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    Gavekal Research

    The RMB: Steady As She Goes

    In the first three trading days of 2017, the renminbi jumped more than 1% against the US dollar. But this bullish start to the year does not signal a change of tack for China's policymakers. Here, Chen Long explains why Beijing’s strategy of managing the renminbi against a trade-weighted basket of currencies will not change in 2017.

    0
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    Gavekal Dragonomics

    Five Macro Questions For 2017

    For our first China research piece of the new year, we offer a guide to the economic outlook in the form of short answers to some big questions: Will China be as boring as consensus forecast imply? Will the central bank hike interest rates? Will the housing market correct sharply? Will it be a good year for Chinese equities? Will the labor market hold up?

    7
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    Gavekal Dragonomics

    Macro Update: Reflation Continues Into 2017

    In our latest quarterly chartbook, Chen Long assesses the outlook for China next year. Growth driven by industrial reflation should continue into early 2017, as private investment and consumption both improve. With inflation up and growth stable, monetary policy is tighter on the margin, which will likely lead to a downturn in housing sales.

    2
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    Gavekal Research

    Our 2016 Holiday Reading List

    “All books are divisible into two classes,” said John Ruskin, “the books of the hour, and the books of all time.” This year’s list of works enjoyed by Gavekal staff in 2016 includes books from both categories; among them are an account of Russian nationalism, an examination of the sharing economy, and a look at the future of Japan. Happy reading.

    2
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    Gavekal Dragonomics

    How Not To Control Coal Prices

    The price of coal has been on a wild ride recently—and the volatility is not over yet. China’s government spent much of 2016 trying to push the coal price up, but the ensuing price surge now has them backpedaling and trying to push prices down again. There is a real risk these interventions will cause prices to overshoot on the downside in 2017.

    0
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    Gavekal Dragonomics

    Putting The Lenin Back In Leninism

    When Xi Jinping took power four years ago, the Communist Party was plagued by opposition and factionalism, a loss of control over provincial governments, and an erosion of legitimacy. To solve these problems Xi has centralized power in a single leader—himself. Such a retrograde approach bodes ill for China’s long-run economic and political future.

    0
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    Gavekal Dragonomics

    Can Stability Maintenance Survive Trump?

    To meet the needs of their own political cycle, Chinese leaders will aim to ensure steady economic growth for the next year. Unfortunately, it seems that the political need of US president-elect Donald Trump is to cause as much disruption for China as possible.

    0
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    Gavekal Dragonomics

    Leninism Upgraded: Xi Jinping’s Authoritarian Innovations

    In order to cement Communist Party control and discipline, Xi Jinping has dismantled China’s successful model of ‘explorative governance’ and latitude for local initiative. China’s long-term success depends on whether he is willing to relax the reins after the 2017 Party Congress.

    0
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    Gavekal Dragonomics

    Grand Bargain Or Grand Conflict With The US?

    For more than two centuries, China-US relations have swung back and forth between high expectations and dashed hopes. Today the stakes are higher than ever, as Beijing seeks to carve out a sphere of influence and Washington struggles to craft a response. And where the relationship is headed under a volatile President Trump is anyone’s guess.

    0
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    Gavekal Dragonomics

    Steady As She Goes (Despite Trump)

    China is still on track to maintain GDP growth of 6% or more in the run-up to the 19th Party Congress in late 2017. Despite threats of a trade war with the US, Trump’s election probably hands China some long-run strategic benefits

    0
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    Gavekal Dragonomics

    Only One Winner In The Global Robot War

    The US and Europe hope that the rise of robotics will bring manufacturing back to advanced economies. But China is well equipped to make the most of the robot revolution, leaving little space for other players.

    0
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    Gavekal Dragonomics

    Boom And Bust In The Electric Vehicle Market

    China has poured immense resources into creating a market for electric vehicles. But it is struggling to create a self-sustaining industry. As with the failed industrial policy for conventional autos in the 1990s, too much intervention might be the problem.

    0
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    Gavekal Dragonomics

    Nearing The End Of The Last Housing Boom?

    In 2016, China had its strongest housing market upturn since the global financial crisis. Driven by policy and debt, this surge is unlikely to continue through next year. Fundamental demand has peaked and the government wants to keep prices in check.

    0
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    Gavekal Dragonomics

    The Enigma Of Chinese Power

    Arthur reviews four books that explain why the Communist Party has been so successful, what could bring it down, and Xi Jinping’s strategy for keeping it alive.

    0
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    Gavekal Dragonomics

    CEQ: Xi Jinping’s China

    2017 will be a very political year for China. The short-term priority is a smooth economic run-up to the Communist Party Congress, when Xi Jinping will strengthen his grip on power. In the long term, questions are growing as to whether the Party is flexible enough to govern a dynamic society. This issue of CEQ assesses China’s political future.

    0
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    Gavekal Dragonomics

    The Rise Of A New Conglomerate

    If China’s sputtering state enterprise reforms are going to be successful anywhere, it should be in Shandong, with its solid economy and reform-minded governor. But a closer look at Yankuang Group, the province’s poster child for SOE reform, shows that local SOEs are just becoming even larger, more complicated and less transparent conglomerates.

    1
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    Gavekal Research

    Assessing EMs Vulnerability To The Trump Trade

    Emerging markets have faced selling pressure since Donald Trump’s US presidential election win started to drive treasury yields higher. EM debt funds saw their largest ever outflow the week after the election, while currencies have fallen on fears of trade protectionism and more talk of the US dollar being primed for a 1980s-style super-spike. Given this basket of worries, Joyce revisits her “emerging market relative balance sheet vulnerability...

    0
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    Gavekal Research

    Something's Gotta Give

    Louis Gave held a conference call on December 6 where he discussed the state of global markets as the US gets ready for a Trump presidency. The fundamental challenge for investors is that while equities and the US dollar have rallied strongly and bonds have sold off in a “Trump reflation trade,” it is not clear how long that trade can withstand the reality of Trump’s economic program.

    0
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    Gavekal Research

    Making Sense Of The Housing-Commodity Nexus

    Early sales data confirm that China’s property cycle took another step down in November. Yet no one seems to have told the commodity markets: even as property sales have cooled off, prices have heated up, with domestic futures for steel, copper, and coal jumping 20-40% in November. In this piece, Rosealea explains how to read these mixed signals.

    0
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    Gavekal Dragonomics

    Don't Blame The Property Speculators

    Is a love of speculation sapping firms’ appetite for real investment? As Chinese companies slow spending on fixed assets, they are buying more investment properties—sparking concern about a “hollowing out” of the economy. Thomas says the blame is misplaced; property speculation is an effect not a cause of firms slowing capex as the economy cools.

    0
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    Gavekal Dragonomics

    The Debt Restructuring Toolbox

    Debt restructuring transactions are finally starting to happen in China, after years of warnings about the dangers of rising corporate debt. Yet there is no sign of a repeat of the huge state-led bailouts of the late 1990s. There will be many smaller deals to help individual firms cut debt, but these won’t add up to an overall deleveraging.

    0
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    Gavekal Dragonomics

    The Chinese Consumer: Outlook & Trends 2016

    In our latest annual review of the Chinese consumer, Ernan covers the most important cyclical and structural trends. This chartbook summarizes the macro drivers of household income, saving and spending; explains what’s booming and what’s not within various consumer markets; and unpacks the fundamentals of the internet economy.

    0
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    Gavekal Dragonomics

    A Permanent Surplus Of Power

    China’s excess supply of coal-fired electricity is now more extreme than ever—and is only getting worse. This huge misallocation of resources was caused by policies that tried to restrain demand for power, but ended up encouraging its supply. As a result, electricity rates are falling, but not quickly or substantially enough to fix the problem.

    2
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    Gavekal Research

    Hong Kong Seminar — November 2016

    Arthur Kroeber presented his thoughts on the outcome of the US election, as well as an analysis of China's leadership politics. Will Denyer presented his thoughts on the US economy. Tom Miller gave an optimistic take on reforms in India under Modi's government.

    0
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    Gavekal Research

    Arthur Kroeber: A New Era Of Sino-US Relations

    While Donald Trump has threatened to slap huge tariffs on Chinese exports, Arthur thinks this would be an act of self-harm given the economic co-dependence between China and the US. In this video interview, he maps out the likely evolution of relations between the two countries in the years ahead.

    0
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    Gavekal Dragonomics

    Behind The Curtain At "Double Eleven"

    Alibaba has grabbed headlines once again by racking up RMB120.7bn in online purchases during its one-day promotional event on November 11. But these enormous numbers are achieved through elaborate promotional schemes that distort consumer behavior, and no longer provide any real information about the China consumer story.

    0
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    Gavekal Dragonomics

    The Risk Avoidance Strategy

    China’s economy has turned in another slate of decent growth data for October. The three drivers of loose credit, recovering construction, and rising commodity prices that have supported the economy are still holding firm. But Andrew cautions that the government’s objective is not exactly growth at all costs, but rather avoiding downside risks.

    0
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    Gavekal Dragonomics

    The Advantage Shifts To China

    Donald Trump’s victory was also a victory for Xi Jinping. Trump’s more isolationist stance and transactional attitude hands the edge to China in the battle for influence in Asia. Trump’s threats of economic warfare with China are also mostly empty; if anything, Beijing has gained a bit of advantage in its bilateral ties with the US.

    0
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    Gavekal Dragonomics

    Trump, Risk, And The Renminbi

    Will the election of Donald Trump prove to be a major “risk-off” event for the Chinese currency and financial assets? Trump’s policies do make it more likely the US dollar will strengthen, and thus that the renminbi will keep weakening. But the chance of an uncontrolled move in the currency is still low, and the stock market also looks insulated.

    4
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    Gavekal Research

    A Very Chinese Reshuffle

    The forces of market-oriented economic reform in China seemed to take a hit yesterday when it was announced that the tough-talking finance minister Lou Jiwei was stepping down from his post. But contrary to what the Western media suggests, this was not at all the untimely end of a superstar reformer who was achieving spectacular results.

    0
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    Gavekal Dragonomics

    A Good Quarter For Corporate China

    China’s listed firms have finished reporting Q3 earnings, and they turned in a good quarter. Net profits at the median nonfinancial firm rose 14% YoY, picking up from 9% in Q2, while sales growth accelerated to 10% from 6%. Both industrial and consumer sectors did well. In this piece, Thomas analyzes the latest key trends in corporate earnings.

    0
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    Gavekal Dragonomics

    The Squeeze On Capex Loosens

    After slowing for years, fixed-asset investment in manufacturing and mining is showing signs of steadying as stimulus policies stabilize demand for their products. Manufacturing FAI could even recover modestly to 6-8% real growth next year. But firms’ caution after years of growth disappointment is unlikely to suddenly turn to exuberance.

    3
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    Gavekal Dragonomics

    The New Reality Of Housing Prices

    The wild ride of Chinese housing prices is a sign of how the housing market has become more speculative and policy-driven as fundamental demand has peaked. Policies intended to help small cities have only made prices in the largest cities frothier. Rosealea thinks this policy-driven volatility in prices will continue even as the cycle turns down.

    0
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    Gavekal Research

    Equities Decouple From The Renminbi

    The renminbi fell to a six-year low of CNY6.78 to the US dollar this week, capping a -3% fall since June. In recent years, similar moves sparked turmoil in stock markets at home and abroad. Yet this time investors have largely ignored it and both A-share and H-share indexes have ripped higher. Why is a weak renminbi no longer a risk-off event?

    0
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    Gavekal Dragonomics

    Household Debt: How Fast Can It Grow?

    Discussions about China’s debt usually focus on corporate and local government borrowing, but households have also become more important. The level of household debt is no longer low, and since 2015 it has become the major driver of credit growth. In this piece, Chen Long investigates the limits to China’s new embrace of household leverage.

    2
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    Gavekal Research

    Safety First In EMs

    After a steady rise in emerging market inflows over the last seven months, tighter US financial conditions have led to an abrupt reversal. On the back of inflation concerns and a stronger US dollar, the seven day moving average of daily portfolio flows to EMs, as of last Monday, had fallen to its lowest level since the renminbi-induced sell-off 14 months ago. EMs are vulnerable to an externally-induced pull-back, for even if key central banks...

    0
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    Gavekal Dragonomics

    Andrew Batson: What Next For Chinese Growth?

    Chinese policymakers are set on maintaining economic stability ahead of a crucial Communist Party meeting next year—but while that means stabilizing growth it also means pushing back against a property bubble. In this video interview, Andrew assesses the tactical trade-offs that must be made in support of the strategy of stability.

    0
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    Gavekal Dragonomics

    The Three Pillars Of Stability

    China has now delivered real GDP growth of 6.7% three quarters in a row—a stability that is uncanny even by its standards. Such stability is even more prized than usual by the government, now preoccupied with next year’s Communist Party Congress. In this piece Andrew assesses how much longer the three pillars supporting this stability can hold up.

    0
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    Gavekal Dragonomics

    The Equality Engine Is Stalling

    For all its leaders’ talk of a “new normal,” China has not weaned itself off the “old normal” of housing and investment-led growth. That model was in fact a powerful engine for reducing regional inequality, so it has much political support. The engine has now stalled—but rather than swap in a new one, the government keeps revving the old one.

    0
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    Gavekal Dragonomics

    Housing & Construction Review 2016

    In the latest edition of our annual overview of housing and construction in China, Rosealea summarizes the short- and long-term outlook for these key economic drivers. This concise chartbook provides 2017 forecasts for major indicators, and covers topics such as changes in housing policy, structural trends in demand, and the state of inventories.

    0
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    Gavekal Dragonomics

    The Foreign Debt Drawdown Stops

    One of the big drivers of recent capital outflows—Chinese companies paying down foreign-currency debt—seems to have stopped, or at least paused, in the second quarter. While China still has net capital outflows, the scale is manageable given the still-high level of reserves, giving the central bank space to pursue its preferred currency policy.

    2
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    Gavekal Dragonomics

    Is Internet Growth Really Slowing Down?

    Often overlooked in the hype around China’s internet boom is the downturn in some key indicators: growth in internet users and in online retail has slowed. How to reconcile this with an apparently thriving internet economy—can the internet’s growth really be slowing down? The answer is yes, and no; it’s how the internet is growing that’s changing.

    0
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    Gavekal Research

    Singapore Seminar—September 2016

    Audio and video from the latest Gavekal seminar in Singapore is available here. Louis Gave explains why financial markets have recently behaved predictably, and why that is about to change. Andrew Batson explains why Chinese policy making is in a holding pattern until next year's party congress is settled. Udith Sikand explains why this year's emerging market outperformance is likely to continue, as bonds and especially equities have...

    0
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    Gavekal Dragonomics

    The Holding Pattern

    Market worries about China have gone very quiet lately—and this is no accident. In this presentation, Andrew argues that China is in a holding pattern of steady growth and cautious policy ahead of the 2017 Party Congress. While China probably won’t be forced out of the holding pattern, financial stress and structural problems continue to build.

    0
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    Gavekal Dragonomics

    The Big Fish Eat The Little Fish

    China’s housing sales may have plateaued, but the largest real-estate companies still have plenty of room to grow by consolidating an enormous and fragmented market. A multiyear boom in M&A has strengthened the market position of the largest developers, who are still easily raising huge sums from capital markets that can fund future deals.

    0
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    Gavekal Dragonomics

    CEQ: Techno-nationalism 2.0

    China’s economy may be slowing, but its ability to cause technological anxiety has never been greater. Many are worried China could succeed in its ambition of becoming a global technology hub, at the expense of existing leaders. This issue of the CEQ focuses on how China is moving up the technology ladder, and the risk this triggers a backlash.

    0
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    Gavekal Dragonomics

    China’s New Mercantilism

    A growth slowdown and financial stress have not dented China’s determination to become one of the world’s technological leaders. The way it is setting about this task threatens to provoke a protectionist backlash.

    2
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    Gavekal Dragonomics

    The Discreet Charm Of Hybrid Companies

    Despite enormous state investments in national champions, China’s technological development has been led by nimble “hybrid” firms combining Chinese entrepreneurship and foreign finance. This model is now under threat from the government’s increasingly techno-nationalist approach.

    0
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    Gavekal Dragonomics

    A New Grand Strategy For Semiconductors

    Over the past two decades China has poured billions of dollars into its semiconductor industry, with limited results. Now it is trying a new approach that combines top-down government policy with more market-based financing. The odds of success are good enough to worry foreign firms, but global cooperation to integrate China into the semiconductor value chain still makes sense.

    0
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    Gavekal Dragonomics

    Foreign Tech Companies: Alive In The Bitter Sea

    Foreign technology firms face a far more challenging environment in China than they did a decade ago. Confronted by an intensified techno-nationalist agenda and strong competition from domestic players, they need to revise their strategies. Careful localization is the best option.

    0
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    Gavekal Dragonomics

    How Much Financial Risk?

    Debt is rising fast, as are bad loans and the complexity of the financial system. Yet the financial risks in China are still localized rather than systemic, thanks to the huge supply of bank deposits, and the fact that the government is the ultimate owner of virtually the entire system.

    0
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    Gavekal Dragonomics

    Open Checkbook, Closed Market

    The rich world is growing uneasy over the rapid expansion of China’s investment abroad. A rise in protectionist rules is likely unless China does more to satisfy reciprocity concerns by opening its own market.

    0
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    Gavekal Dragonomics

    The Retirement Policy Conundrum

    The working-age population is shrinking and growing older, jeopardizing economic growth prospects. One solution would be to make people work longer: the average retirement age is 54, the lowest in the world. But such a goal conflicts with local governments’ desire to manage layoffs in excess-capacity sectors by offering early retirement.

    0
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    Gavekal Dragonomics

    Actually, China Can Innovate

    Can Chinese firms innovate, and will China produce more branded, globally competitive firms like its Huawei? The answers from the authors of these three books are a unanimous yes on both counts. The verdicts are based on substantial first-hand research and fly in the face of much (less well founded) “China cannot innovate” writing in recent years.

    0
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    Gavekal Research

    The End Of A Bubble?

    Ask three economists for the definition of a financial bubble, and you will be lucky to get fewer than four different answers. Even in our little shop, we like to make distinctions between bubbles in productive assets (US railroads, the internet, fiber optic cables, shale gas wells...) and bubbles in unproductive assets (gold, tulips, Japanese land, Florida condos…). We also like to make distinctions on how bubbles are financed: equity (good) or...

    2
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    Gavekal Research

    What Happens When Growth Disappoints Again?

    The panic over China’s currency in early 2016 feels like ancient history. Since then, worries about the economy have largely receded from market concerns. But China’s business cycle peaked in the first half of the year, is now clearly slowing and will likely fail to reach its growth target in early 2017. How will the world react when this happens?

    0
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    Gavekal Research

    A Free Hedge In Hong Kong

    Cost effective hedges are getting increasingly hard to find. However, the US dollar-Hong Kong dollar forward market offers a cost-free hedge against global volatility, explains Joyce, with 12-month forwards likely to move from their current discount to a handsome premium over spot in the event of a general risk-off move.

    0
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    Gavekal Research

    A Better G-20 Communiqué

    Another year, another G-20, another yawn. Though the group of the world’s 20 biggest economies was useful in the aftermath of the 2008 financial crisis, it has since degenerated into another global drawing room where leaders explain to one other how the world would be a better place if only it were a better place. This was a missed opportunity.

    1
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    Gavekal Dragonomics

    Video: Is China At A Crisis Point?

    Fresh off the publication earlier this year of his book on China, Arthur in this video interview explains China’s long-term economic development strategy before zooming in to answer the key questions that currently vex investors, namely, the trajectory of growth and the potential for a severe financial crisis.

    0
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    Gavekal Research

    Who Is Buying Chinese Bank Shares?

    Few segments of global equity markets have been more reviled in recent years than the shares of China’s big state banks. As corporate debt levels in China ballooned, especially among state-owned enterprises, and economic growth slowed, international investors shied away from the H-shares of state banks listed in Hong Kong, fearing an almighty accumulation of unrecognized bad loans on their balance sheets. This caginess was reflected in bank...

    7
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    Gavekal Dragonomics

    A Pause In The Bond Bull Market

    The summer rally in the Chinese domestic bond has been strong, but now may be due for a pause. While Chinese government bonds certainly remain attractive over the medium term, they will probably range trade for the next three to six months until the central bank is ready to let policy interest rates take the next step down.

    0
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    Gavekal Dragonomics

    Playing The Game

    The Olympic Games may be over, but Chinese enthusiasm for sports and a healthier lifestyle is still going strong. Participation in sports has steadily risen in recent years, driven by higher incomes, a changing culture and a more supportive government. Higher-income Chinese people are, like their peers abroad, ever more focused on their health.

    0
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    Gavekal Research

    Milestones On A Different Road

    The latest surge in China’s outward investment is not driven by state firms following strategic dictates—the Belt-and-Road has yet to gain traction—but by the private sector. The key question now is how long rich countries will put up with big inflows of Chinese money while their own firms are shut out of the best parts of China’s economy.

    0
  • Gavekal Dragonomics

    When Will Monetary Policy Get Interesting Again?

    China’s monetary policy hasn’t been exciting lately: the PBOC has not moved benchmark interest rates since October 2015, instead keeping interbank rates stable. But as Mervyn King said, a successful central bank should be boring. This quiet can last a bit longer: the PBOC is unlikely to cut rates until 2017, when growth comes under more pressure.

    2
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    Gavekal Research

    A New—But Pricey—Market

    The last big barrier to investment in onshore Chinese equities is to be dismantled. Yesterday China’s cabinet approved the Shenzhen-Hong Kong Connect scheme. When the new link goes live, international investors will have free access to 80% of China’s onshore market capitalization, though the Shenzhen-listed stocks have eye-watering valuations.

    0
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    Gavekal Dragonomics

    Housing Takes A Breather; More Stress On The Way

    July was a weak month for China’s economy, as investment, industrial production and retail sales all slowed. An important exception was the property market, where sales ticked up and buyer sentiment seems strong. Nonetheless, housing activity will continue to slow over the rest of the year, if at a gentler pace than the plunge in May and June.

    0
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    Gavekal Dragonomics

    Car Sales: Plenty Of Gas In The Tank

    With heavy industry in the doldrums and the golden age of housing long gone, it’s getting harder to spot areas of sustained growth in China’s economy. An important bright spot is the automotive sector: while the recent breakneck pace of car sales will slow, the value of new car sales is likely to keep growing faster than GDP for the next decade.

    0
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    Gavekal Dragonomics

    A Better Indicator Of Investment

    Growth in fixed-asset investment is now the lowest it has been in the 12-year history of the data. But FAI is a very messy indicator, and increasingly inconsistent with the national accounts. Out of frustration, I have built a simple model to track investment growth in national-accounts terms—gross fixed capital formation—on a monthly basis.

    4
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    Gavekal Dragonomics

    The Temptation Of Early Retirement

    China's workers retire young—at age 54 on average, a decade earlier than in many European welfare states. The central government is now pushing hard to extend retirement ages to keep pension costs under control. But local governments are resisting, hoping to keep using early retirement to manage redundant workers in excess-capacity industries.

    0
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    Gavekal Research

    The EM Equity Question

    Despite this year’s strong run-up, there remain good reasons to stick with emerging market assets. The twin impact of collapsed borrowing costs amid a renewed global hunt for yield, and greatly reduced exchange rate volatility has been the ideal environment for EM yield curve flattening trades.

    2
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    Gavekal Dragonomics

    Profits Follow Housing Up, And Down

    China’s industrial profits bounced back to 6.2% growth in the first half, a stronger than expected recovery. The drivers are a boom in metals driven by the housing rebound, and continued gains in consumer sectors. But the metals boom is a temporary one, so after a couple more quarters of gains, a renewed down-cycle is likely in early 2017.

    0
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    Gavekal Dragonomics

    Iron Ore’s Battle Of Attrition Is Over

    China’s iron ore imports jumped in early 2016, finally validating global mining companies’ strategy to gain market share. As low prices continue to force domestic mines to close, iron ore imports still have a few quarters of growth ahead. But with import penetration already over 80%, there is not much market share left for global miners to grab.

    0
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    Gavekal Research

    The Flow Through To EM Equities

    These are strange times for investors with bond yields in big developed markets plumbing new depths on dark concerns about never ending deflation and stagnation. Yet in a clearly related development, US equities are making new highs while corporate- and emerging market-bonds continue to rally.

    2
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    Gavekal Dragonomics

    The Mixed Progress On Excess Capacity

    Domestic coal output has declined sharply this year, but steel production has been flat. This pattern reinforces the point that excess capacity only shuts when forced to by low prices—and steel prices were high because of the stimulus. While both excess capacity sectors will continue to contract, trade tensions are unlikely to vanish quickly.

    0
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    The Growth Trade-Off Gets Harder

    China’s better-than-expected economic data for the second quarter underscore just how effective a jolt of stimulus to housing and construction can be. But housing is already cooling, and the rest of the economy will soon follow suit. The froth in housing prices will continue to limit the government’s ability to pump up growth to meet its targets.

    0
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    The Post-Brexit Rally: Head Fake Or Game-Changer?

    Let’s face it, few expected the rally in global risk assets of the past ten days. Even investors who, like Charles, believed that Brexit was a fundamentally positive development did not expect positivity to erupt quite so suddenly. Yet, here we are, with the Nikkei up 10% since its post-Brexit low, the S&P 500 breaking out to new highs and the Shanghai benchmark above 3,000. Will it last?

    3
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    The Weak Links In The Financial System

    Where are the risks in the Chinese financial system? Two weak links deserve particular attention: the rapid expansion of small and regional banks with unstable funding, and the increasing complexity of credit creation. Neither threatens an immediate systemic crisis, but they do mean that the risk of ugly financial accidents is rising.

    0
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    A Storm Brews In The South China Sea

    Beijing declared it “null and void,” but the verdict of the international tribunal in The Hague is clear: there is no legal basis for China’s maritime claim over the South China Sea. Beijing now faces a choice: does it find a face-saving way of lowering tensions, or does it risk military conflict by actively asserting its territorial interests? It is quite possible that Beijing does yet not know itself, and will wait to respond to international...

    1
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    Behind The Jobs Target

    China’s leaders may have missed their GDP growth targets for the last couple of years, but they are still beating their targets for job growth. Yet the statistic used for this target gives a very misleading picture of the labor market. It’s better to instead watch surveys of households and employers, which capture the real, deteriorating trend.

    0
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    The Renminbi Falls; No One Cares

    This week the renminbi slipped to its lowest level against the dollar since 2010. Yet this decline had little impact on global markets, a sharp contrast to the convulsions caused by previous drops. In the absence of a radical shift in currency policy or accelerating capital flight, China’s gradual depreciation is a non-story for most investors.

    0
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    The Caution Of Chinese Corporations

    China’s rising corporate debt is now driven more by banks pumping out credit than by reckless firm behavior. Chinese companies are increasingly risk-averse: happy to borrow from banks, but preferring to sit on the cash not spend it. This behavior is a big reason why monetary policy is becoming less effective at stimulating demand.

    0
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    The Natural Gas Glut

    China’s natural gas demand is likely to rise by 7-9% annually for the rest of the decade, half the 15% pace of 2003-14. That is still a pretty decent pace of growth—but well below what the government planned for. Having signed contracts and built pipelines on the basis of ambitious forecasts, China’s challenge is now dealing with a glut of gas.

    0
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    A Boring Infrastructure Bank

    The creation of the Asian Infrastructure Investment Bank promised to reshape the world’s economic architecture, and greatly worried the US. Yet now that the AIIB is a reality, it is not challenging the existing Bretton Woods institutions. It is on course to resemble them—and cooperate with them. In fact, the AIIB has become just a bit boring.

    0
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    Macro Update: The Limits Of Stimulus

    In our latest quarterly overview of China’s economy, Chen Long assesses the outlook after the stimulus of early 2016 and the Brexit vote. The property and credit cycles are turning as policymakers grow cautious, though private investment has benefited little. Still, deflation is easing, capital outflows are moderating and exports are improving.

    2
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    Household Savings: A Permanently High Plateau?

    China’s famously high household savings rate is still stuck in the stratosphere: it has hovered around 37-38% of income since 2008. So have the drivers of savings not changed at all in recent years? Far from it. High savings were mainly caused by China’s massive housing boom, and now that the boom is over, savings rates will be grinding lower.

    0
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    What Does China’s Propaganda Ministry Do All Day?

    When asked to speak about China at big investment conferences, I often kick-off by asking the audience “who here trusts Chinese data?” When no one raises their hand, my follow-up is generally “OK: 0 out of 250! That’s more than usual”. Beyond getting a cheap laugh, the point is to highlight how most foreign investors are suspicious, and often downright fearful, of China. Such distrust may stem from China being one of the few major economies to...

    1
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    CEQ: The State Sector’s New Clothes

    In this issue of the CEQ, we take a close look at state-owned enterprises, which lie at the heart of Xi Jinping's strategy for restoring China to greatness. The goal of Xi’s recent policies is clear: to strengthen SOEs and make them more effective instruments of macro management at home, and more powerful agents of national interests abroad.

    0
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    Villains Or Victims? The Role Of SOEs In China’s Economy

    State-owned enterprises are often blamed for China’s excess capacity, but private firms are the bigger culprits. The real problem is that the government now forces SOEs to act as economic stabilizers, at high cost. This makes them an ever-growing liability to the state.

    0
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    State Enterprise Reform: Missing In Action

    In 2013, the Third Plenum Decision promised bold reform of the SOEs, to diversify their shareholding and improve their financial performance. Nearly three years on, little remains of that agenda beyond a conflicting jumble of vague directives.

    0
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    Return Of The Line Ministries

    In the 1990s, Zhu Rongji broke up state-owned conglomerates, to spur efficiency through competition. Now Xi Jinping’s SOE reform aims to bring those conglomerates back to life. The effort will be spearheaded by Xiao Yaqing, whose ambition to turn the state aluminum company into a global metals giant foundered, but who is now the bureaucrat in charge of all central SOEs.

    0
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    Stability Above All

    The government seeks to keep both GDP growth and the exchange rate as steady as possible ahead of the Communist Party Congress scheduled for the fall of 2017. It may succeed, but probably at the cost of further delaying its structural reform program.

    0
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    The Future Of China’s Oil Demand

    China’s demand for oil—unlike its need for other commodities—will continue to grow, thanks mainly to greater use of automobiles. Imports, though, will be more volatile, and determined largely by how fast the country tries to fill its strategic reserves, and how quickly refiners adapt to changing consumption patterns.

    0
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    The Long March To Europe

    China’s investment in Europe is surging, as Chinese firms step up their M&A efforts and put more money into infrastructure ventures. European authorities must do a more active job of weighing the economic benefits of this investment against the political risks.

    0
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    Making Sense Of The Economic Policy Mess

    Xi Jinping’s economic policy seems like a mass of confusion. This is only because he has been coy about stating his true aim: to make the state sector as strong as possible.

    0
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    A-Shares: The Food Is Terrible, And Such Small Portions

    The decision by MSCI not to include China’s onshore A-share market in its Emerging Markets index should have come as no surprise. Despite real progress, there are still regulatory roadblocks to inclusion that have yet to be dismantled. In any case, the resulting fund flows into the A-share market would be smaller than many observers expect.

    0
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    Never Do On Monday What You Wish You’d Done On Friday

    The first rule of bear markets is never to do on Monday what you wish you had done on Friday. During bear markets, the constant stream of negative stories from the media leads to a build-up of anxiety among investors, anxiety that pours out first thing on Monday morning on trading floors everywhere.

    1
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    Capex Lacks All Conviction

    China’s latest debt-driven stimulus has stabilized growth, but the benefits have been narrow: outside infrastructure and real estate, private investment has not picked up at all. Total investment growth will be higher in 2016, but a renewed slowdown of capital spending in 2017 is very likely, as companies adjust to the end of the housing boom.

    0
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    South China Sea Risks

    In the next few weeks the Permanent Court of Arbitration in The Hague will likely rule in favor of the Philippines in its dispute with China over territorial claims in the South China Sea. Beijing’s reaction will show to what extent China is prepared to defy international law to defend what it claims are “core interests”.

    5
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    The Housing Cycle Is Aging Rapidly

    The latest up-cycle in China’s housing sales has probably reached its peak. Major cities saw a marked step-down in sales growth in May, and absent major new stimulus national data will follow suit. Housing sales are still on pace for full-year growth of over 10%, but will slow to single digits later in 2016, and 2017 will see a deeper correction.

    0
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    How Fast Is China’s Debt Really Growing?

    The latest debate about Chinese statistics centers on debt: are the figures capturing the size of the latest stimulus? Official credit growth is now 12-13%, but total credit is actually rising by 16-18% due to government debt and new forms of shadow finance. Yet regardless of the exact measure, China’s national leverage is still rising rapidly.

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