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    Gavekal Dragonomics

    Embracing Housing Debt

    China’s latest wave of supportive policies for the housing market won’t generate a huge bounce, but they do show the government is happy to use easy credit to keep housing sales going. Helping the market digest the oversupply of new housing is clearly a major priority. But the consequences will be rising household leverage and frothy prices.

    0
  • Gavekal Research

    A New Forex Driver?

    Foreign exchange markets are serial monogamists. The currency exchange rate between two economies can be driven by factors such as differences in their respective interest rates, monetary policies, purchasing parity levels, return on invested capital, current account deficits, trade balances and inflation rates. But at any point in time, only one single factor is likely to be the primary driver of performance, which is why currency markets tend...

    3
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    Gavekal Research

    No Rush As China’s Bond Market Opens

    The opening of China’s domestic bond market to global investors announced yesterday is a milestone event, which will lead, over time, to a large influx of foreign capital. But in the near term, policy uncertainty and concerns about the currency outlook are likely to outweigh high Chinese yields, so the impact on capital flows will be modest.

    1
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    Gavekal Research

    Seeing The Chinese Forest, Not The Trees

    I do not know as much as I should about China, but I would beg readers’ indulgence as I have some general knowledge of how economies work, and some particular insights into economic history. My fairly unoriginal starting point is that the first phase of China’s development, starting in about 1990, required a focus on building infrastructure and this caused particular rules to be adopted. Since the essential roads, bridges, power plants and...

    7
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    Gavekal Dragonomics

    Doubting Debt Deflation

    After four years of declines in the PPI, there are growing concerns that China has a structural deflation problem. And when debts are high, deflation can make that burden even heavier. Indeed, China’s commodity producers have been experiencing a debt-deflation cycle for years. But this dynamic is not spreading to the rest of the economy.

    2
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    Gavekal Dragonomics

    Chasing The Recession In Shaanxi

    We all know that big swaths of China are suffering, especially areas dependent on the declining coal and steel industries. Matt spent his Chinese New Year break in a poor county of Shaanxi province to see what things are like on the ground. He did not find what he expected: conditions are neither as dire as he feared nor as good as he hoped.

    1
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    Gavekal Research

    Is It Supply Side Or Demand Side?

    The signals from Chinese policymakers are mixed. In recent months official rhetoric has taken a harsh turn, with praise for deleveraging and calls for money-losing “zombie” companies to be shut down. At the same time, officials are promising yet more infrastructure spending, and new data show a record surge in bank loans in January. So which is it?

    0
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    Gavekal Research

    Having Your Cake, And Eating It

    Is the world really facing a 2008-style economic and market meltdown all over again? If it is, then the prescription for investors is clear: load up on long-dated US treasuries in expectation of a continued slide in yields, leaven your portfolio with exposure to gold, and prepare for the apocalypse. But what if the end of days is not imminent? In that case, investors face a trickier call.

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  • Gavekal Research

    Crisis? What Crisis?

    Two weeks ago I published an article dissenting from the near-universal view among my Gavekal colleagues, and also probably among our clients, that the global equity markets had entered a severe bear market (see Is Wall Street In A “Bear Market”?). Since I expressed this relatively optimistic view on January 27, the S&P 500 has fallen another -2.7%, the world MSCI-ex US by -3% and the Nikkei by a whopping -8.5% in yen terms. It may therefore...

    4
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    Gavekal Dragonomics

    How Good Are Those Service Jobs?

    China’s housing-led slowdown is clearly taking a toll on jobs, with troubled industrial firms laying off millions of workers. Offsetting these losses is the very rapid pace of job creation by the service sector, a fact the government regularly trumpets. But a closer look reveals that most new service jobs are at low-paying small businesses.

    2
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    Gavekal Research

    QSCB: How To Adapt To A Slow-Growth Future

    Growth in the world’s two biggest economies is settling at much lower rates than investors are used to. We predictably struggle to find a neat consensus on what the current macro environment means for asset allocators, but Charles, Louis and Anatole all offer specific portfolio advice.

    0
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    Gavekal Research

    No More Shock Absorbers?

    Things have come to a pretty pass when the heads of two of the world’s three leading central banks come out with all guns blazing in an attempt to persuade markets that they will do whatever it takes and more to ease policy—and their currencies promptly strengthen by two big figures. Yet that is exactly what has happened this week. On Monday Mario Draghi dropped a heavy hint that the European Central Bank is preparing to push interest rates even...

    2
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    Gavekal Dragonomics

    Capital Flows And The Currency Endgame

    Concerns are rising about China’s big capital outflows, which topped US$700bn in 2015. Yet our analysis shows that China is not experiencing massive capital flight. Unfortunately, this does not matter much to markets. The real problem is that China’s currency regime is losing credibility, and outflows erode its ability to steady the renminbi.

    10
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    Gavekal Dragonomics

    Say Goodbye To Coal Imports

    China’s coal imports dropped a stunning 30% in 2015—and all signs indicate more declines are coming. Imported coal is taking the brunt of the adjustment in the nation’s energy demand, as the domestic transportation bottlenecks that made imports attractive have eased. We think China will stop being a major net importer of coal in about two years.

    0
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    Gavekal Research

    Why Is Yen Weakness ‘Good’ But Renminbi Weakness ‘Bad’?

    When the yen falls, global markets think it is A Good Thing, and risk appetite increases. But market moves early in January demonstrated that the opposite applies to China: when the renminbi falls, markets think that is A Bad Thing, and risk appetite vanishes. So why do investors like a weak yen but fear a weak renminbi?

    1
  • Gavekal Research

    Red Herrings, Margin Calls And Heart Attacks

    Most recent commentary we have read suggests that January’s turmoil can be blamed on either the slowdown in China or the fear of an impending US recession. But let us suggest an alternative: these are red herrings which only distract from the real analytical challenges faced by investors.

    4
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    Gavekal Research

    The Gavekal Monthly: Enter Ursus Magnus?

    January was a hair raising month for investors with a deeply worrying combination of falling oil prices, plunging equities and soaring yields for sub investment grade debt. In this edition of the Gavekal Monthly we seek some answers to the “what next” question, kicking off with Charles and Anatole who take very different views on whether a bear market is upon us.

    0
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    Gavekal Research

    Is Wall Street In A “Bear Market”?

    Charles has boldly defined a serious bear market as a downtrend in which investors who buy at the top do not recover their money for four years or more. By contrast, he dismissed a -15% to -20% decline lasting less than 18 months as a mere bear cub that could equally well be described as a “pause that refreshes”. In my view the present decline it looks rather more like “cub” than an Ursus Magnus.

    4
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    Gavekal Dragonomics

    Another Grim Year For Profits

    For Chinese industry, 2015 was a year of unrelieved pain—and there is little prospect of any turnaround in 2016. Although demand for consumer goods is solid, the heavy industry sector is just clinging on until the construction cycle picks up. Our base case is for a 1% decline in industrial profits this year.

    0
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    Gavekal Research

    Time To Choose, PBOC

    Some calm has returned to China’s exchange-rate market—but for how long? For the past two weeks, the renminbi’s value has been relatively stable against both the US dollar and its official trade-weighted basket. But questions about the future trajectory of the renminbi have not gone away. Despite the central bank’s massive recent interventions, many market participants view the current “peg to a basket” as a temporary tool that will, at some...

    5
  • Gavekal Research

    Who Is The Marginal Buyer?

    Notwithstanding yesterday’s equity market rally (carried over into the Asian morning), the behavior of risk assets over the past month begs the question of whether a big financial actor is seriously “sick”. The constant plunge in commodities, the relentless rise in spreads and an inability of all major equity markets to hold on to a rally suggests that someone, somewhere, is just “puking” a massive portfolio (as AIG did in 2008).

    3
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    Gavekal Research

    The Debate Over Renminbi Policy

    One of the core tenets of Gavekal’s philosophy is that we embrace open debate. Rather than concealing the diversity of our analysis beneath a single suffocating “house view”, we strongly believe that conducting our —often animated—discussions about the big topics of the day out in the open adds value for our readers. And few of our recent debates have been as lively as the one over Beijing’s renminbi policy. Joyce’s view is that the Chinese...

    10
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    Gavekal Research

    No Need To Fear For The HK Dollar

    In times as volatile as these, a currency move of 0.8% in a week hardly sounds remarkable. But when the currency is the Hong Kong dollar, people sit up and pay attention. As sentiment towards China’s renminbi has turned deeply bearish over the last few weeks, the Hong Kong dollar has moved away from the strong side of its HKD7.75-7.85 convertibility band against the US currency. In early trading on Wednesday, the Hong Kong dollar reached HKD7....

    2
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    Gavekal Dragonomics

    Two Speeds, Both Slower

    China’s “two-speed” economy coasted to a moderate slowdown in 2015, with rapid gains in services helping offset a downturn in industry. But industry will worsen further in 2016, and the recent strength in services will prove to be cyclical. We think this slowdown will be gradual, but are watching risks in the financial sector and the job market.

    0
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    Gavekal Dragonomics

    The Turning Point For Excess Capacity

    2015 saw historic declines in China’s output of coal and steel—which are far from over. Falling commodity prices have brought the excess-capacity sectors to a turning point, finally forcing them to cut output. More producers will cut in 2016, at a pace similar to or faster than in 2015; the government is talking tough but prefers a gradual process.

    2
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    Gavekal Research

    Looking For The Bright Side

    By most measures, the first two weeks of 2016 have been the worst-ever start of the year for risk assets. With the MSCI All-Countries index down nearly -20% from last May’s high, we are now in a global bear market.

    1
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    Gavekal Dragonomics

    Retreating From An International Renminbi

    Behind the recent turbulence in markets lies an important shift in China’s longer-term currency strategy. The drive to internationalize the renminbi, which required keeping the currency strong, has run out of steam. Now that the central bank has gotten much of what it wanted, internationalization is no longer driving currency policy.

    5
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    Gavekal Research

    China: Still Off Course

    We began 2016 thinking that China’s policymakers had learned some lessons from last year; obviously, last week’s mayhem proved us wrong. But the real problem with the missteps on the currency and the stock market is not that collapse is imminent. Rather, it is that the leadership is not setting a clear course toward a more market-driven economy.

    0
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    Gavekal Research

    It’s About The Dollar, Not The Renminbi

    In my 50 year career working in financial markets, I have never seen the money supply of one country move across the border to another country. Hence I must confess to being perplexed when reading recent commentary fretting about “capital flight” from China. Never mind that China’s highest denomination bill is RMB100, meaning that a fleet of trucks would be needed to move any meaningful sums into Hong Kong, but the country still has foreign...

    1
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    Gavekal Research

    Going Down With The Renminbi

    Emerging markets have faced significant headwinds ever since the “taper tantrum” of mid-2013 when investors began to factor in tightening moves by the Federal Reserve. Their headache got much worse last summer when China allowed a mini-devaluation of the renminbi, and 2016 is hardly starting well. The root problem is that most emerging markets are over-geared and need to ease policy if growth is to be kick-started. Unfortunately, easing is...

    4
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    Gavekal Dragonomics

    Clearing Up The Currency Confusion

    China’s currency has once again grabbed the spotlight. Big falls against the dollar have raised fears that China is embarking on a major competitive devaluation, or that it has lost control of the financial system. We do not think these fears are correct, but the central bank’s failure to explain a new currency policy is causing much turbulence.

    6
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    Gavekal Research

    The Gavekal Monthly: The Balance Of Risks

    The new year has been a wild ride so far, with sharp drops in the renminbi, Chinese stock markets, and oil prices leading global markets down. In our first Gavekal Monthly of 2016 we try to make sense of the risks facing investors today. As usual there are some strong differences of opinion: Anatole argues that developed economies are in decent shape, the dollar's rise will soon be over, and equities should post a better performance than...

    0
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    Gavekal Dragonomics

    Five Macro Questions For 2016

    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 derail the global economy? Will the government step up policy easing? Will housing prices collapse? Will industrial profits recover? Will troubled companies lay off more workers?

    3
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    Gavekal Research

    The Day One Carnage

    “Well, that was an oddly timed report,” one of our long-suffering clients remarked yesterday, with justice. Right after we pressed send on our outlook for the year ahead, assuring readers that China fears and commodity prices would not play as big a role in markets in 2016 as they did last year, the Shanghai index collapsed by -7%, and oil prices had a volatile ride thanks to growing tensions between Iran and Saudi Arabia. Have we been proved...

    0
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    Gavekal Research

    ASEAN Could Yet Matter

    Until the Asian Financial Crisis of the late 1990s, Southeast Asia’s export-led development was driven by ethnically-Chinese entrepreneurs who ran dispersed production that mostly supplied the garment, electronics and consumer goods sectors. By the mid-2000s these relationships had greatly simplified, with the economies of the Association of South East Asian Nations either slotting into the Chinese manufacturing supply chain, or alternatively...

    0
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    Gavekal Research

    Forget About Oil And China, Look To The US In 2016

    On the whole, 2015 was a year for investors to forget. US bond and equity prices were both flat, equity gains in Europe were mostly wiped out (for US dollar investors) by the fall of the euro, and commodity plays and high-yield issues crumbled. China sparked a brief panic after a clumsy intervention to cushion a stock-market collapse and an unexpected currency devaluation, but by the end of the year the Shanghai index was still up nearly 5% in...

    0
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    Gavekal Research

    New Economic Realities

    As we close the book on 2015, it is worth sifting through our research to find the patterns that are likely to influence events in 2016 and beyond. Three stand out.

    0
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    Gavekal Dragonomics

    Macro Update: A Cloudy Outlook For 2016

    Our latest quarterly overview of China’s economy outlines the prospects for 2016. Growth will slow further, as industry stays weak and the performance of services fades. More moves to support growth are also certain, with the focus switching to fiscal from monetary policy. Meanwhile, pressures on the financial system and labor market are rising.

    2
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    Gavekal Dragonomics

    The Year Of Peak Everything

    2015 should go down as a turning point in China's economic history: coal demand is having its biggest drop for 15 years, steel for 20, cement for 25. The previous declines in materials use were one-offs that were quickly forgotten in the ensuing boom; this time, they will be longer lasting.

    2
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    Gavekal Research

    The Clash Over Fossil Fuels

    Over the weekend in Paris, the leaders of 195 nations announced a landmark deal to address climate change that its more optimistic supporters say heralds “the end of the fossil fuel era.” But both market action and many government policies point in the opposite direction. Crude oil prices continue to tumble towards the US$30 mark, and coal prices have also collapsed—both moves that reflect abundant global supplies of fossil fuels. The Paris...

    4
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    Gavekal Research

    Hong Kong Finally Rolls Over

    One of the world’s great bull markets may finally be rolling over. In the 12 years to August 2015, Hong Kong’s residential property prices climbed 557%, with most of the increase occurring since the 2008 financial crisis as prices surged on the back of plentiful liquidity and ultra-low mortgage rates. Now evidence is mounting that the market has peaked. Over the last three months, secondary market prices have slipped by -5%. With the US Federal...

    0
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    Gavekal Research

    The Cure For Low Prices Is Low Prices

    What is the latest rout in commodity prices telling us? Certainly, China’s demand for many commodities is weak—but everyone knows this. The most important signal is rather on the supply side: low prices are finally pushing commodity producers to cut output. It is this restructuring that will eventually bring stability to commodity prices.

    0
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    Gavekal Dragonomics

    Taiwan And China: Can The Uneasy Truce Last?

    After seven years of relative quiet, Taiwan is back in the spotlight. Next month’s elections are all but certain to bring the opposition DPP, which China dislikes, back to power. So could one of Asia’s oldest frozen conflicts start to heat up? In fact there are reasons to think that ties between Taipei and Beijing will not break down completely.

    0
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    Gavekal Dragonomics

    Cash Hogs On The Loose

    There are many privileges that come with being a state-owned enterprise in China. One of them, apparently, is the freedom to not pay your bills. We find that SOEs are delaying payments to their suppliers, in order to hoard the cash they need to pay their large debts. This does help SOEs avoid defaults, but at the expense of smaller private firms.

    0
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    Gavekal Research

    A Year-Defining Week

    Four hugely important events occurred last week which between them have largely determined the course of the world economy in the year ahead: the strong US payrolls, the Organization of the Petroleum Exporting Countries’ decision not to reduce production, the European Central Bank’s escalation of monetary stimulus and the inclusion of the renmimbi in the International Monetary Fund’s Special Drawing Rights basket. While all these events were...

    1
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    Gavekal Dragonomics

    The Chinese Consumer: Outlook & Trends

    As the downturn in China's investment-driven economy deepens, ever more hope is being placed on consumer spending. But the dynamics of Chinese household spending remain poorly understood. In this concise presentation, we outline the macro factors driving the growth of consumption, as well as the key structural changes.

    2
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    Gavekal Dragonomics

    Finding The Missing Coal

    This year statisticians decided China has actually been using about 600mn more tons of coal than previously estimated. The news is a bit awkward for official pledges to cap coal consumption and carbon emissions. But actually these new figures only reinforce our conviction that China is already very close to its peak level of coal demand.

    2
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    Gavekal Research

    Are Emerging Markets Cheap?

    On the face of it, the valuation of emerging markets looks compelling. After declining -30% from its 2011 high, the MSCI Emerging Markets index is now at a forward P/E ratio of 12, a third cheaper than the S&P 500. As a result, the valuation premium of developed over emerging equity markets is close to its highest in more than ten years. What’s more on average, emerging-market currencies are now below fair value against the US dollar,...

    1
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    Gavekal Research

    The Gavekal Monthly: A Cloudy Currency Outlook

    The Gavekal Monthly outlines our highest conviction ideas and summarizes the key economic, market and thematic views held by the firm’s partners and analysts. This report is an attempt to answer a question that we are often asked, but find it hard to answer: "What does Gavekal think?".

    0
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    Gavekal Research

    What Now For The Renminbi?

    It’s official: the IMF has confirmed that the renminbi will join the SDR currency basket. Now that China has achieved this goal, attention will turn to the renminbi’s exchange-rate outlook. The reality, however, is that SDR inclusion is largely irrelevant to the trajectory of the exchange rate; what happens to the US dollar will be the key.

    3
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    Gavekal Dragonomics

    Bringing The World To China's Doorstep

    Chinese consumers love global brands, but hate their high prices. So well-off Chinese have often shopped for them abroad rather than pay inflated domestic prices. These days, though, Chinese consumers can import foreign goods over the internet at much lower prices. This trend will wreak havoc on middlemen, but will also create new opportunities.

    3
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    Gavekal Research

    No Savior On The New Silk Road

    Over the last year China has stepped up its efforts to build an informal empire in Asia. This “One Belt, One Road” initiative has the potential to boost regional development and strengthen China’s geopolitical heft. But in the shorter term, can Beijing’s grand plan absorb China’s industrial overcapacity and revive commodity demand? Sadly, no.

    1
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    Gavekal Dragonomics

    A Less Distorted Mirror

    China’s stock markets reflect its economy as in a funhouse mirror: consumer and service sectors shrink to midget proportions, while finance and industry swell to giant size. The process of correcting these distortions speeded up in 2015 as industry slumped and services held steady. Progress will likely slow some in 2016, but the trend is clear.

    0
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    Gavekal Dragonomics

    Breaking Down The Services Cycle

    With China’s industrial sector in a deep slowdown, the services sector has been generating most of the good economic news in 2015. But there is no economic law that makes services immune to the business cycle. Services have their own ups and downs, and while that cycle has helped growth this year, it will provide less of a boost in 2016.

    1
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    Gavekal Dragonomics

    The Benefits Of Membership

    The renminbi’s path to becoming the fifth sovereign currency in the SDR is now clear, with IMF chief Christine Lagarde endorsing the move on Friday. This is a diplomatic coup for China and a victory for its central bank. But we do not see SDR inclusion as a game-changer for capital flows into China, though they will continue to rise.

    0
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    Gavekal Research

    A Happy Apologist

    At Gavekal the conversation with clients never stops and from time to time we like to offer up a taste of debates that strike us as interesting. Louis got into just such a discussion earlier this week with one of our smarter, free-market embracing US clients. The topic of discussion was China and why Louis is such an apologist for the Chinese Communist Party when he clearly has little time for governments meddling with markets elsewhere?

    2
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    Gavekal Dragonomics

    Dead Cat Bounce Or Tiger’s Leap?

    With China’s stock market and currency both up from their lows, the “stabilization trade” looks to be firmly in effect. But while this stabilization is definitely warranted, it is mostly markets correcting their over-reaction to the August currency move. It has little to do with any broader stabilization of the real economy, which is still weak.

    5
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    Gavekal Research

    The Limits Of Xi Jinping’s Grand Plan

    As China’s growth slowdown deepens, making even the government’s reduced growth target of 6.5% a year for the rest of this decade look less and less realistic, policymakers are increasingly pinning their hopes on Beijing’s much-touted “Belt and Road Initiative”. Not only do they hope that the plan to build new trading networks across Central Asia and the Indian Ocean will boost China’s flagging exports, but that the demand for commodities and...

    2
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    Gavekal Dragonomics

    The Chinese Dream (I): The Empire Strikes Back

    Xi Jinping’s project of national rejuvenation needs to be taken seriously, with an understanding of the history from which it springs.

    0
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    Gavekal Dragonomics

    The Never-Ending Slowdown

    Xi Jinping’s ambition to extend China’s global influence is obvious. Whether he can sustain the long-run economic growth needed to finance that ambition is less clear.

    0
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    Gavekal Dragonomics

    The Chinese Dream (II): Great Leap Outward Along The New Silk Road

    The Belt-and-Road Initiative promises an infrastructure bonanza for Asia’s least-connected regions. How much it will extend China’s political influence is an open question.

    0
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    Gavekal Dragonomics

    The Chinese Dream (III): Should We Fear It?

    As a ‘peace-loving’ China flaunts its military, political and economic might, Asia and the US puzzle over how to respond.

    0
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    Gavekal Dragonomics

    Financing China’s Global Dreams

    Beijing has promised to put a lot of money to work building infrastructure across Eurasia. But the actual amount of finance China is likely to mobilize in the next several years is much less than the extravagant headline figures. The biggest constraint on its ambitions to revive is not money, but finding viable projects are to finance.

    0
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    Gavekal Dragonomics

    China And Russia: Locked In Reluctant Embrace

    China’s economic activity is gradually reducing Russian influence in Central Asia. Despite that, shared authoritarian values keep the two countries closely aligned on many issues.

    0
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    Gavekal Dragonomics

    Instead Of A Balance Of Power, Create Better Rules Of The Game

    Critiques of Obama’s ‘rebalance to Asia’ miss the point. It is not about adjusting the balance of power in Asia, but about refining the rules of the international order that China is inexorably entering.

    0
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    Gavekal Dragonomics

    How Should The US Respond To China’s Rise?

    The longstanding US approach to a rising China—economic engagement and military balancing—no longer works. More muscular balancing, and smarter engagement, is now required.

    0
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    Gavekal Dragonomics

    Two Cheers For Hypocrisy

    Are the world’s two biggest economies headed for a “Thucydides trap,” in which China’s determination to carve out a sphere of influence in Asia provokes an all-out effort by the US to maintain its primacy in the Pacific?

    0
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    Gavekal Dragonomics

    CEQ: China Reshapes Asia

    In the last two years China has made a bold push to expand its influence in Asia, using both the carrot of well-funded infrastructure diplomacy and the stick of forceful assertion of territorial claims in the South and East China Seas. What explains this newly assertive foreign policy, and what are its effects likely to be? This special issue of the China Economic Quarterly tries to answer these questions.

    0
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    Gavekal Dragonomics

    Justifying The Bond Bull Market

    China has enjoyed a great bull market in bonds in 2015, but concerns are also growing that credit risk is mispriced and that a new bubble is emerging. In this piece we review the big questions on the Chinese bond market and conclude it is not a bubble; short-term government bonds are attractive but the outlook for corporate bonds is less certain.

    4
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    Gavekal Dragonomics

    The Housing Recovery Is Fading

    One of the few recent bright spots in China’s economy has been the recovery in housing sales. Unfortunately, a number of indicators show that recovery losing steam: gains in sales and prices will slow in coming months. This turn in the cycle reinforces our view that construction activity will be weak in 2016, and that more rate cuts will come, says Rosealea.

    0
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    Gavekal Research

    The Gavekal Monthly: A Possible Return Of US Inflation

    The Gavekal Monthly outlines our highest conviction ideas and summarizes the key economic, market and thematic views held by the firm’s partners and analysts. This report is an attempt to answer a question that we are often asked, but find it hard to answer: "What does Gavekal think?".

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    Gavekal Dragonomics

    A Plan For Less Planning?

    China’s leaders have launched their next five-year plan with a big step back from planning, at least of the family variety: henceforth all couples will be allowed to have two children. This is a good thing. But we’re not so sure it is a sign of the “decisive” move away from central planning and toward market mechanisms that reformers have promised.

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    Gavekal Dragonomics

    Housing & Construction Review 2015

    Our annual overview of China’s housing and construction markets summarizes the short- and long-term outlook for these crucial economic drivers. In this concise chartbook, Rosealea explains the structural challenge from stagnant demand, the new focus of housing policy, and the role of inventories in shaping the construction cycle.

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    Gavekal Research

    London Seminar Audio And Slides

    We held our main fall seminar on October 27 in London, where Anatole Kaletsky, Francois-Xavier Chauchat, Neil Newman, Tom Miller and Louis-Vincent Gave presented their views on the global economy. Anatole discussed the implications of recent developments in financial markets; Francois examined Europe’s resilience to global headwinds; Neil outlined three major investment themes in Japan; Tom explored China’s regional foreign policy ambitions, and...

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    Gavekal Dragonomics

    London Seminar: The Aggresively Friendly Giant

    What sort of country is China, and what sort of power does it want to be? In this presentation to our seminar in London, Tom Miller explains how to understand the signals China’s leaders have been sending. China wants to pursue great-power status, a process that may alienate its neighbors and will require adjustments from the US.

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    Gavekal Dragonomics

    A New Era For China’s Monetary Policy

    More important than its sixth rate cut in 12 months was the Chinese central bank’s announcement that it has abandoned the ceiling it has long set on commercial bank deposit rates. This step brings the decade-long process of interest rate liberalization almost to completion, and ushers in a new era for China’s monetary policy.

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    Gavekal Dragonomics

    Cross-Border Flows And The Renminbi

    China is now earning more renminbi from its foreign trade and fewer US dollars, which means its currency can come under depreciation pressure even if the trade surplus is widening. But such downward pressure has diminished since August, and we do not expect the renminbi to fall more than about 3% against the dollar over the next six months.

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    Gavekal Research

    The Long And Short Of Liquidity

    Charles sometimes likes to say that investing is simple: all one needs to do is figure out whether there is “more money than fools”, in which case risk assets rise, or “more fools than money”, in which case equity markets struggle, since they are one of the world’s main reservoirs for excess liquidity. Alas, what Charles fails to say with this quip is that working out whether there is more money than fools, or the reverse, is no easy job. What’s...

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    Gavekal Research

    Excerpt From Anatole Kaletsky's Hong Kong Seminar Presentation

    Excerpt From Anatole Kaletsky's Hong Kong Seminar Presentation

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    Gavekal Research

    Hong Kong Seminar

    This is the full recording from Gavekal's October Hong Kong seminar featuring Joyce Poon, Andrew Batson and Anatole Kaletsky as well as a Q&A session.

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    Gavekal Dragonomics

    Hong Kong Seminar: Housing Explains Everything

    What is the best way to sort through the complexities of China’s enormous, continent-sized economy? In this presentation to our seminar in Hong Kong, Andrew argues that if you understand what’s going on in the housing market, then you know pretty much everything you need to know about the Chinese economy.

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    Gavekal Dragonomics

    More Headwinds Than Tailwinds

    The better-than-expected GDP number China released today should help further calm market fears about collapsing growth and capital flight. But while growth is not collapsing, it’s also not rebounding, The data will likely look a bit better in the fourth quarter, but we still think China’s growth will take another big step down in early 2016.

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    Gavekal Dragonomics

    When Will Construction Rebound?

    Given the huge role that real estate plays in China’s economy, we can’t expect growth to rebound much until construction recovers. In this piece we propose scenarios for how this could happen, focusing on the inventory cycle. We conclude that construction starts will decline again in 2016, with a cyclical rebound not arriving until 2017 or 2018.

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    Gavekal Dragonomics

    A Rough Road For Retailers

    Chinese consumers spent plenty of money over the national holiday this month—but growth in retail sales has clearly slowed along with the rest of the economy. On top of this slowdown, structural changes in shopping patterns are wreaking havoc with traditional retailers, who increasingly struggle to benefit from the bright spots in consumption.

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    Gavekal Research

    Can Stimulus Save China?

    Last week the International Monetary Fund confirmed its forecast that China’s growth will slow to 6.3% next year—the weakest rate since 1990, in the aftermath of Beijing’s suppression of the Tiananmen Square protests. In an attempt to counter this slowdown, in recent months the government has rolled out a series of measures designed to stimulate demand. It has cut interest rates, reduced bank reserve requirements, released funds for...

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    Gavekal Research

    The Fallacy Of Containment

    Japan’s Prime Minister Shinzo Abe hailed this week’s deal on the Trans-Pacific Partnership as evidence that “the curtain is finally rising on a new Asian century.” The TPP is the biggest trade agreement for 20 years, its 12 members accounting for a full 35% of global trade (see The Big Winner From The TPP). Yet it is hard to get excited about a trade deal that deliberately leaves out the world’s biggest trading nation: China. The TPP is designed...

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    Gavekal Dragonomics

    Spreading The Urban Wealth

    President Xi Jinping is promoting a plan for integrating Beijing and Tianjin with poorer Hebei province, ev even declaring it a national strategy to drive future growth. If successful, the plan will spread some of the resources in central Beijing more evenly around the region. This in turn will push up property prices in suburbs and smaller cities.

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    The Best Financial News In Months

    To our relief, China’s latest reserve statistics showed a significantly smaller than expected decline, confirming that capital flight out of China has eased substantially. The threat to the global economy generated by the summer turmoil has now lifted, and markets all over the world should therefore return to risk-on mode.

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    Gavekal Research

    The Birth Of A Pain Trade?

    The question we have received most in recent days is whether this week’s counter-trend rally in commodities, deep cyclicals and emerging markets can morph into a “melt-up” akin to that seen in 4Q98. Seventeen years ago the blowback from the Asian Financial Crisis culminated in late September with the failure of Long Term Capital Management. Within days of a hurriedly agreed creditor bailout, the Federal Reserve had made the first of three...

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  • Gavekal Dragonomics

    The Stimulus Question: Not When But How

    With China’s growth heading below the government’s 7% target, policymakers are once again rolling out supportive measures. But will yet more stimulus be enough to arrest the slide in growth and turn around sentiment? In this piece, Andrew explores the potential impact from two conventional and two unconventional options for further stimulus.

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    Gavekal Research

    Asia's Good For A Bounce

    Financial markets offer a real-time snapshot of how humans, and increasingly computer programs react to new information. When they collectively engage in a fit of irrationality the opportunity arises to extract profits. With Hong Kong equities rallying hard in this morning’s session, it seems that enough investors reckon such a moment has arrived in Asia.

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    Gavekal Research

    The Gavekal Monthly: More Questions Than Answers

    With the Fed having put its rate hike decision on hold, investors face an uncertain environment of weak global growth and inflation, tottering emerging markets and continued worries about China. In this edition of The Gavekal Monthly, Louis-Vincent Gave surveys the crucial questions investors must grapple with and identifies the indicators to monitor in the coming weeks. In addition, we highlight three calls from our analyst team: Joyce...

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    Gavekal Research

    QSCB: What Is The Trade Slowdown Telling Us?

    For the first time since the 1970s global trade is growing more slowly than global GDP, and if anything this growth is decelerating. One explanation is that slower world trade is a symptom of weak global demand, and perhaps a harbinger of worse economic news to come. That is possible, but in this Quarterly Strategy Chartbook we argue that the trade slowdown reflects structural changes in the world economy, and signals that a new phase of...

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    Gavekal Dragonomics

    Macro Update: The Next Step Down In Growth

    In our latest quarterly overview of the Chinese economy: monetary easing has done little to reverse the slowdown, and weakness in heavy industry and construction is now spreading to exports and consumption. Meanwhile financial markets are in turmoil and the reform agenda is disappointing. Another step down in growth looks inevitable.

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    Gavekal Research

    A Worrying Set Of Signals

    Regular readers will know that we keep a battery of indicators to gauge, among other things, economic activity, inflationary pressure, risk appetite and asset valuations. Most of the time this dashboard offers mixed messages, which is not hugely helpful to the investment process. Yet from time to time, the data pack points unambiguously in a single direction and experience tells us that such confluences are worth watching. We are today at such a...

    0
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    Gavekal Dragonomics

    The Mixed-Up Case Of Mixed Ownership Reform

    China’s long-awaited plan for state-owned enterprise reform centers on the vague concept of “mixed ownership.” This new slogan at first seemed to promise more privatization of state enterprises and a greater role for the private sector. But in actual practice, mixed ownership does not look much like privatization at all.

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    Gavekal Dragonomics

    The Diverging Fortunes Of The Two Chinas

    One of the most important facts about China’s current slowdown is how unevenly distributed it is. There is a huge and growing gap between different sectors and provinces; in economic terms there are effectively “two Chinas.” Understanding this disparity is key to assessing China’s growth prospects, financial risks and global impact.

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    Gavekal Research

    How Much Does China Really Matter?

    How much does China’s slowdown really matter to the rest of the world? At first this might sound like a silly question. After all, China is home to a fifth of humanity, it is the world’s second largest national economy and its second largest importer, and in recent years has contributed between a quarter and a third of global growth. What’s more, the recent volatility in China’s stock markets and exchange rate caused shockwaves around the world...

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    Gavekal Dragonomics

    From Empire Builders To Traders

    The new oil-market reality of abundant supplies and low prices is sapping the financial and political power of China’s state-owned oil companies. So they are reducing their capital spending and domestic output, and ramping up their oil trading operations—and shaking up markets in the process.

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    Gavekal Research

    Is The China Panic Abating?

    For the past six weeks, global markets have been in a China-centric panic, sparked partly by bad economic data, but mostly by policy bungling from China’s policymakers. Having spurred a huge expansion in equity margin debt, regulators turned tail in June and cracked down on the practice. As an equity market crash unfolded, policymakers took to swinging a big stick: price-keeping operations were tried, stock trading was halted and speculators...

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