Gavekal Dragonomics

Thomas Gatley

Mar 13th 2017

China’s listed companies won’t report their final Q4 earnings for another month, but preliminary numbers show it was their best quarter since 2010: profits for the median company jumped 28% in Q4 after a 25% rise in Q3. Strong earnings mean that fundamentals are supporting the slow but steady rally in A-shares that is now about nine months old.

Gavekal Dragonomics

Ernan Cui

Mar 08th 2017

Premier Li Keqiang says pressure on employment is growing, so he has raised the government’s target for urban job creation in 2017. Ernan however disagrees with the premier: the pressure on China’s job market will actually ease somewhat this year, as the cyclical recovery in the economy means that companies have less need to cut jobs.

Gavekal Research

Tom Holland

Mar 06th 2017

Last month, home prices in Hong Kong’s secondary market climbed to a record high, up more than 150% from the depths of the financial crisis. At the same time, Hong Kong’s stock market has been among the world’s strongest major markets so far this year, comfortably outperforming the S&P 500. The buoyancy of Hong Kong assets owes more than a little to investor enthusiasm for the global reflation trade, and to inflows of Chinese money. But more...

Gavekal Research

Arthur Kroeber, Long Chen

Mar 01st 2017

For the last three months, markets have been focused on “Trumpflation”. But the global reflation trade began long before Donald Trump’s November election, with China’s surprisingly strong growth rebound early last year. This suggests that China’s growth performance in 2017 will be a key factor in determining the sustainability of global reflation. In this edition of Gavekal’s Strategy Monthly, Arthur Kroeber and Chen Long argue that China’s...

Gavekal Research

Joyce Poon

Feb 22nd 2017

The Hong Kong-listed H-shares of mainland Chinese financials are the best performing segment of one of the world’s strongest markets year-to-date. So far this year, the H-share index is up 12% in US dollar terms, driven largely by gains in the stocks of China’s big banks and insurers. So it is natural for investors to sit up and take notice on reports that China’s big four financial regulators have drafted a joint proposal to tighten their...

Gavekal Dragonomics

Long Chen

Feb 22nd 2017

China’s central bank is striking a hawkish tone by pledging to curb speculation and leverage, but its actual tightening has been marginal and gradual. What might shift its stance to something tougher? In this piece, Chen Long evaluates three things that could push the PBOC to tighten more: inflation, financial risk, and the politics of growth.

Gavekal Research

Louis Gave, Arthur Kroeber

Feb 20th 2017

In Gavekal Research’s February conference call, Louis-Vincent Gave delves into the unexpected origins of the reflation trade in order to assess its future prospects. And Arthur Kroeber unpicks the combative rhetoric emanating from Washington to gauge the probability of heightened trade friction between the United States and China.

Gavekal Research

Louis Gave

Feb 17th 2017

China’s effort to build a regional sphere of influence is upending Asian geopolitics and through huge infrastructure building, quite literally changing the geography. As such, China’s pursuit of empire is an epochal undertaken which investors need to properly factor into their macro understanding of the region. This is why Gavekal’s Tom Miller wrote a book on the topic and as Louis explains in this piece, it is a tome he really wanted to write...

Gavekal Dragonomics

Arthur Kroeber, Yanmei Xie

Feb 13th 2017

Is Donald Trump backing down from his threat to get tough on China trade? It might seem so: after three weeks of rapid policy moves, his promised anti-China trade action is still missing. But it will not stay missing for long. Some US move against China trade looks inevitable in coming months, though the costs will be high and the benefits unclear.

Gavekal Dragonomics

Rosealea Yao

Feb 03rd 2017

After more than a decade of debate, could China finally be ready to start imposing a property tax? In this piece, Rosealea argues that political will and technical preparations point to progress toward a tax in 2017. While some fear the impact on prices, the gradual rollout of a narrowly focused tax should be mostly a non-event for markets.

Gavekal Research

Louis Gave

Jan 26th 2017

Having experienced a rough 2016, the temptation for most investors is to clean the slate and start again. Unfortunately, life in financial markets does not allow for such neat endings. In one of his biggest reports in years, Louis argues that after such a complex and tumultuous year, it is essential for investors to draw a breath and derive some understanding of what just happened. Only then should they try to sketch out future scenarios.

Gavekal Research

Andrew Batson

Jan 23rd 2017

China reported an acceleration in its economic growth on Friday, just hours before Donald Trump was sworn in as US president. But growth could take a hit if Trump makes radical changes to tax and trade policy. And while China has plenty of weapons to fight a trade war, those measures are unlikely to completely offset a sudden shock to its exports.

Gavekal Research

Arthur Kroeber, Charles Gave, Will Denyer

Jan 18th 2017

Charles Gave argued that Donald Trump’s protectionist policy could lead to a breakdown of the post-1971 fiat money system that is based on a US dollar standard. Will Denyer deconstructed the likely workings of a new trade taxation regime in the US and explained what that means for currencies. Arthur Kroeber outlined the likely Chinese response to a US trade broadside and argued that Beijing was decently well placed to weather the attack.

Gavekal Research

Arthur Kroeber

Jan 17th 2017

Once Donald Trump occupies the White House he is sure to launch salvos at China in the form of new tariffs, anti-dumping actions and the labeling of China as a currency manipulator. It is tough to predict exactly what these actions will entail going forward. What is certain is that the long-running US consensus on how to handle China has broken down.

Gavekal Dragonomics

Thomas Gatley

Jan 16th 2017

The stimulus-driven rebound in housing sales and commodity prices lifted the profits of China’s industrial firms in 2016. With the cycle turning, profit growth is certain to weaken in 2017. But for most manufacturers—outside the volatile commodity complex—the end of reflation should see only a gradual slowdown and still decent profit growth.

Gavekal Dragonomics

Rosealea Yao

Jan 11th 2017

The return of severe smog to northern China since December has frightened families and raised more doubts about the government’s declared “war” on air pollution. So is the government losing the war? Or are they not even fighting it in the first place? In this piece, Rosealea explains the political and economic realities of air pollution in China.

Gavekal Research

Long Chen

Jan 06th 2017

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.

Gavekal Dragonomics

Andrew Batson, Long Chen, Rosealea Yao, Thomas Gatley, Ernan Cui

Jan 04th 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?

Gavekal Research

Research Team

Dec 14th 2016

“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.

Gavekal Dragonomics

Joseph Fewsmith

Dec 12th 2016

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.

Gavekal Dragonomics

Sebastian Heilmann

Dec 12th 2016

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.

Gavekal Dragonomics

Long Chen

Dec 12th 2016

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

Gavekal Dragonomics

Matthew Forney

Dec 12th 2016

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.

Gavekal Dragonomics

Arthur Kroeber

Dec 12th 2016

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.

Gavekal Dragonomics

Yanmei Xie

Dec 06th 2016

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.

Gavekal Research

Louis Gave

Dec 02nd 2016

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.

Gavekal Research

Anatole Kaletsky, Louis Gave, Will Denyer, Nick Andrews, Arthur Kroeber

Dec 01st 2016

Markets have been on a startling trajectory since Donald Trump upended investors’ assumptions with his win in the US presidential election. In this issue of the Monthly two Gavekal partners ask whether the macro environment really has fundamentally shifted due to the emerging policy platform of the president-elect.

Gavekal Dragonomics

Long Chen

Nov 29th 2016

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.

Gavekal Dragonomics

Rosealea Yao

Nov 21st 2016

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.

Gavekal Research

Arthur Kroeber

Nov 16th 2016

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.

Gavekal Dragonomics

Andrew Batson

Nov 14th 2016

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.

Gavekal Dragonomics

Long Chen

Nov 10th 2016

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.

Gavekal Dragonomics

Thomas Gatley

Nov 07th 2016

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.

Gavekal Research

Arthur Kroeber, Rosealea Yao, Nick Andrews, Neil Newman

Nov 01st 2016

The biggest market move of the past month was a significant rise in bond yields across the US and Europe. Much commentary has suggested that this might be a symptom of a sustained rise in inflationary pressures, as wages and rents start to push up prices in the US, and Chinese producer prices end four long years spent in negative territory. We are skeptical. The recent rise in yields has so far reversed only half of the decline in the first half...

Gavekal Research

Long Chen

Oct 27th 2016

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?

Gavekal Research

Joyce Poon

Oct 24th 2016

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...

Gavekal Dragonomics

Andrew Batson

Oct 19th 2016

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.

Gavekal Dragonomics

Rosealea Yao

Oct 11th 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.

Gavekal Dragonomics

Ernan Cui, Andrew Batson

Sep 27th 2016

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.

Gavekal Dragonomics

Andrew Batson

Sep 22nd 2016

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.

Gavekal Dragonomics

Douglas B. Fuller, Dieter Ernst, Caroline Pan, Agatha Kratz, Joe Studwell

Sep 15th 2016

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.

Gavekal Dragonomics

Douglas B. Fuller

Sep 15th 2016

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.

Gavekal Dragonomics

Caroline Pan

Sep 15th 2016

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.

Gavekal Dragonomics

Tom Miller, Agatha Kratz

Sep 15th 2016

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.

Gavekal Dragonomics

Joe Studwell

Sep 15th 2016

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.

Gavekal Research

Andrew Batson

Sep 08th 2016

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?

Gavekal Research

Arthur Kroeber

Sep 06th 2016

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.

Gavekal Research

Long Chen

Sep 02nd 2016

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...

Gavekal Dragonomics

Long Chen

Aug 29th 2016

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.