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    Gavekal Research

    Five Corners (20 August): Velocity Of Money

    In the latest bi-weekly review of global economics and investment we focus on the velocity of money and the credit cycle in the major economic regions: Overview: Charles Gave notes with concern the downturn in the Gavekal Velocity Indicator. US: Will Denyer looks where the US is in the credit cycle and argues it looks more like 2004 than 2007. Europe: François Chauchat argues that contrary to popular belief Europe’s long credit crunch is...

    0
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    Gavekal Research

    A Spectacular Eur-Asian Divergence

    Financial markets are nothing if not a real time survey of real people playing with real money. Hence, no one can seriously doubt that markets contain a huge amount of highly pertinent information. The problem for the investor is how can this be profitably extracted?

    6
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    Gavekal Dragonomics

    The Mystery Of Provincial GDP

    Among all the criticisms on the accuracy of Chinese statistics, the most famous and obvious one is that the sum of China’s provincial GDP is always substantially higher than the national figure released by the National Bureau of Statistics. This reflects the fact that GDP is the most important criterion used to evaluate local government officials, so they have a strong incentive to gussy up their numbers.

    0
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    Gavekal Dragonomics

    Beijing Eyes The Bay Of Bengal

    Under President Xi Jinping, Beijing is pursuing a foreign policy with one grand aim: to restore China’s historical status as the dominant power in Asia. In the South China Sea, this shift towards a muscular, “proactive” diplomacy has intimidated and angered its neighbors (see Perilous Seas). Yet Beijing knows that it cannot simply bully its way to Asian domination: it must offer carrots as well as sticks. So along its southern and western...

    0
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    Gavekal Research

    5C China: Uneasy Easing Undermines Market Reforms

    How do you ease without easing? That is the conundrum China premier Li Keqiang has set for himself. After a disappointing round of July data made clear that economic recovery was still fragile, Li’s cabinet, the State Council, issued a document asking the People’s Bank of China (PBOC) and other ministries to “lower borrowing costs.” But it stopped short of signaling an interest-rate cut.

    0
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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.

    0
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    Gavekal Dragonomics

    The Enduring Hatred Of Big Cities

    China’s government has been promising a “new-style” urbanization policy that will remedy some of the past decade’s many ills. But the ideas behind it are old: planners still seem convinced that the growth of big cities growth must be controlled, and are continuing wasteful efforts to shift resources to smaller and less productive cities.

    0
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    Gavekal Research

    Momentum Shifts From Europe To Asia

    European equity markets have taken a beating in the last 50 days. The average eurozone stock is down 6%, while Portugal and Austria are both down more than 10%, putting them in correction territory. Germany and France are not far behind, down almost 9%. However, this broad underperformance masks a lot of intense individual pain: 20% of eurozone companies have fallen more than 20%. As always with a large sell-off, there are two approaches one...

    0
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    Gavekal Research

    Five Corners (6 August): Central Bank Balance Sheets

    In our latest bi-weekly review of global economics and investment, we examine the bloated balance sheets of the world’s major central banks. We ask what exit strategies the central bankers have prepared to slim them down again, or whether expanded balance sheets are here to stay. If so, how will central bank bloat will affect investors in the coming years? Overview: Anatole Kaletsky argues persuasively that the US Federal Reserve and other...

    0
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    Gavekal Dragonomics

    The RMB's Depreciation Is Over

    After falling by 4% from mid-February to April, the renminbi has now appreciated for three months in a row, gaining 1% against the US dollar. Since February, we have argued repeatedly that the renminbi’s depreciation was stage-managed by the People’s Bank of China in order to curb speculative capital inflows and that it would prove relatively short-lived. Following the recent gains, we are now convinced the renminbi’s depreciation episode is...

    0
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    Gavekal Research

    Growth & Markets Monthly (August 2014)

    This month saw a further improvement, albeit a small one, in our growth indicators. Risk appetite, on the other hand, now looks much more mixed compared with last month’s strong positive tendency. Also noteworthy is the recent spike in our diffusion index of US CPI components, which highlights the abatement of US deflationary pressures. On the asset side, government bonds continue to look expensive, especially in France. Meanwhile, equities are...

    2
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    Gavekal Research

    Wider Spreads And Weaker Equities

    Over the past five weeks, the spread between US high yield debt and US Treasuries has widened by almost a full percentage point. Admittedly, this move could be dismissed as an overdue correction after spreads for high yield debt narrowed to unsustainably tight levels. Unfortunately, it seems that equities markets are no longer in such a forgiving mood. In the past week, the widening of high yield spreads has weighed heavily enough on equity...

    2
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    Gavekal Dragonomics

    How Resilient Are Consumers?

    It’s increasingly clear these days that China has not one economy but two: the investment-driven complex of housing, infrastructure, materials, and the consumption-driven complex of services and consumer goods. Investment was the leader for many years, but since 2009 growth in capital spending has slowed very sharply. Heavy government stimulus and easy credit has smoothed rather than stopped this slump, which does not yet look to be over. The...

    0
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    Gavekal Research

    5C China: Sticking To A Conventional Monetary Policy

    Is China’s monetary policy even looser than it seems? In July, central bank governor Zhou Xiaochuan said that in preparation for interest rate liberalization, he will introduce a new tool called pledged supplementary lending (PSL) to guide medium-term interest rates. Soon after that, local papers reported that the People’s Bank of China had used PSL to hand RMB1trn to China Development Bank to support loans for slum redevelopment programs....

    0
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    Gavekal Dragonomics

    The Last Tiger

    The big game hunter has now bagged his finest trophy. On Tuesday, the Communist Party officially announced a corruption investigation into Zhou Yongkang, a former member of the ruling Poliburo Standing Committee. Over recent months investigators have already detained many of Zhou’s relatives and associates. But no official of Zhou’s rank has been formally disciplined for corruption in the reform era, and it has been uncertain when or if he would...

    0
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    Gavekal Dragonomics

    China: Still Waiting For The Re-Rating

    China’s equity markets are finally beginning to play catch-up. Over the first half of 2014, the Shanghai composite index and Hong Kong’s ‘H-share’ China enterprises index were the worst performing markets in the region, both recording losses while the rest of emerging Asia enjoyed a great run. Lately, however, both the Shanghai market and H-shares have showed signs of renewed vigor. Over the last five trading days both have risen by around 5% to...

    0
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    Gavekal Research

    Housing’s Quiet Period Is Over

    A turning point in China’s housing policy has arrived, half a year into a downturn in property sales and construction. Since late June, major cities such as Hohhot, Jinan, Haikou, Tianjin and Chengdu have moved to support their housing markets. This is a change from earlier months, when local governments were more hesitant and often failed to publicize their policies, limiting their effect. The central government’s implicit approval of the new...

    4
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    Gavekal Research

    Playing Emerging Asia's New High

    Some 18 months after US stocks regained the ground lost in the 2008-09 crisis, emerging Asia has finally made a new high. Yesterday the MSCI emerging Asia US dollar total return index closed above its 2007 peak for the first time, having risen 10% year-to-date. That makes emerging Asia the best performing major regional market in the world so far in 2014. If you invest equally in the countries in the index’s universe, your gains are even better...

    0
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    Gavekal Dragonomics

    Beijing Battles With Bureaucrats

    It’s official: Li Keqiang is fed up. China’s mild-mannered premier has recently been described in official press releases as “speaking in an extremely severe tone” and “shaking his fist.” The target of this display of temper: government officials who are not moving fast enough to implement economic reforms. And Li’s temper tantrums are not just for show. Nine months after the publication of an ambitious modernization agenda, many of Beijing’s...

    2
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    Gavekal Research

    The Price Of A Diminished US Dollar

    Nature, it is said, abhors a vacuum. In much the same way, geopolitics cannot tolerate a power vacuum. So it is small surprise that as a chastened and diminished United States has retreated from direct involvement in the Middle East and adopted a less interventionist diplomatic and military stance elsewhere in the world, ambitious opportunists have stepped forward to fill the gap. In East Asia, China has assumed a far more assertive attitude...

    2
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    Gavekal Dragonomics

    The Future History Of China’s Deleveraging

    If there’s one thing almost everyone can agree about on China, it’s that its rise in debt has been very rapid, and is not sustainable. But where does China go from here? In this chartbook, we use historical examples to think about how a future deleveraging process might occur.

    14
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    Gavekal Research

    Emerging Asia's Leverage Problem

    Aggregate debt levels in Asia (ex-China) are back to levels seen just prior to the 1997-98 Asian Financial Crisis. This does not pose a near term macro-economic risk since most Asian economies have large foreign currency reserves and run flexible currency regimes. Indeed, this was the mercantilist lesson most Asian economies learnt from the late '90s crisis. Still, Joyce and KX show in this chart book that the likes of China, South Korea...

    0
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    Gavekal Research

    5C China: Uncertainty Is The Real Problem

    Chinese equities look cheap, both in historical terms and compared with other markets. The price to earnings ratio for the Shanghai Composite has fallen from highs of more than 60 in 2007 to around 10, well below the MSCI World average of 15. But given the economic transition China is going through, neither its own history, nor other countries, are a good guide to whether current valuations are low. On examination, the earnings growth rates...

    0
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    Gavekal Dragonomics

    Fears For China's Growth Postponed

    The Chinese government has once again successfully stabilized the economy. Spooked by decelerating growth and a property market correction early in the year, the government has spent the last few months loosening credit and rolling out supportive policies. Today’s economic data release showed the pay-off: GDP growth in the second quarter picked up slightly to 7.5%, beating expectations it would be flat at 7.4%. This means that investors’ fears...

    1
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    Gavekal Dragonomics

    Of Reform And Red Tape

    Is China’s reform drive for real? Since Xi Jinping and Li Keqiang took over the reins of government at the beginning of 2013, they have promised sweeping changes to economic policy, foreign affairs and public morality, among other areas. But they have also faced persistent skepticism that the substance of these changes lags behind their lofty rhetoric—and it is true that many of their biggest reforms remain mostly in the planning stages.

    0
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    Fathom China

    The Crucial Smell Test For Investors In Chinese Companies

    With asset prices around the world continuing to rise, low-priced Chinese equities now look extraordinarily attractive to value investors. But investors should not check their skepticism at the border. Many investors in seemingly vibrant Chinese private sector firms have become victims of frauds, often later exposed by short sellers. However, the fear of falling for such scams is no reason to avoid investing in all Chinese firms. Straightforward...

    0
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    Fathom China

    Profile: Due Diligence: Don't Get Fooled Again

    Many investors in Chinese firms check their skepticism at the border, and so have been easy prey for short sellers who benefit from exposing fraudulent companies. This report shows how investors can gain confidence that Chinese companies will be unlikely to come under successful short attacks. Solid due diligence can prevent a lot of pain.

    1
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    Gavekal Research

    Five Corners (9 July 2014)

    Nothing should stay the same and so we are tweaking the format of Five Corners to make the whole report focus on a key thematic issue that impacts all major centers of the global economy. We kick off with an in depth look at inflation which is again rearing its head even as the specter of deflation continues to haunt the most growth-challenged regions.

    0
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    Gavekal Dragonomics

    The Wrong Kind Of Leverage

    For years now the Chinese government has been trying to make it easier for private-sector firms to borrow. Its recent measures to encourage bank lending have privileged those banks that lend more loans to (overwhelmingly private) small and medium-sized enterprises. This is a worthy goal: since private firms make much higher returns on investment than their clumsy state-owned cousins, economic growth will get a boost if private firms borrow and...

    0
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    Gavekal Research

    Growth & Markets Monthly (July 2014)

    Having watched our growth indicators soften over recent months, we are now witnessing a momentum shift since our economic activity indicators have perked up markedly. Moreover, the velocity of money has risen rapidly, while our price indicators continue to show lessening deflationary pressure. Hence, it was not surprising to see that bonds are getting more expensive. Unfortunately, equities are not cheap, and this makes it a challenging...

    0
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    Gavekal Research

    5C Overview: Gold & inflation

    An investor who bought gold upon Arthur Burns’ arrival at the Federal Reserve and held it up until the day Ben Bernanke announced the second round of quantitative easing would have done about as well as someone who bought-and-held US equities (using the S&P 500 total return as the proxy). Both assets compounded at a little over 10% a year between February 1970 and August 2011. Amusingly, most gold-bugs reacted to QE2 (and then QE3) with glee...

    0
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    Gavekal Research

    5C China: Looking For The Exit From Deflation

    From the consumer’s perspective, China’s inflation trends look wonderfully benign, with the consumer price index showing the kind of stable and low-but-positive inflation readings beloved of central bankers. Since 2012, CPI inflation excluding food has hovered around 1.6% YoY, never going above 1.9% or below 1.4%. Yet from the producer’s perspective, China has been going through an extended and wrenching period of deflation: the producer price...

    0
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    Gavekal Research

    Perilous Seas

    Across Asia, Xi Jinping’s much-vaunted “Chinese Dream” looks more and more like a Chinese nightmare. Last week, China unveiled an official map showing the South China Sea as an integral part of the country. The new map, which is designed to enhance awareness of China’s territorial claims stretching down the coasts of Vietnam, Malaysia and the Philippines, deepens concern that the China Seas are beginning to resemble central Europe in the early...

    0
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    Gavekal Dragonomics

    Growth, Reform Or Both?

    Is China’s government more focused on short-term growth or long-term reform? Those hoping for a clear answer are getting disappointed.

    0
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    Gavekal Research

    Perilous Seas

    Across Asia, Xi Jinping’s much-vaunted “Chinese Dream” looks more and more like a Chinese nightmare. Last week, China unveiled an official map showing the South China Sea as an integral part of the country. The new map, which is designed to enhance awareness of China’s territorial claims stretching down the coasts of Vietnam, Malaysia and the Philippines, deepens concern that the China Seas are beginning to resemble central Europe in the early...

    4
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    Gavekal Research

    Buried Krugerrands Or Outperforming Emerging Markets

    Approaching 2014’s half-way mark most major asset classes have returned between 3% and 6% over the year to date. There are two outliers: Japan, which has lagged other markets following 2013’s gains, and precious metals, which have outperformed. So far this year gold is up 9.4%.

    4
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    Gavekal Research

    Five Corners (25 June)

    In the latest bi-weekly review of global economics and investment:

    0
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    Gavekal Research

    Rising Velocity Is Driving Markets

    As we approach the half-year mark for 2014, it is remarkable how well asset markets have performed this year. Pretty much every major asset class has registered decent gains. US bonds? The long end of the US government bond market is up by 10%, even after the recent mild sell-off. Commodities? The CRB index is up by 8.6%. Global equities? The world MSCI is up by 6%.

    2
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    Gavekal Research

    The Hong Kong Crisis That Isn’t

    Over the weekend 700,000 inhabitants of Hong Kong, China’s dominant international financial center, voted in an unofficial referendum calling for full democracy and universal suffrage in the territory from 2017. The poll comes just over a week before a pro-democracy movement known as Occupy Central—or Occupy Central With Love And Peace, to give it its full name—has threatened to blockade key roads in the city, bringing the main financial...

    0
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    Gavekal Dragonomics

    Healthcare: From Demand To Supply

    The moment has come for China’s healthcare sector. As the nation’s economy shifts onto a slower growth trajectory, the boom sectors of the previous decade or two are in retreat, and domestic and foreign investors are looking for new growth areas. Healthcare fits the bill: the economic properties of healthcare mean that, at least over the longer term, demand for health services will grow at least as fast and probably faster than the overall...

    0
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    Gavekal Research

    5C China: Broccoli Or Cheesecake?

    It’s now official. In a speech delivered in London, China’s Premier Li Keqiang said his government “can guarantee economic growth won’t slip below 7.5%” this year. It’s the first time he has stated explicitly that Beijing regards 7.5% as its floor for growth in 2014. Until last week he had maintained that a moderate slowdown would be tolerable and that the government was focused more on the quality than the quantity of China’s GDP.

    0
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    Gavekal Dragonomics

    More Postcards From The Edge Of Sichuan

    Two years ago, we visited a small rural county near the southern edge of Sichuan province, whose residents and officials were able to give us some insights as to how central government policy was being implemented at the grassroots level (see Postcards From The Edge Of Sichuan). Since then, a new administration has come to power, which is trying to shake up how local government works. So we recently paid a return visit to the place we call...

    2
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    Gavekal Research

    Indonesia Ups The Ante On Resource Nationalism

    The China-driven resource boom over the past decade has created great wealth in developing countries with big mining industries. It has also created a move toward “resource nationalism,” as countries seek to capture more of the value of their natural resources by clamping down on exports of raw ores and forcing investment in domestic smelting and processing plants. The poster child for this movement is Indonesia, which banned exports of many...

    0
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    Gavekal Research

    China Property: How Bad Can It Get?

    The critical question in China today is the direction of the property market. Are we finally seeing the long overdue, bloody end to a mammoth housing bubble? Or is this simply a cyclical correction, similar to previous downturns in 2008 and 2012, that will quickly reverse after modest price cuts and an easing of credit?

    0
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    Gavekal Research

    New York Seminar June 2014 - Louis, Anatole & Andrew

    We held our summer seminar in New York on June 10, with Anatole, Louis and Andrew offering their take on the state of the world economy and financial markets. We were also joined by Henrik Christensen who is director of Robotics at Georgia Tech. Audio recordings of their discussions are available below:

    0
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    Gavekal Research

    A Chinese Bretton Woods?

    Even as it plants offshore oil rigs and rams foreign vessels in disputed waters, China is wooing its neighbors with infrastructure investment. Its next step is to create new multilateral banks whose twin goals are to allay fears about Chinese expansionism and to provide an alternative to the US-dominated system of development finance.

    2
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    Gavekal Research

    The Risks Of Selective Easing

    The Chinese government is finally getting worried about the economy. Following a series of inspection tours, Premier Li Keqiang has clearly signaled that he doesn’t want growth to slow much from the current rate. The State Council has asked the People’s Bank of China (PBOC) and various ministries to take supportive measures. The central bank is complying, reluctantly, but the risk is that its minimalist moves both fail to support growth and...

    0
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    Gavekal Dragonomics

    The Capital Spending Crunch Continues

    For an economy so reliant on investment, China suffers from a strange dearth of accurate and timely ways to gauge businesses’ capital spending. The most common reference—monthly data on fixed-asset investment—has been painting a bizarrely rosy picture, with nominal growth steady around 20% for years. In reality, investment has slowed very sharply since the big stimulus of 2009, as it takes only a glance at the current suffering of the heavy...

    0
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    Gavekal Research

    5C China: Squeezing Shadow Credit Is A Risky Business

    Last week the central authorities launched an investigation into a trading company in the port city of Qingdao, which supposedly pledged stocks of aluminum and copper multiple times to secure foreign currency bank loans. The immediate impact was a 5% fall in the copper price, which historically derived some support from the metal’s use as collateral in Chinese financing deals.

    0
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    Gavekal Research

    Overcoming The Macro Breakdown

    The financial crisis of 2008-2009 heralded a golden age for macro investors. As the wholesale market crash rendered the relative value judgments of stock pickers irrelevant, macro investors enjoyed a boom time—especially ones who had had the foresight to short US housing, global financials, or eurozone peripheral debt. Now, as the crisis recedes further into the rear view mirror, macro investors are struggling to adapt to a world in which...

    0
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    Gavekal Research

    Growth & Markets Monthly (June 2014)

    Having watched our growth indicators soften over recent months, we are now witnessing a momentum shift since our economic activity indicators have perked up markedly. Moreover, the velocity of money has risen rapidly, while our price indicators continue to show lessening deflationary pressure. Hence, it was not surprising to see that bonds are getting more expensive. Unfortunately, equities are not cheap, and this makes it a challenging...

    0
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    Gavekal Dragonomics

    CEQ: Investment Abroad — The Dragon Steps Out

    China is now the world's third biggest source of outward direct investment, and the things it is buying are rapidly changing. Gone are the days when Chinese outward investment was all about state-owned enterprises buying oil wells and iron ore mines. There are still plenty of state-driven resource deals, but 40% of Chinese direct investment is now conducted by private firms, who are mainly interested in consumer, technology and service...

    0
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    Gavekal Dragonomics

    How Much Pain For How Much Gain In China?

    Xi Jinping and his colleagues have been running China for a year, and they face a crucial set of decisions. They have reined in runaway credit growth and intimidated opponents of structural reforms with an anti-corruption drive of remarkable ferocity. Now the economy is growing at its most sluggish pace in 15 years, and a further slowdown is certain. How much more economic pain are the leaders willing to endure, and how much structural gain can...

    1
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    Gavekal Dragonomics

    CEQ Q2 2014

    Growth in 2014 will slow more than policymakers anticipated. It is almost certain that the 7.5% real GDP growth target will not be met, and a fall below 7% ispossible. The slowdown is led by property investment; consumption and exports are holding up well and the labor marketis still tight.

    0
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    Gavekal Dragonomics

    CEQ Q2 2014 - A Portrait Of China's Gilded Age

    Age of Ambition: Chasing Fortune, Truth and Faith in the New China, by Evan Osnos (Farrar, Straus and Giroux, 2014)

    0
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    Gavekal Dragonomics

    CEQ Q2 2014 - One-Child Policy, Foreign Companies

    Relaxing The One-Child Policy: Too Late, Too Little

    0
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    Gavekal Dragonomics

    CEQ Q2 2014 - The Winding Road To Interest Rate Liberalization

    Bank deposit rates are among the last major controlled prices in China. To keep the economy humming, they need to be deregulated. This will require deposit insurance, a new policy interest rate—and a plan to avert financial crisis.

    0
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    Gavekal Dragonomics

    CEQ Q2 2014 - China's Expanding Empire In Laos

    China’s economic influence in Southeast Asia is rising, and smaller countries in the region must figure out how to extract maximum benefit without becoming vassal states.

    0
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    Gavekal Dragonomics

    CEQ Q2 2014 - Aid To Africa: Helpful Or Harmful?

    Critics have long argued that Chinese aid to Africa is self-interested and perhaps even harmful for African states. A close study of the data suggests the truth is much more complicated.

    0
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    Gavekal Dragonomics

    CEQ Q2 2014 - America, Land Of Opportunity

    China’s outward direct investment is rising rapidly, and the United States is getting a bigger share of those flows—US$14 bn last year. But unless China opens its own doors wider to foreign investment, a political backlash could emerge.

    0
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    Gavekal Dragonomics

    CEQ Q2 2014 - How Much Pain For How Much Gain

    Economic growth is slowing, structural reform has only just begun, and a severe anti-corruption campaign is sowing fear and uncertainty.

    0
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    Gavekal Dragonomics

    CEQ Q2 2014 - More Deals, More Players

    The face of China’s outward investment is changing: state-owned firms still pour plenty of money into big-ticket resource deals, but private firms are rapidly catching up, investing in consumer goods, technology and services. And developed countries, not emerging markets, are the big beneficiaries.

    0
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    Gavekal Dragonomics

    CEQ Q2 2014 - Whatever Became Of China, Inc.?

    Some used to worry that “China, Inc.”—Chinese resource companies, state-owned banks and government agencies working in concert—would “lock up” energy and mineral resources around the world. Those fears proved misplaced, thanks to miscues by Chinese firms and changing market conditions.

    0
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    Gavekal Dragonomics

    Rethinking The One-Child Policy: Too Little, Too Late

    Relaxing the one-child policy has emerged as the most concrete and popular policy change following the Third Plenum meeting in November 2013. Yet the initial public reaction has been lukewarm, and there is no chance of a new baby boom. The policy change both came too late and was too little to change the nation’s demographic trajectory.

    0
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    Gavekal Research

    China Becomes A Willing Seller

    Tea-leaf reading is all the rage in Beijing again. With a deepening correction in the housing market promising to significantly drag on China’s growth this year, every utterance of the political leadership is being parsed for clues as to how and when the government might respond. The tone does seem to be changing: Premier Li Keqiang this week has repeated his usual bromides on “fine-tuning” policy as necessary, but without his previous emphasis...

    0
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    Gavekal Research

    Drumroll To The ECB Meeting

    Yesterday the yield on 10-year US treasury bonds broke downward through 2.5%, its floor ever since last summer’s ‘taper tantrum’. There were two main catalysts for the move. First, there was renewed weakness in the renminbi, as the offshore CNH set a new low for the year with US$-CNH rising to 6.27. Second, there was poor data from Germany and, especially, France, where the ranks of the unemployed continued to expand. Looking at the evolution of...

    0
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    Gavekal Research

    Five Corners (28 May 2014)

    In the latest bi-weekly review of global economics and investment:

    0
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    Gavekal Research

    The Earnings Expectations Paradox

    When it comes to global equity investment, all markets are not equal. Over the last couple of years, investors have evolved distinctly different attitudes about how to discount trends in profit growth in each of the four major equity market regions.

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    Gavekal Dragonomics

    Testing The Reformers’ Resolve

    The outlook for China’s growth this year is deteriorating, thanks to a deepening correction in the property market. This will test the government’s stated desire to focus on structural reforms rather than once again stimulating growth. In this concise presentation, we summarize our current views on the economy and policy. Much depends on how extended the downturn in property is: with a contained cyclical correction, the government is unlikely to...

    5
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    Gavekal Research

    A Grand Bargain

    In the run up to this week’s meeting between Russian President Vladimir Putin and Chinese President Xi Jinping, expectations had run high that 20 years of discussions could be concluded with an agreement for Russia to pipe natural gas to China. Russia’s deputy energy minister even stated last week that a contract was “98% ready.” The long history of inconclusive China-Russia negotiations on the issue suggested that his was an overly optimistic...

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    Gavekal Research

    5C Overview: Keeping China In Check

    How much should we worry about China’s increasing assertiveness beyond its borders? Provocations continue to pile up in maritime Asia, most recently a spat over a Chinese oil rig in what Vietnam considers to be its waters. And last week’s Xi Jinping-Vladimir Putin summit in Shanghai, capped by the signing of a long-delayed US$400 bn gas pipeline deal, conjured the specter of a Sino-Russian concert enabling both countries to defy the United...

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    Gavekal Research

    A Grandmaster At Work

    “Check-mate”. As Vladimir Putin signed Russia’s historic US$400bn gas-supply agreement with China, he must have felt the satisfaction of a chess grandmaster revealing the inexorable outcome of a complicated endgame. In theory, the next phase of the chess game between Russia and the West in Ukraine will only begin with the Ukrainian presidential election on Sunday, but Putin’s positioning of the pieces means the outcome is preordained, whoever...

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    Gavekal Research

    5C China: A Dysfunctional Market, And Far Too Small

    Last week, the Ministry of Finance gave permission for 10 local governments to issue bonds worth RMB109bn directly to the market. At first this looks like a breakthrough for fiscal reform. But it is too early to celebrate. The approved issuance is small, even compared with the RMB400bn quota in this year’s budget, and the initiative is beset by problems.

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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 Research

    A Supply-Sider’s View Of China

    Let’s conduct a simplified thought experiment. Imagine a country where there are two types of capex: capital spending used for building infrastructure and capital spending deployed in favor of other private sector activity. By rights, money should go to those projects with the higher return on invested capital. The problem is that most returns from infrastructure accrue to third party users of the asset (so called “externalities”) and not to its...

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    Gavekal Research

    How To Lose The Eastern Front

    Russia, it appears, has emerged victorious in Ukraine. After the unofficial referendums organized by pro-Russian groups in Ukraine’s eastern regions, Kiev knows it must negotiate with the separatists to avoid national disintegration. A deal on autonomy for parts of Donetsk and Luhansk will have to be made on terms acceptable to Vladimir Putin.

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    Gavekal Research

    The Case For (Some) Emerging Markets

    Investors in emerging markets need to focus on three main things: nominal GDP growth in US dollar terms, valuations and leverage. The problem is that over the last decade, most EMs enjoyed very strong nominal growth in US dollar terms, in which valuation and currency played a bigger role than real growth. That game has run its course and the key to success in the coming period is identifying those markets with strong real growth prospects that...

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    Gavekal Research

    Five Corners (14 May 2014)

    In the latest bi-weekly review of global economics and investment:

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    Gavekal Research

    Constructing The Profit Cycle

    As housing goes, so goes China’s economy. The last couple of painful downturns in domestic growth, in 2008 and 2012, were largely driven by downturns in housing and new construction. While real estate and construction are large sectors themselves, the real reason for this broad economic impact is how much the sales and profits of other business sectors depend on construction activity. The latest data for April—housing sales falling 16% YoY, and...

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    Gavekal Research

    EM Carry Trade Looks Vulnerable

    Over the last two months, emerging markets have delivered a handsome rally, with the MSCI emerging markets index recording a 7% return in US dollar terms, compared with just 1% for the developed markets. The trouble is that this rally has been driven primarily by investors’ growing enthusiasm for carry trades in an environment of declining global volatility. Experience teaches this is an engine which can all too suddenly be thrown into reverse

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    Gavekal Research

    5C China: Clouds Gather Over Property Outlook

    China’s economic indicators for April showed growth holding steady, albeit at sluggish rates, in manufacturing and consumer spending. Exports are even picking up once the data problems are dealt with. But while growth may be stable for the moment the risks of a further downturn are rising, as sales and sentiment worsen in the housing market.

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    Gavekal Dragonomics

    The Search For Safe Food

    Since the horrifying melamine scandal of 2008—when 300,000 children were sickened by milk products tainted with an industrial chemical—the safety of food in China has been in permanent crisis. Hardly a month seems to pass without a media exposé of real or exaggerated problems: pesticides in produce, banned drugs in meat, cadmium in rice, the re-use of cooking oil. The result has been a dramatic and sustained shift in Chinese consumer behavior as...

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    Gavekal Research

    5C Asia: Hong Kong’s Diminished Prospects

    Even as Chinese growth has ebbed, Hong Kong has defied the downturn. The territory effectively has full employment and real wages have risen nicely. Over the last year, hot money flows continued to enter Hong Kong and tourists from across the border kept arriving. This, at least, was the case until recently when cracks started to appear in the prosperity of China’s preferred haven for tax-avoidance and luxury shopping.

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    Gavekal Dragonomics

    The Renminbi Reconsidered

    The fall in the renminbi over the last two months has prompted much anxiety. For the past nine years one of the few certainties of global markets was that the Chinese currency would end the year stronger (or at least no weaker) than it began. That certainty has been demolished—which indeed was the goal of the People’s Bank of China (PBOC) when it engineered the depreciation. There are now two questions to consider. First, how much further might...

    1
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    Gavekal Research

    Growth & Markets Monthly (May 2014)

    For a second straight month, our growth indicators have weakened, suggesting the possibility of another summer lull. The outlier is US employment, as evidenced by last week’s very decent non-farm payroll report. We were also intrigued by the recent pick-up in US 5-year inflation expectations, which does not seem to fit with the narrative of constant deflationary pressures. Combined with recent US wage growth, could this imply that there is a...

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    Gavekal Research

    Five Corners (30 April 2014)

    In the latest bi-weekly review of global economics and investment, Arthur Kroeber considers the implications of Asian deflation. Will Denyer & Tan Kai Xian consider the strong rental market for US homes and wonder what this means for the broader housing sector. Nick Andrews looks up close at reduced liquidity in the eurozone’s financial system. Chen Long looks at a favorable convergence between national GDP numbers and the growth claims made...

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    Gavekal Research

    What Ails The Dollar

    A curious brew of cheap money, a grinding cyclical recovery and “new economy” verisimilitude has helped drive Wall Street to new highs. And yet even as equity investors have scaled the wall of worry, the dollar has remained uninspired. The unit arguably started a structural upswing in 2008 but the recent performance has been lackluster with the DXY index at the bottom of its trading range.

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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...

    0
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    Gavekal Research

    Beijing’s Peruvian Copper Play

    Earlier this month a consortium of Chinese state-owned companies agreed to buy a huge Peruvian copper mining project from Glencore Xstrata for US$5.9bn. The new Chinese owners will need to invest another US$2.4bn to bring the project on stream by its scheduled start date in 2015, bringing their total investment to US$8.3bn. Is this massive deal yet another example of China Inc. overpaying for resource assets? Probably not: tight global supplies...

    0
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    Gavekal Dragonomics

    What's Going On With The RMB?

    Even though the renminbi fell steeply in the first quarter, sliding 2.7% against the US dollar, capital continued to flow heavily into China. Balance of payments data published last Friday show China’s current account surplus for the period was just US$7.3bn. The capital account, however, notched up a surplus of US$118.3bn.

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    Gavekal Research

    Beijing's Peruvian Copper Play

    Earlier this month a consortium of Chinese state-owned companies agreed to buy a huge Peruvian copper mining project from Glencore Xstrata for US$5.9bn. The new Chinese owners will need to invest another US$2.4bn to bring the project on stream by its scheduled start date in 2015, bringing their total investment to US$8.3bn. Is this massive deal yet another example of China Inc. overpaying for resource assets? Probably not: tight global supplies...

    0
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    Fathom China

    Profile: UnionPay: Breaking The Monopoly

    The way that billions of people pay for things is in flux across the world. No sooner had consumers grown accustomed to using bank cards instead of cash than the next big thing, online payments, swept onto the scene. In China, a giant state-owned firm called China UnionPay (“UnionPay”) has long straddled most payment channels as the only authorized bank card network. UnionPay is a government-controlled cousin to Visa or MasterCard, with its logo...

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    Gavekal Dragonomics

    Watch Capital Flows For The Central Bank’s Next Move

    How will China’s central bank respond to the country’s slowing growth? Speculation about the next move from the People’s Bank of China has been rising as economic indicators continue to be tepid, credit growth continues to slow and the currency remains weak. Similarly, in early 2012 GDP growth was also weak, credit was cooling and the RMB was depreciating—and shortly afterward the central bank cut banks’ reserve requirements and credit growth...

    0
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    Gavekal Research

    5C China: Regional Growth Gets Uglier, But More Accurate

    In China, the whole is not necessarily greater than the sum of its parts; in fact it can be less. China’s provincial GDP figures are viewed skeptically because of two obvious problems: the sum of provincial GDP is often much higher than national GDP, and most provinces report GDP growth faster than the national average. In what could be a sign of higher-quality data at the local level, both of these trends are now changing: the gap between the...

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    Gavekal Dragonomics

    Defaults Are Coming: Where, When And How

    In early 2014, China’s financial markets witnessed a milestone: for the first time, issuers of local, domestic-currency corporate bonds went into default. With China’s economy slowing and many debts coming due this year, these will be only the first of many defaults on corporate bonds.

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    Gavekal Research

    5C Overview: How Much More Asian Deflation?

    The latest news from Asia’s biggest economies is uninspiring. China’s growth grinds lower, and the renminbi has declined by 3% against the US dollar since January. Japan is suffering the anticipated effects of this month’s consumption tax hike, and Anatole has predicted that the BoJ will respond later this year with a fresh round of money-printing which could push USD/JPY well above its established level of 102 to the dollar.

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    Gavekal Research

    Five Corners (16 April 2014)

    In the latest bi-weekly review of global economics and investment, Charles Gave explains why it still pays to run a balanced portfolio, despite the market’s rotation. Will Denyer argues that outlook for US consumption remains favorable, even though consumer cyclicals have taken a beating. François-Xavier Chauchat examines the reasons behind the euro’s persistent strength. Andrew Batson looks at Beijing’s new focus on jobs and finds the...

    0
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    Gavekal Research

    Running The Red Queen's Race

    By reporting the relatively low figure of a 7.4% rise in first-quarter gross domestic product, down from 7.7% in the previous quarter, China has confirmed that the current pace of economic expansion is now roughly as weak as it was during previous downturns in 2008 and 2012. While the headline number was better than market expectations, and growth clearly picked up a little in March from the lows of January and February, there are worrying signs...

    0
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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...

    0
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    Gavekal Dragonomics

    Breaking The Mold Of Capital Markets Reform

    For more than 20 years, China has been experimenting with ways of bringing in capital from equity investors overseas. What has characterized all of its various programs, with their bewildering array of names—red chips, B shares, QFII—was extremely tight central-government control over who could participate and how large the fund flows could get. But the tie-up announced last week between the Hong Kong and Shanghai stock exchanges shows that a...

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