported a relatively modest 216mn barrels, as the world’s biggest importer.

    0
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    Gavekal Dragonomics

    Property Responds To Treatment

    Although China’s economic data for April were generally mediocre, property was a bright spot. National property sales rebounded to a 7% YoY gain, after 1% decline in March, marking the first positive growth in 15 months. The latest interest rate cut is likely to further fuel the recovery, and indeed preliminary data point to continued sales gains in May. Broad-based monetary easing has proved a more effective remedy for weak housing demand than...

    0
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    Gavekal Research

    Why Asia Should Suck Up Tantrum II

    Asian currencies took a hit yesterday as the ongoing global bond market sell-off forced capital outflow. Yet unlike the “taper tantrum” of two years ago, the region has navigated this sell-off with limited collateral damage—emerging Asia’s benchmark bond index has fallen by -3% in the last two weeks compared with a -19% peak-to-trough slump in 2013. In this piece we are not going to opine on the outlook for global bond markets as our last two...

    0
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    Gavekal Research

    New York Seminar May 2015 - Anatole, Louis, Joyce & Will

    We held our US spring seminar in New York on May 11, with Anatole, Louis, Joyce & Will offering their views on the most important developments in the global economy.

    0
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    Gavekal Dragonomics

    Working Harder To Reduce Rates

    China’s central bank is about to enter uncharted territory. While the People’s Bank of China is still a long way from having to resort to unconventional monetary policy (see To QE Or Not QE), its benchmark lending rate has hit a record low after the latest cut. Yet this move is unlikely to be the last: we think the current easing cycle will deliver one more cut to benchmark rates this year, as well as substantial cuts to bank reserve...

    0
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    Gavekal Research

    A Sino-Indian Powerhouse?

    Next week the leaders of the world’s two biggest emerging economies will meet for talks in Beijing. Together, China and India have a population of 2.6bn—36% of the global total—and a GDP exceeding US$12trn. They share a border nearly 4,000km long. Yet China trades more with Thailand than with its most populous neighbor, and there are eight times as many flights between Beijing and Bangkok per week as there are between Beijing and Delhi. The weak...

    1
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    Gavekal Dragonomics

    The Emerging Strategy For Debt

    China’s strategy for managing its mountain of debt is finally becoming clear. This strategy will shape the country’s economic trajectory for years to come, and in particular will have big implications for the bond market. We see interest rates falling, bond issuance exploding, and pressure for capital-account liberalization rising.

    0
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    Gavekal Research

    Embrace The Asian Deflation

    The specter of deflation continues to threaten big chunks of the global economy and the alarm has even spread to China after the GDP deflator was revealed to have slipped into negative territory in 1Q14. Our starting point is that deflation does not have to be some grizzly beast that must end with soup kitchens, for as Charles has forcefully argued, periods of falling prices have in the past been associated with rapid capital formation and...

    0
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    Gavekal Research

    Five Corners (6 May): The Weakness In Wages

    Overview: Charles Gave wonders why in spite of policymakers having the best of intentions, their efforts have caused declining productivity, lower median incomes and fewer quality jobs. United States: The labor market is no longer a clear indicator of the US economic cycle, says Will Denyer, who looks for new insights into what variables may guide the Fed in its policymaking. Europe: Although jobless numbers have fallen across much of the...

    0
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    Gavekal Research

    Growth & Markets Monthly (May 2015)

    While our growth readings ticked higher last month, the big shift came with a sharp rise in our risk appetite indicators. We also note an easing of deflationary pressure with the US breakeven inflation level registering a nine-month high. On the liquidity side, the European Central Bank has cranked up its expansionary efforts and its balance sheet is rising at 16% YoY. Taken together, these moves have benefited equity markets (notwithstanding...

    0
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    Gavekal Research

    The World's Most Crowded Trade

    Markets are made at the margin. As a result, the key driver of prices for a given asset is the question of where the marginal buyer (or seller) comes from. This is why very crowded trades can prove dangerous: by the time every one and their dog is convinced that (i) the euro can only go down (early 2015), (ii) being short long-dated bonds is the single best trade out there (early 2014), (iii) underweighting European equities is the easiest path...

    6
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    Gavekal Dragonomics

    Property Is Still Too Big To Let Go

    While the share of China’s economy driven directly and indirectly by real estate and construction has declined over the past three years, it is still substantial at roughly one-third. This means that the government cannot afford to be relaxed about the housing market as fundamental demand starts a long-term decline.

    0
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    Gavekal Research

    5C China: Policymakers Are Concerned, With Good Reason

    China’s labor market has held up relatively well so far this year despite a pronounced slowdown in growth. But the actions of policymakers and the trajectory of the economy both suggest that there will be more bad news for the job market in the second half of the year. Official indicators of employment in China are patchy, but the published figures have been resilient.

    0
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    Gavekal Dragonomics

    The End Of The Margin Squeeze

    The profits of Chinese industry have not grown since August, but the worst of this crunch now seems to be over. The fall in industrial profits was all but guaranteed by the combination of an extended slowdown in housing construction and the aftershocks of the collapse in commodity prices in late 2014 (see Profits Under Pressure). But thanks in part to the recent stability in oil prices, China’s industrial sector is on course to avoid a worst-...

    0
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    Gavekal Research

    China: QE Or Not QE?

    Press reports that China’s central bank is preparing to launch quantitative easing may give investors the impression that the People’s Bank of China is about to join the ranks of major central banks that have embraced unconventional monetary policies. This impression would be false. The PBOC is certainly in easing mode, but its methods have been, and will continue to be, entirely conventional. With the benchmark deposit rate still at 2.5%, the...

    4
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    Gavekal Research

    The Pros And Cons Of A Bull Market

    In sharp contrast to their approach in 2007, Chinese government officials are actively encouraging the current bull market in onshore equities, repeatedly saying that rising share prices are a good thing for China. We agree that there are definite economic advantages to the run-up in stocks, but it is also worth keeping an eye on the risks.

    3
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    Gavekal Research

    No One Likes To Pay Taxes

    No one likes to pay taxes, and a good few try to find a way around it. Perhaps this is why the US tax code and associated practice notes runs to 74,000 pages. Pretty much everyone feels better equipped to spend their own money than the government, and rightly so (anyone who pretends differently is a hypocrite; or did not earn their money themselves). This is why as people pay more tax there is demand for a clear accounting of the services...

    2
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    Gavekal Research

    Maritime Silk Road Or “String Of Pearls”?

    China’s strategic expansion into the Indian Ocean is causing jitters in both Washington and Delhi. This week Xi Jinping pledged to finance a whopping US$46bn of investments in Pakistan, a large chunk of which will fund a 3,000km “economic corridor” from the Arabian Sea to northwest China. The route will begin at Gwadar, a Chinese-run port near the Iranian border, which Indian security experts fear will become a strategic base for the Chinese...

    0
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    Gavekal Research

    Five Corners (22 April): Global Trade

    Overview: Charles Gave argues that an era of globalization and expanding world trade is coming to an end. On balance, he says this is no bad thing. United States: The negative impact of the strong dollar on US exporters will become clear once disruption from the early year port strikes on the US West Coast clear up according to Will Denyer and Tan Kai Xian. Europe: Europe’s huge trade surplus is purely a German issue. François-Xavier Chauchat...

    0
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    Gavekal Dragonomics

    Trembling Giants

    Political and public pressure is building for an overhaul of China’s state-owned oil companies. China National Petroleum Corp. and Sinopec Group, formed in the 1980s from government departments, are among the largest companies in China and their influence is difficult to overstate (two other state energy firms, CNOOC and Sinochem, are smaller and less powerful). Nevertheless the political winds are now blowing against them and a change of some...

    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 Research

    Fuel To The Fire

    As if the flames under Chinese equities weren’t hot enough already, Beijing is busy throwing fuel on the fire. Yesterday the People's Bank of China said it would cut the reserve requirement ratio for banks by 100bp, with an extra 100bp cut for small rural institutions. This is the greatest reduction in RRRs since November 2008 in the depths of the global financial crisis, and unlike the previous cut in February it is not intended merely to...

    1
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    Gavekal Research

    5C Overview: Why The Coming Collapse Of World Trade Should Be Celebrated

    Sustained economic growth has always gone hand-in-hand with a big rise in communications infrastructure. To explain why, assume that a country has two cities, named A and B. At the point that a modern communication infrastructure is built (road, trains, internet) then, in each case, a single line of communication is needed. Three cities implies the need for three lines; a fourth city means six lines. Ultimately, if all the cities are to...

    0
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    Gavekal Research

    The Crocodile Mouth About To Close

    What is the most significant macro event thus far in 2015? Most of our clients would likely answer the collapse in oil prices. Or perhaps the European quantitative easing program and the fall of the euro. Others, more bearishly inclined, may highlight the relentless and tedious process towards Grexit, the underwhelming US macro data or the devastating Middle-Eastern civil war. These are all perfectly valid answers—in fact, we made a number of...

    16
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    Gavekal Research

    Slumping Growth, Booming Market

    The gap between China’s booming stock markets and slumping economic growth just got a lot wider. Figures for the first quarter published today showed a picture of nearly unrelieved gloom, with most growth readings at their weakest since the first quarter of 2009 when China was suffering from the global financial crisis. This poor performance is not surprising, given the structural slowdown in the housing market, falling corporate profits, anemic...

    0
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    Gavekal Research

    The Perils Of Leadership

    Around 50 countries have signed up to join China’s Asian Infrastructure Investment Bank. A year ago, when Beijing began to draw up plans for a new multilateral lender, no one could have guessed that it would cause such a global stir. We first wrote about China’s attempt to provide an alternative to the US-dominated system of global development finance last June (see [China] A Chinese Bretton Woods?). But it is too early to conclude that the...

    0
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    Gavekal Research

    The Best Of Both Worlds In Hong Kong

    My mother often said that the main reason she pushed Charles to return to work following the sale of his previous business in the mid-1990s was that having a retired husband was the worst of both worlds: “Less money and more husband”. On this measure, Hong Kong should be happy today. In its troubled marriage with mainland China, it looks very much as if Hong Kong is about to get “more money and less mainlanders” out of its conjugal partner. In...

    1
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    Gavekal Dragonomics

    Developers Fatten Up For The Long Winter

    China’s beleaguered property developers are finding their way to a new strategy. While the real-estate boom of the past decade rewarded those who could build the most the fastest, the structural slowdown in housing demand that is now underway (see Housing’s Next Decade) calls for a different approach. Consolidation not expansion is the order of the day: in 2014, developers sharply increased their spending on mergers and acquisitions, even as...

    0
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    Gavekal Research

    Buy On China Skepticism

    Widespread skepticism about the power of monetary policy at the outset of easing cycles can provide great investment opportunities. Despite clear lessons about the effects of central bank activism in the US in 2009, Japan in 2012 and Europe in 2014, international investors still doubt the quality of the bull run in China’s onshore stock markets ignited by the People’s Bank of China. As a result, even though the Shanghai A-share market has...

    0
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    Gavekal Research

    Five Corners (8 April): The Outlook For Bank Earnings

    Overview: With banks’ earnings squeezed on one side by flat yield curves, and on the other by tech companies encroaching on their traditional consumer-facing business lines, Louis wonders where the banking sector will generate future earnings growth United States: Doing More With A Flatter Yield Curve: Now consumers have deleveraged, and with strengthening demand set to drive a pick-up in corporate investment, Will argues that earnings growth...

    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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    Gavekal Research

    One Belt, One Road, One Grand Strategy

    In what can only be described as a triumph for Chinese financial diplomacy, some 48 countries had defied US disapproval to sign up for Beijing’s new Asian Infrastructure Investment Bank by yesterday’s deadline. The applicants included not only Europe’s big four economies, but staunch US allies such as Saudi Arabia, geopolitical rivals like India, and even Taiwan, which China does not recognize as a separate country.

    2
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    Gavekal Research

    5C China: The Worst Is Yet To Come

    China’s banks are going through their toughest times since the central government bailed them out at the end of the late 1990s banking crisis. After 10 years of double digit growth, the earnings of China’s five largest banks grew by only 6.5% in 2014. Fourth quarter profit growth was actually negative. China’s smaller banks have performed better than their larger counterparts, but even so their profit growth has also slowed significantly. What’...

    0
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    Gavekal Dragonomics

    The Relevance Of Bank Reserve Cuts

    China is set to make further cuts in the extraordinarily high reserve requirement ratio it imposes on its banks. In early February the People’s Bank of China reduced RRRs for the first time since May 2012, cutting the ratio for all financial institutions by at least 50bps (with a bigger cut for selected banks). However, even after February’s cut, the RRR for big banks remains at 19.5%, a punishingly high level by international standards,...

    0
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    Gavekal Research

    Exogenous vs Endogenous Shocks

    Markets can be hit either by endogenous shocks (they collapse suddenly because of the build-up of internal excesses—think the 2000 tech bubble, the 2008 US mortgage crisis, or the 2011-12 eurozone crisis) or by exogenous shocks (9/11 in the US, or the price of oil shooting up from US$100/bbl to US$150/bbl in 2008 following the Sichuan earthquake and preceding the Beijing Olympics). This raises the question how investors should view...

    4
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    Gavekal Dragonomics

    Macro Update: A Broader And Deeper Slowdown

    2015 is off to a soft start for China. The housing downturn in 2014 led to economic pain that was concentrated in regions and sectors that supplied steel and other construction materials. But now the slowdown is spreading through the rest of the economy, with corporate profits and consumption starting to show weakness. Monetary policy will continue to ease in response, though neither a strong surge in credit growth nor a big depreciation of the...

    0
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    Gavekal Research

    The Divergence In Market Action

    After yesterday’s trading action, the S&P 500 is now broadly flat for the year so far, and stands at the same level as on November 21. Interestingly, over the past 26 days since February 17, the US index has not managed to string together two consecutive days of gains. In other words, US equities are now adding more volatility and less returns to portfolios. That’s hardly the combination that most investors are looking for. In contrast, the...

    3
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    Gavekal Research

    China Update: A Rare Bond Market Bright Spot

    The rule of thumb in all of our fixed income models used to be that the nominal yield on ten-year government bonds for a given country should be equal to the country’s ten-year average inflation rate plus the structural real growth rate of its gross domestic product (i.e. demographic growth + productivity gains). So, for example, if the US were to see 2% GDP growth (1.2% productivity gains and 0.8% demographic growth) and 2% inflation, then the...

    0
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    Gavekal Research

    Five Corners (25 March): Where To Find Value

    Overview: Louis deconstructs the cycle across different regions to work out what investment strategies should work best, and where. North America: David Hay argues that the Canadian dollar may be nearing its trough, and if so, that Canadian REITs offer compelling value. Europe: Turkish assets have suffered recently. But with cheaper oil and a recovery in European demand emerging, Cedric makes the case for an impending rebound. China: With yields...

    0
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    Gavekal Dragonomics

    Managing The Disappointment In Housing

    China’s housing market has gotten off to a very bad start for the year, with housing sales falling 18% YoY in January and February, the worst decline since 2009. The terrible data are another reminder that we have entered a structural downward trend in housing demand, which means that sales are more likely to undershoot than to overshoot. But the negative trend also means that previous government concerns about overheating housing prices and...

    0
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    Gavekal Research

    5C China: A Rare Bond Market Bright Spot

    The rule of thumb in all of our fixed income models used to be that the nominal yield on ten-year government bonds for a given country should be equal to the country’s ten-year average inflation rate plus the structural real growth rate of its gross domestic product (i.e. demographic growth + productivity gains). So, for example, if the US were to see 2% GDP growth (1.2% productivity gains and 0.8% demographic growth) and 2% inflation, then the...

    0
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    Gavekal Research

    5C Overview: Three Regions, Three Strategies

    Fundamentally, there are three ways to make money in financial markets: Momentum trades: ideally buying high and selling higher. Return to the mean trades: ideally buying low and selling higher. Carry trades: borrowing short to lend long.

    0
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    Gavekal Research

    All 21st Century Roads Lead To...

    With trillions of US dollars’ worth of transactions every day, the G7 foreign exchange markets are supposed to be the most liquid, least prone to manipulation, markets out there. Even so, the five day rate of change of the EUR-US$ exchange rate has lately fluctuated in the +5% to -3% range usually only seen at times of deep market crisis. As a result, most investors, or companies looking at their budgets and sales projections for the second...

    0
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    Gavekal Research

    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

    Asia Is Not So Scary

    One reason we have received push-back on our call to overweight Asian equities has been the risks associated with a major US dollar spike. Asia has not racked up foreign currency debt at the rate seen in recent years since just before the region’s financial crisis in 1997. Still, we would argue that there are sufficient differences this time around to think that Asia can generate strong performance on lower volatility over the coming year.

    1
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    Gavekal Research

    Who Gains When The Fed Hikes?

    The Fed has lost patience in words only, not in deeds. In its statement yesterday the Federal Open Market Committee dropped its linguistic backstop—the word “patient”—indicating that the first rate rise since 2006 could come as early as June (remember, Fed chair Janet Yellen defined “patience” as meaning there would be no rate hike for at least two meetings after the word’s use). But the underlying message the market took away yesterday is that...

    0
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    Gavekal Research

    Don’t Bet On A Renminbi Depreciation

    A number of clients have asked recently when we think the renminbi will start to weaken against the US dollar, and how far we expect it to fall. With the euro and the yen having both recorded double digit percentage falls against the US currency over the last six months, and with the Taiwan dollar down -4% and the Korean won now down -7% after the Bank of Korea cut interest rates last week to a record low, the renminbi is a glaring exception....

    1
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    Gavekal Research

    A Petty And Short-Sighted Hissy Fit

    The UK’s decision to join China’s new Asian Infrastructure Investment Bank is turning into a diplomatic triumph for Beijing and a disaster for Washington. France, Germany and Italy say they will follow the UK’s lead. South Korea and Australia, which the US urged not to sign up when the bank was established last October, are reconsidering. Even Japan, the most stalwart US ally in Asia, is rumored to be wavering.

    1
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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

    Five Corners (11 March): Currency Wars

    Overview: Charles Gave wonders whether Japan might surprise by affecting an appreciation of the yen. United States: With the US dollar rampant, Will Denyer runs the numbers against the euro and yen and finds decisively in favor of the yen. Europe: Francois Chauchat argues that as a major trading currency, the euro was never going to be driven just by trade flows. However in the final analysis the strong external position of euroland will make...

    0
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    Gavekal Research

    Aluminum: Coping With Excess Capacity

    The commodity super cycle is finished. After massive and sustained increases during the early part of this decade, prices for most metals are now thoroughly depressed. The one exception to this trend is aluminum—not because its price is not low, but because it never went up strongly during the heights of the commodity boom. In fact this exception only proves the rule that China and supply-side discipline were the key factors behind the boom in...

    0
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    Gavekal Dragonomics

    CEQ Q1 2015

    Growth momentum will slow further. Headline GDP growth was steady at 7.3% in the fourth quarter of 2014, and the full-year figure barely missed the target of 7.5%, but most indications are that growth is headed lower in 2015. The government’s cut in this year’s official growth target, to 7% from 7.5%, acknowledges this reality.

    0
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    Gavekal Research

    5C China: A Slowdown In Currency Internationalization

    As the renminbi’s once-steady appreciation against the US dollar has lost steam, so has the pace of currency internationalization. After doubling in size from early 2013 to early 2014, thanks to strong growth in Taiwan and South Korea, total offshore renminbi deposits have barely increased in recent months. In January, renminbi deposits actually declined by more than 2% in Hong Kong, the currency’s largest offshore center.

    0
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    Gavekal Dragonomics

    CEQ Q1 2015 - The Price Of Reform Without Openness

    For years, increased openness was the companion of reform. Xi Jinping believes openness is dispensable, and is clamping down on the internet, academia and civil society. His program may work, but bodes ill for the hope that China can become an innovation hub.

    0
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    Gavekal Dragonomics

    CEQ Q1 2015 - China's Climate-Change Turnaround

    China was blamed for the failure of the last big climate-change talks, in Copenhagen in 2009. Will it be able to take credit for the success of the next round, in Paris this year?

    0
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    Gavekal Dragonomics

    CEQ Q1 2015 - How China Will Gain From Lower Oil Prices

    China has surpassed the US as the world’s biggest oil importer. The plunge in crude prices gives it new leverage in its quest to diversify its sources of supply.

    0
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    Gavekal Dragonomics

    CEQ Q1 2015 - The Great Gas Price Conundrum

    For years, China’s problem has been finding enough new supplies of natural gas to satisfy its voracious demand. Now, the critical issue is to get prices right.

    0
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    Gavekal Dragonomics

    CEQ Q1 2015 - King Coal's Long, Slow Decline

    Just a few years ago, the notion that China’s coal use might soon stop growing was laughable. Now it seems likely that peak coal demand is imminent.

    0
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    Gavekal Dragonomics

    CEQ Q1 2015 - When Realism Bleeds Into Paranoia

    The Hundred-Year Marathon: China’s Secret Strategy to Replace America as the Global Superpower by Michael Pillsbury (Henry Holt, 2015)

    0
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    Gavekal Dragonomics

    CEQ: Energy And Climate Change

    This issue of the CEQ explores the dramatic and sometimes contradictory changes in China's energy picture. China is now the world's biggest importer of oil and by far the largest emitter of greenhouse gases. But the economic slowdown and pollution reduction policies are also starting to bite, sharply curbing growth in energy consumption.

    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.

    0
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    Gavekal Research

    The Oil Bubble Implosion

    Since the late 1980s, oil prices have only collapsed by -50% or more over a six month period on two occasions: during the 2008 crisis and in the period since last August. In itself, this begs some interesting questions: does the sudden drop in the WTI and Brent price mean that the world economy is falling apart? Or that oil is set to bounce back? Or finally, that oil was in a bubble which has now imploded? At this juncture, the first option...

    1
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    Gavekal Research

    Investing Along The New Silk Road

    In China, political slogans matter. They help to set the agenda, acting as political weather vanes. In recent months, “One Belt, One Road” has become a signature slogan of Xi Jinping’s administration. A contraction of “Silk Road Economic Belt” and “21st Century Maritime Silk Road,” “One Belt, One Road” describes Beijing’s policy of financing and building transport infrastructure across Eurasia, the South China Sea and the Indian Ocean—aka the...

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    Gavekal Research

    Growth & Markets Monthly (March 2015)

    Our latest monthly report shows that the modest recovery in growth indicators, which started last month, has continued. Since central banks are engaged in aggressive easing action on a number of fronts, it would be surprising if this improvement does not continue. In addition, our velocity indicator has rallied and hovers at a six month high, which mirrors the low level of the VIX index. Such readings point to a “risk-on” environment, but we...

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    From Managing Growth To Managing Debt

    China’s central bank has announced another interest-rate cut—but how many more is it prepared to deliver? The latest move reduced benchmark lending and deposit rates by 25bp, after last November’s 40bp cut, a response to the growing pressure to ease the financial strain on companies from falling prices and weak growth. Indeed, we think monetary policy decisions in China are increasingly driven not just by the classic issues of growth and...

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    Five Corners (25 February): Global Property Wrap

    Overview: Property gets a bad rap from macro-economists as an “unproductive” asset. This mistakes its true value in modern economies, argues Anatole Kaletsky. United States: Despite recent soft housing data, the US housing market is ready to rip, say Will Denyer and Tan Kai Xian. Europe: Francois Chauchat argues that Europe’s housing market may have entered a gently rising cycle for the first time since 2007. China: Property sales have picked...

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    Gavekal Research

    5C Overview: The Importance Of Property

    Property, both residential and commercial, is the world’s oldest investment and, in the long run, the most reliable and profitable store of economic value. Like the world’s oldest profession, however, it operates in the financial shadows. Property lacks the transparency of mainstream asset classes such as equities, bonds and currencies, with no completely objective price benchmarks to measure returns reliably even in sophisticated markets such...

    3
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    5C China: Property's Supply-Side Correction Continues

    Over the past few months, the long-running decline in China’s housing sales has clearly bottomed and started to improve. December’s sales decline was just 4% YoY, compared to the 16% drop in July. But while this kind of improvement in previous cycles would have translated into a similar turnaround in construction activity, that has not been forthcoming this time.

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    5C Asia: Hong Kong's Pro-Cyclical Property Roller Coaster

    Nowhere is the US Federal Reserve’s eventual decision to raise interest rates awaited with greater trepidation than in Hong Kong’s property market. The territory’s currency board link to the US dollar means that Hong Kong had no choice but to import US interest rates when the Fed cut its own benchmark short term rate to zero at the end of 2008. With safe haven funds flooding into the city’s financial system, Hong Kong banks cut their residential...

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    Gavekal Dragonomics

    Oil Insecurity Is Not Going Away

    For the world’s second-largest buyer of crude oil, the collapse in oil prices is a great bargain: the import bill for the 6mn barrels of oil shipped to China every day has halved in the space of a few months. But does now-cheap oil mean that the billions of dollars China spent buying oil assets abroad, or on loans to friendly governments of oil-producing countries, have been a waste? We doubt China’s policymakers are losing much sleep over this...

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    A Sheep In Goat’s Clothing

    In the West, ‘sorting the sheep from the goats’ is a common metaphor for separating the good from the bad. The Chinese language, however, does not differentiate between the two species. So as the year of the sheep (or goat) approaches, it is perhaps understandable if some investors are asking which sort of beast China’s offshore dim sum bond market represents. With China’s growth slowing, with the renminbi down -2.3% against the US dollar in the...

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    Gavekal Dragonomics

    Can The New Silk Road Revive China’s Exports?

    The various New Silk Road initiatives add up to one of the biggest and most elaborate export-promotion plans in history. Yet even this new brand of checkbook diplomacy may struggle to reverse the global economic forces that have been weighing on Chinese exports.

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    Gavekal Research

    Five Corners (11 February): The Earnings Squeeze

    Overview: Charles contrasts US companies' strong accounting profits with the less impressive numbers reported in the national accounts and asks some hard questions. United States: The latest earnings season revealed a tale of two markets with multinationals and energy firms lagging while domestics surge ahead. Will and KX ask whether this can last. Europe: François argues that if eurozone GDP growth picks up to the degree that the...

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    Gavekal Dragonomics

    Will The Middle-Class Consumer Please Stand Up?

    The big beneficiaries of China’s tight job market have been lower-income rural migrant workers. This is no bad thing, but these households account for a very small share of total consumption. The real drivers of consumer spending in China, as elsewhere, are the middle classes—and their income growth has been slowing.

    1
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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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    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...

    0
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    5C China: Big Dark Cloud, Small Silver Lining

    With commodity prices collapsing, the profits of China’s industrial sector are in free-fall (see [China] Profits Under Pressure). Since heavy industrial corporations make up a sizable proportion of China’s publicly-traded sector, this is bad news for listed company earnings. State-owned banks, which make up another large portion of China’s stock market indexes, also face earnings pressure as expected interest rate cuts hurt their margins and bad...

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    Gavekal Dragonomics

    Peak Coal Is Nigh

    Here’s some good news for China’s smoggy skies: the nation’s consumption of coal fell outright in 2014, for the first time since 1998. This decline—the result of a severe downturn in the most energy-intensive industries—has upended some long-held assumptions about China’s future trajectory of energy use. Last year’s unexpected combination of 7.4% GDP growth and just 2.2% growth in energy consumption means it is now very likely that China is...

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    Why RMB Stability Vs The US$ Matters

    In China’s onshore market the renminbi is trading within a whisker of the weak side of its permitted trading band against the US dollar. Meanwhile in the offshore market the renminbi hit a two year low last Friday. Against the backdrop of a strong US dollar—in trade-weighted terms the US currency rose 9% over the three months to the end of January—these moves have prompted a number of clients to ask whether Beijing is about to steer a...

    3
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    Gavekal Dragonomics

    Profits Under Pressure

    China looks like it should be a winner from falling commodity prices, as it is a large importer of raw materials. Unfortunately, the truth is almost exactly the opposite: lower commodity prices mean that its own energy, mining and metals firms are suffering. Add in the construction slump, and 2015 is shaping up to be a horrible year for industry.

    0
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    Gavekal Research

    Asia’s Encouraging Currency Stability

    Three months ago to the day, the US Federal Reserve ended its outright purchases of treasuries. Three months before that, the ECB instituted negative interest rates. And whether by coincidence or causation, most commodity prices chose the past six months to unravel. The combination of these events has led to some sharp exchange rate moves. Over the past three months, commodity currencies have been taken to the woodshed: the Russian ruble is down...

    0
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    Five Corners (28 January): In Central Banks We Trust

    Overview: When central banks led a war on inflation in the late 1970s and 80s they kept on fighting long after the enemy was beaten into submission. They are likely to take the same approach of using overwhelming force in today’s fight against deflation, says Anatole. United States: The Swiss may have given forward guidance a bad name, but the Fed should be taken at its word, argues Will Denyer. Unlike Anatole, he thinks that interest rate...

    3
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    The Case For A Real Chinese Bull Market

    This report makes the case for a secular improvement in returns from Chinese equities. It does so by a political economy analysis of long-run equity market performance in the three East Asian developmental success stories most akin to China: Japan, South Korea and Taiwan. The basic argument is that when a high-growth economy shifts from policies of “financial repression” to a more liberalized financial system, a sustained period of improved...

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    Chinese Equities: A Guide For The Perplexed

    The 60% rally in China’s main onshore stock market was clearly one of the big stories of 2014. Whether this bull market can continue is obviously one of the big questions for 2015. As attentive readers will have noticed, we at Gavekal have formed a wide range of views on this subject. This note is an effort to summarize and, we hope, clarify our various opinions.

    1
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    Gavekal Research

    5C China: The PBOC Loves To Be Feared

    With consumer inflation modest, producer prices falling, and many other central banks in easing mode, the People’s Bank of China looks set to cut interest rates further this year following last November’s reduction (see Five Macro Questions For 2015). At the same time the central bank also seems intent on maintaining the pace of financial reform after last year’s moves to widen the renminbi’s permitted trading band and liberalize deposit rates...

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    Gavekal Dragonomics

    The Inevitable Rise Of Fiscal Deficits

    China is now pushing forward the biggest reforms to its fiscal system in 20 years.. These important changes will however have one major and rather counter-intuitive consequence: the official government budget deficit will have to get much larger. In China’s case, a wider budget deficit will be evidence of progress not regress.

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    Gavekal Research

    In China, Bad News Is Just Bad

    It never rains but it pours. China’s official statisticians announced today that the economy’s annual growth slowed to 7.4% in 2014, the slowest rate in 24 years. Their news came hard on the heels of yesterday’s -7.7% slump in the domestic A-share market, triggered by a tightening in the regulations governing margin trading. That intervention came out of the blue, although the regulators are clearly concerned by the growth of illicit margin...

    5
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    Gavekal Research

    Where's The Arbitrage In China Shares?

    The rally in China’s domestic equity market over the last two months has been spectacular; the run-up in Hong Kong’s offshore market less so. While the Shanghai composite index has shot up 33% since late November, the MSCI China index—composed of mainland businesses listed in Hong Kong—has climbed a relatively feeble 5%. As a result, onshore and offshore valuations have diverged markedly, defying expectations that November’s launch of a channel...

    4
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    Gavekal Research

    5C China: A Mixed Bag Of Blessings

    Most researchers have rightly argued that China will on balance benefit from US$50 a barrel oil since it is a large net-importer of the stuff. The standard story runs that the trade surplus should swell and consumers can use their effective tax cut to buy other items. We have addressed the regional impact of cheaper oil, but on the whole the negative consequences have gotten less attention (see The Losers From Lower Energy Prices). This is a...

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    Still Aiming For The Top

    China has long criticized the dominant role of the US, arguing instead for a “multipolar” world. But a recent and surprisingly dovish speech by Vice Premier Wang Yang has stirred up a debate about whether Beijing’s foreign policy is becoming more accommodative. So is China really willing to accept a US-led international order? Don’t believe it for a moment.

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    Gavekal Research

    Discrimination Pays In The Emerging Markets

    Viewed as a single asset class, the emerging markets had a tough time of it in 2014. A world characterized by weak global demand, soft commodity prices and a stronger US currency left US dollar-reliant emerging economies exposed and vulnerable. Today, as we roll into 2015, emerging markets are still facing the same headwinds. The US will struggle to support global growth single-handedly and the oil price is unlikely to stage a meaningful...

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    Gavekal Research

    Stay Long The Renminbi

    With the Federal Reserve expected to raise interest rates, Europe seemingly about to embrace quantitative easing, and Japan’s economy still in the doldrums, the US dollar’s rise looks unstoppable. But for investors seeking a longer term store of value, the Chinese renminbi is a surer bet.

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    Gavekal Dragonomics

    Five Macro Questions For 2015

    For our first China research piece in the new year, we offer a guide to the economic outlook in the form of short answers to some big questions: Will the pace of economic reform accelerate? Will monetary policy keep getting looser? Will the property market recover convincingly? Can corporate profits hold up? Is consumer spending in trouble?

    2
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    The Long Shadow Of The Commodity Bust

    The commodity boom of the past decade had all the hallmarks of a typical bubble: massive retail participation (through ETFs, mutual funds etc…), large pension fund involvement, a widespread belief that ‘this time, things were different’ and that a ‘commodity super-cycle’ was unfolding. But like all bubbles, this one too has come to an end. There were plenty of potential triggers in the shape of (i) the Federal Reserve’s decision to stop printing...

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    Gavekal Dragonomics

    Macro Update: Easing Policy In The New Normal

    China’s government has moved to more decisively support growth by cutting interest rates. But at the same time the leadership is emphasizing that China also faces “new normal” of slower growth. How will the latest move to easier policy play out in this new context? We think lower rates will offer some support to the real economy, but that the upturn in the credit cycle will be modest by recent standards. In the latest installment of our China...

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    Gavekal Dragonomics

    Beijing Will Call The Shots In Resource Sector Battle Royal

    In October the world’s fourth largest mining company, Glencore, launched an audacious merger bid for the world’s second biggest miner, Rio Tinto. The approach was rebuffed, and United Kingdom takeover rules—both companies have London listings—forbid Glencore from making any further overtures for the following six months. Yet few in the mining business believe that is the end of the story. Glencore’s chief executive officer Ivan Glasenberg has...

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    Gavekal Dragonomics

    Deflation: Local Or Global?

    Another month, another fall in Chinese producer prices. Last week’s release of inflation data showed that consumer-price inflation is still low at 1.4%, and producer prices are still dropping, by 2.7%. The producer-price index (PPI) has now fallen every month since March 2012. This extended spell of falling prices is giving rise to worries that China’s deflationary pressures could spread beyond its borders, weighing down attempts by Europe,...

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    Gavekal Research

    China And North Asia’s Deflation Syndrome

    Northeast Asian economies are “fated” to experience a structural deflation as they mature due to the nature of their industrialization model. Such economic determinism means that China faces an imminent risk of structural deflation similar to that experienced by Taiwan 20 years ago. In this piece Joyce argues that the way Northeast Asian economies protect their financial systems helps them avoid acute financial crises, but ensures a date with...

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    Five Corners (10 December): Contrarian Ideas For 2015

    Overview: Anatole Kaletsky looks at the struggle between the Middle-East sheiks and US oil producers and concludes that oil is about to finally conform to standard economic theory. One unintended consequence may be the effective liquidation of western oil majors. United States: Will Denyer considers the dramatic scaling back of the US shale oil sector but argues that US capital spending should do just fine next year. Europe: Francois Chauchat...

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