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    Gavekal Dragonomics

    The Flailing State Of Enterprise Reform

    A decisive move on economic reform would be very helpful in demonstrating that China is still on the right track. Unfortunately the long-awaited plan for state-owned enterprise reform is not such a move. Instead it is an ungainly mishmash of bureaucratic compromises that sets no clear goals and is riven by internal contradictions.

    0
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    Gavekal Dragonomics

    Taking The Pulse Of The Construction Cycle

    China’s housing-driven industrial cycle is stuck in low gear, but has not worsened dramatically. What is getting worse are the parts of the economy that had been doing better earlier in the year: exports, consumer spending and finance. The result will be headline GDP growth that (finally) falls below 7% in the third quarter.

    0
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    Gavekal Dragonomics

    No New Coal: Power Sector Crosses Green Energy Threshold

    The combination of structural shifts under way in the economy and new regulations mean that future growth in China’s electricity demand growth can be met entirely from clean energy sources. The implication is that over the coming years, China will no longer need to build new coal-fired power plants.

    0
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    Gavekal Research

    Has The Asian Currency Collapse Run Its Course?

    The past four months have seen an unprecedented divergence in the performance of developed market and emerging market currencies, with Asian units getting sucked into the EM downdraft even though their manufacturing-heavy economies should, on paper, be beneficiaries of the commodity collapse. Or to be more specific the more than 10% decline in Asian currencies against the euro over the last four months has been a near two standard deviation...

    0
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    Gavekal Research

    Is The Bull Market Over? (II)

    Yesterday we examined the three big fears that—in the absence of any markedly negative news from the OECD economies—lie behind the recent equity market sell-off, and which have prompted many investors to ask “Is The Bull Market Over?”

    2
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    Gavekal Dragonomics

    Debating The Data Denialists

    There are growing fears that China’s economic statistics are massively overstating growth, so rather than growing by 6-7%, China is now “really” growing by only 3-4%. These worries are overdone: Chinese statistics have problems, but they do provide a broadly accurate view of the growth trajectory.

    1
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    Gavekal Research

    Is The Bull Market Over? (I)

    Is the bull market in equities over? As our readers might imagine, this is a question we have been asked more than once over the past few weeks. Notwithstanding the bounce of the last two days, the simple fact that clients are wondering about the answer is troubling in itself. Their doubts are embodied by three ominous developments:

    1
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    Gavekal Research

    The RMB, The HKD And A Flood Of Cash

    If nothing else, yesterday’s announcement that China spent US$94bn of its foreign reserves in August to prevent the renminbi from falling against the US dollar should convince the doubters that China has no intention of being a mercantilist “currency warrior”. As a result, any bearish case against the renminbi should not rest on the government’s intentions—in spending its US$94bn, the People’s Bank of China has made it clear that it will hold a...

    3
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    Gavekal Research

    Termaillage And The Renminbi

    For years I have felt like a lone voice in the wilderness, monitoring central bank reserves as an important determining factor of what I loosely call “international liquidity”. Suddenly I’ve got company. In the last few weeks everyone has been focusing on the topic, and “experts” by the dozen have penned reports about it. Naturally, I’ve read everything that has passed across my screen, and—sad to say—I’m appalled by the results: an egregious...

    0
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    Gavekal Dragonomics

    The Nationalist Style Of Economic Reform

    China’s leaders are not far-sighted planners calmly executing a long-term strategy, but politicians responding to events and seizing opportunities. Economic reform in China is not going in reverse, but the nationalist shift in politics means reform is scattershot and opportunistic—and that creates risks and increases volatility.

    0
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    Gavekal Dragonomics

    Goose Stepping Into Isolation

    China’s military parade to celebrate victory over Japan 70 years ago will be lapped up by a patriotic nation that revels in shows of national strength. But rather than winning it new friends, China’s military chest-thumping is only scaring its neighbors into the arms of the US. The parade reflects not strength but a chronic lack of self-confidence.

    0
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    Gavekal Research

    The Four Horsemen Of The Apocalypse

    Markets are entering bear market territory and what vexes Charles and Louis is whether the root cause is a liquidity crunch, a solvency crisis or a deflationary bust. In this wide ranging chart book they explore the problem through the revelatory prophecy of four riders whose presence marked the coming of judgement day. We don’t mean to pile on the misery in what is shaping up as a tough week and the moderately good news is that the-end-of-times...

    0
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    Gavekal Research

    The Three Options For Renminbi Policy

    Heavy intervention by the People’s Bank of China has restored stability to the exchange rate, but raised questions about its longer-term strategy. We think the central bank has three options: continue intervention to maintain stability; cease intervention and allow a sizable devaluation; scale back intervention and allow a gradual depreciation.

    2
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    Gavekal Dragonomics

    Bubbles, Busts And Regime Change

    Collapsing commodity prices, a deflating bubble on the Shanghai stock exchange, dodgy infrastructure financing schemes. It all sounds a lot like China in 2015, but it happens to be a description of the country in 1910—when China was on the brink of a revolution that would bring down the Qing dynasty.

    6
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    Gavekal Research

    The Real Message From Oil

    Violent swings in oil prices are destabilizing economies and financial markets worldwide. When the oil price halved last year, from US$110 to US$55 a barrel, the cause was obvious: Saudi Arabia’s decision to increase its share of the global oil market by expanding production. But what accounts for the further plunge in oil prices in the last few weeks—to lows last seen in the immediate aftermath of the 2008 global financial crisis—and how will...

    18
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    Gavekal Dragonomics

    What To Worry About, And What Not To In China

    The unexpected devaluation of the renminbi earlier this month focused international attention on the continuing slowdown in China and triggered increased worries about its problems. In this piece, we detail four areas where fears about economic fragility have been overstated, and four areas where investor concerns are justified.

    3
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    Gavekal Dragonomics

    China’s Broken Directional Signal

    There has clearly been a recent breakdown of communication between Beijing and global financial markets. The underlying problem is that policies that are good for China are bad for the rest of the world, and vice-versa. Beijing has not made clear whether it will do what’s right for China, what’s right for the rest of the world, or neither.

    1
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    Gavekal Research

    A Solvency Crisis Or A Liquidity Crisis?

    Over the past five years, critics of zero-interest rate policies have typically fallen into one of two camps:

    0
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    Gavekal Research

    The Four Horsemen Of The Apocalypse

    In almost every good movie battle scene, the heroes must face attacks on several fronts at once. Invariably, as losses mount, the defensive perimeter shrinks until, with American movies at least, (Saving Private Ryan, Fury…) the cavalry arrives in the nick of time, and our heroes are saved. If the movie is French (La 317eme Section) the position gets overrun and, like in Camerone or Dien Bien Phu, a glorious disaster ensues. Right now, many...

    1
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    Gavekal Research

    How To Build A Reserve Currency

    A store of value, a unit of account and a medium of exchange—these are the three essential characteristics of any proper currency. Needless to say a reserve currency must possess all three. But they are far from enough. A reserve currency must have at least six other attributes too, as Jacques Rueff and Robert Triffin did so much to establish.

    1
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    Gavekal Dragonomics

    Expect The Unexpected

    The last couple of months have caused whiplash for China-watchers: first, the government creates huge uncertainty by a massive intervention to prop up the stock market. Next, the government creates huge uncertainty by giving up much of its historic control over the exchange rate. So does the Chinese government love markets or hate them? It is hard to tell a consistent story either way (though that hasn’t stopped people from trying). The one...

    0
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    Gavekal Research

    Four Lessons And Three Forecasts From A Busy Week In China

    It has been an exciting week in China. Now that the dust has settled and the renminbi seems once more on a firm footing, it is time to step back and consider what we have learned. We offer four lessons, and three forecasts for what the new renminbi regime portends.

    0
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    Gavekal Research

    Conference Call Following The Renminbi Devaluation

    After the renminbi’s devaluation investors have been left with more questions than answers. In this conference call, Louis Gave assesses the resulting investment scenarios for China and the rest of the world.

    0
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    Gavekal Research

    Emerging Asia’s Nightmare

    The investment case for Asian currencies has been a tough one to make over the last year as stagnant global trade and a stronger US dollar has constrained the growth outlook. Still, until this week’s “renminbi shock”, the region’s reasonable fundamentals and decent yields continued to justify a holding in Asian currencies. After China’s “devaluation”, this risk-reward position has changed as regional currencies look like prime victims of Beijing...

    0
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    Gavekal Research

    Four Lessons And Three Forecasts From A Busy Week In China

    It has been an exciting week in China. Now that the dust has settled and the renminbi seems once more on a firm footing, it is time to step back and consider what we have learned. We offer four lessons, and three forecasts for what the new renminbi regime portends.

    0
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    Gavekal Research

    New Renminbi Policy Cannot Reverse China’s Slowdown

    Weak growth will prompt the government to enact more supportive policies in the months to come, but at best these will stabilize the slowdown. They are unlikely to turn the cycle around. A weaker currency—the renminbi is now down 3% against the US dollar since Tuesday’s surprise policy change—will also do little to support domestic activity.

    0
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    Gavekal Research

    Cutting The Tail Of The Dog

    When docking the tail of a dog there are (in theory at least) two ways by which the offending appendage can be removed: it can be amputated with a single incision, or instead sliced incrementally so that the poor creature barely notices its loss. The same logic applies to economic policymakers when a “tough” decision has to be made. The Thatchers of this world go for a single chop, while the likes of Hollande or Chirac will always plump for...

    3
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    Gavekal Research

    China’s New Exchange Rate Policy

    It looks, at long last, as if China is serious about having a largely market-driven exchange rate. After Tuesday’s surprise move, which saw the People’s Bank of China push the daily fixing of the renminbi against the US dollar down by -1.9% and declare that future fixings would be determined by the previous day’s closing spot rate, the central bank followed through today. Wednesday’s fixing, at CNY6.33, closely matched the prior day’s close, and...

    3
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    Gavekal Dragonomics

    The New Exchange Rate Policy

    It looks, at long last, as if China is serious about having a largely market-driven exchange rate. But ignore the silly headlines about “currency wars”. China’s move has little to do with competitive devaluation and a lot to do with enabling the renminbi’s admission into the IMF’s special drawing rights basket.

    0
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    Gavekal Research

    What Is The PBOC Really UP To?

    The People’s Bank of China sprang a surprise this morning, lifting the daily fixing rate for the US$-CNY exchange rate by 1.9% and triggering an effective 1.8% devaluation of the renminbi—the currency’s biggest one day move since July 2005 when Beijing started its exchange rate reforms. At first glance today’s move looks like a response to months of dismal trade data. In our view, however, today’s exchange rate move is a lot more than a panic...

    10
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    Gavekal Dragonomics

    What Is The PBOC Really Up To?

    The People’s Bank of China sprang a surprise this morning, lifting the daily fixing rate for the US$-CNY exchange rate by 1.9% and triggering an effective 1.8% devaluation of the renminbi—the currency’s biggest one day move since July 2005 when Beijing started its exchange rate reforms. At first glance today’s move looks like a response to months of dismal trade data. In our view, however, today’s exchange rate move is a lot more than a panic...

    2
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    Gavekal Dragonomics

    The Infrastructure Conundrum

    Officials are once again promising to boost public works to support growth. But infrastructure spending is unlikely to accelerate sharply from its already rapid pace. With little pressure on existing infrastructure, it is harder to justify new rail and power projects. And projects that do get built will be at more risk of making poor returns.

    1
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    Gavekal Research

    Capital Account Deficit Is The New Normal For China

    China’s official foreign exchange reserve has declined by US$300bn in the last 12 months, while the capital account deficit has widened significantly. The concern is that as the tide rolls back on a long boom, capital is fleeing the world’s second largest economy. Since China has lots of debt and has seen a sharp economic slowdown in the last two years, such worries are understandable. We have previously offered a contrary take on this view (see...

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  • Gavekal Dragonomics

    Are Multinationals Losing The Chinese Consumer?

    Rising Chinese incomes should in theory be good for multinational companies. But in the automobile market, there are now signs that local Chinese companies are capturing much of the gains from the new stage of consumer spending—a worrying development for multinationals counting on China growth.

    2
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    Gavekal Research

    Growth & Markets Monthly (August 2015) – by Pierre Gave

    Our latest monthly indicators look to have taken on a somewhat schizophrenic character. On the growth side, our main indicator of global economic activity is perking up, implying a stronger second half of the year. But our diffusion index of OECD leading indicators is clearly heading south, as are commodities. A similarly bifurcated story can be seen on the risk-appetite side. Our velocity indicator has registered improvement and short term...

    1
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    Gavekal Dragonomics

    Housing: From Suppression To Support

    After two rounds of relaxing housing policies, China’s authorities have almost run out of ammunition within the existing policy framework. As a result, the authorities are eyeing new tools to support demand: a greatly expanded market in mortgage-backed securities and a housing policy bank to help finance home purchases.

    2
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    Gavekal Dragonomics

    China Update: Weak Imports Are No Mystery

    Something has happened to China’s demand for imports. In the first and second quarters, the country’s goods imports fell by about -15% year-on-year in nominal terms, even as real GDP grew 7%. Clearly some of the decline is due to the drop in prices of raw commodities, which are among China’s biggest imports. But WTO data shows China’s imports in volume terms were down -12% in 1Q, and preliminary figures point to continued volume declines in 2Q....

    0
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    Gavekal Research

    Five Corners (July 29): The Slowdown In Trade

    Overview: After years in which the world’s major governments have been busy manipulating prices, Charles Gave finds it astonishing that anyone should be surprised by the current slowdown in global trade.

    0
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    Gavekal Research

    One China, Three Worries

    The week started badly, and the epicenter of bad news was China. On Monday the Shanghai Composite Index lost -8.5%, its second worst day ever, erasing virtually all of the gains from the previous two weeks of all-out government support. Commodity markets, which had been sickly anyway, followed suit, as did various other China-linked assets, such as mining stocks and the Brazilian real. More broadly, people are starting to question whether the...

    2
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    Gavekal Research

    5C Asia: No Escape From The Regional Trade Slowdown

    Asia’s trade performance has been disappointing. After a two-year post-crisis rebound in 2010-2011, export growth in the region has slowed to an annual average of 7.5% in US dollar terms and 6% in volume terms. Compare that with US dollar growth rates of 30% seen in the years before the crisis.

    0
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    Gavekal Dragonomics

    Why China Inc. Has Stopped Investing

    China’s investment growth is now the slowest it has been in recent memory, and it continues to decelerate. This extended slowdown is the result of longer-term shift in China’s growth drivers: the end of the supercycle in housing demand. Until the industrial sector can adjust to this new reality, investment growth will remain sluggish.

    6
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    Gavekal Dragonomics

    So You Want To Be A Reserve Currency

    Once every five years the International Monetary Fund reviews the composition of its own artificial currency, the Special Drawing Right. This normally technical and boring process has now become an occasion of high financial drama, thanks to China’s unprecedented campaign to get the renminbi added to the SDR basket. Although there is still debate over the merits of the campaign, all the signals indicate the renminbi will indeed join the SDR...

    5
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    Gavekal Dragonomics

    Inventories Still Weigh On Housing

    Many Chinese cities are still working off the overbuilding of recent years, so developers have little reason to start new housing. Until this is resolved, improving housing sales will do little to boost the economy. This excess supply will continue to weigh on construction for at least another year.

    0
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    Gavekal Research

    Not A People’s Republic-An Empire

    We often say that money managers are not paid to forecast, but to adapt. The challenge, of course, is knowing what to adapt to. For example, an investor picking up a copy of today’s Financial Times will be left scratching his head over the importance of the Greek crisis to the future of the eurozone, the likely impact of coming US Federal Reserve rate hikes, and how the deepening oil supply glut will affect global markets. In our latest...

    1
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    Gavekal Dragonomics

    For Beijing, It’s Goodnight Vietnam

    Vietnam recently scrapped foreign ownership caps across a swathe of industries as a spur to its stalled program to privatize state-owned enterprises. It has signed up to the proposed Trans-Pacific Partnership, a US-led attempt to boost trade and investment in the Asia-Pacific, and is pursuing a free trade agreement with the EU. Liberal-minded Vietnamese are hopeful that the reformist prime minister, Nguyen Tan Dung, will take over as Communist...

    0
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    Gavekal Research

    For Beijing, It’s Goodnight Vietnam

    Vietnam recently scrapped foreign ownership caps across a swathe of industries as a spur to its stalled program to privatize state-owned enterprises. It has signed up to the proposed Trans-Pacific Partnership, a US-led attempt to boost trade and investment in the Asia-Pacific, and is pursuing a free trade agreement with the EU. Liberal-minded Vietnamese are hopeful that the reformist prime minister, Nguyen Tan Dung, will take over as Communist...

    0
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    Gavekal Dragonomics

    The Capital Account: Pushing On A Half-Open Door

    China’s recent embrace of capital account liberalization is a surprising move for a government obviously still very concerned with maintaining stable financial markets. The changes underway as part of the drive to make the renminbi a reserve currency do indeed raise concerns that China will become more vulnerable to destabilizing swings in global capital flows. But the push for convertibility makes sense once two important facts are understood....

    2
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    Gavekal Research

    Be Greedy When Others Are Fearful

    “Be fearful when others are greedy, and greedy when others are fearful,” as Warren Buffett may or may not have said. Either way, when it comes to Chinese equities, this is sound advice. The -30% slide in the Shanghai Composite index over the last month stunned a market in which greed had been pumped up to stratospheric levels by a 153% rally over the previous 12 months. As with all previous leverage-propelled booms, the run-up eventually rolled...

    0
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    Gavekal Research

    Five Corners (July 15): Deflation Redux

    Overview: When governments interfere with the price discovery mechanism, most people believe the inevitable result is runaway inflation. On the contrary, argues Charles Gave, official manipulation of prices threatens to plunge us all into deflation. United States: Tan Kai Xian examines the marked divergence between goods prices and services prices and ponders what it means for the overall US inflation outlook. Europe: As the eurozone inches its...

    0
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    Gavekal Dragonomics

    Five Macro Questions For The Rest Of 2015

    1. Will economic reform make more progress? 2. Will interest rates keep falling? 3. With housing recovering, will construction also rebound? 4. Will investment growth stabilize? 5. Will deflation intensify?

    2
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    Gavekal Research

    5C China: Is Deflation’s Grip Really Easing?

    Over the past few years, China has experienced a huge deflationary shock: nominal GDP growth went from nearly 20% in 2010-11 to around 10% in 2012-13, stepped down further to 8% in 2014, and then reached 5.8% in the first quarter of 2015. So when can we expect this deflationary shock to be over?

    0
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    Gavekal Research

    What Lies Beneath

    As the rout in Chinese shares has deepened—and spread, hitting markets in Hong Kong and beyond—Beijing’s efforts to prop up domestic stock prices have only intensified. After an unprecedented package of market-support measures at the weekend failed to stem declines, even more unprecedented actions followed. On Wednesday, the central bank pledged to help maintain market stability, and Chinese stock regulators banned company officers and major...

    0
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    Gavekal Research

    Markets From China, Media Commentary From Uranus

    At one point in the movie Uranus, the central character played by Gérard Depardieu exclaims: “I am a bar-owner, a Communist Party member and a Freemason. That should tell you how much BS I have heard in my life... But this takes the cake!”. This is a little bit how we feel looking at all the ink that has been spilt over the recent collapse in Chinese equities. So to recap the most important points:

    4
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    Gavekal Dragonomics

    Beijing’s Persian Power Play

    Now that sanctions may be lifted, Iran is hoping to re-engage western investors and to weaken China’s stranglehold on its economy. Unless Beijing can successfully transcend the bilateral tensions of recent years to consolidate its first-mover advantage, China’s energy interests and strategic goals in Iran could gradually come undone.

    0
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    Gavekal Research

    The Xi Jinping Put

    Over the weekend the Chinese government rushed out an unprecedented grab-bag of measures intended to support the free-falling A-share market, which by Friday’s close had tumbled 29% from its mid-June high. By deploying almost every weapon in their armory, the authorities managed to arrest the market’s slide, at least in the immediate short term. By the close of trading on Monday, the Shanghai market was up 2.4% from Friday’s close. But there is...

    3
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    Gavekal Research

    The Unequal Sell-Off in Chinese Stocks

    While the world’s headlines are concentrating on Greece, the real drama in financial markets is happening much further to the East. Since its peak in mid-June, the Shanghai Composite Index has now fallen by almost -23%, putting mainland Chinese shares in what is generally accepted to be bear market territory. Meanwhile intra-day volatility has reached mind-blowing levels, with the index swinging by more than 6% from peak to trough in each of the...

    0
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    Gavekal Research

    Five Corners (July 01): Manufacturing Machinations

    Overview: Charles Gave argues that the manufacturing sector remains the last bastion of proper economic data in the US, and the message being sent is not good. United States: Tan Kai Xian somewhat demurs from Charles and argues that the US manufacturing sector is unlikely to be the fountainhead of the next US recession. Europe: Central Europe has emerged as the manufacturing powerhouse of Europe at the expense of France and the southern...

    0
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    Gavekal Research

    Chinese Equity Demand And The Acceleration Phenomenon

    More than any other major stock market, Shanghai is driven by flows from domestic retail investors. And obviously, in the past couple of weeks, many of these retail investors have decided to head for the exits (the Shanghai Composite Index has plunged -22% from its early June high). Of course, this drop only brought Shanghai back to where the index stood in mid-April; but why the sudden rush for the door? Have the drivers of retail sentiment...

    4
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    Gavekal Dragonomics

    How Low Will Interest Rates Go?

    Continued weak growth and high borrowing costs have led the People’s Bank of China to cut interest rates again. The timing looked like a gift to stock-market investors, coming after the 20% correction in the Shanghai market over the past two weeks, but stocks were nonetheless down another 3.3% on Monday. We think more monetary easing is inevitable, though we suspect that for the next half-year or so the central bank will try hold off on rate...

    0
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    Gavekal Research

    5C China: Better Manufacturing, Not Just Bigger

    China’s status as the workshop of the world faces no serious challengers. Accounting for nearly 25% of global manufacturing value-added, it is by far the world’s largest single manufacturing economy. But the country’s leaders still seem discontented. China may have quantity, they fret, but it lacks quality. It is not enough for China to be a “big” manufacturer, they say, it must also be a “strong” one. With a spate of new industrial policies...

    0
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    Gavekal Dragonomics

    Macro Update: After Easing, A Limited Recovery

    In the latest quarterly chartbook, Chen Long summarizes the outlook for China’s growth and economic policies in a concise presentation. After a very weak start to 2015, the authorities stepped up their supportive policies. Housing sales are now growing again as a result, but the industrial sector is still weak, and the recovery has been marginal. But the fixes to some of the first half’s fiscal problems should offer more support to growth in the...

    3
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    Gavekal Research

    A Bear Market, Or A Rotation?

    Last week’s violent sell off in Chinese A-shares inflicted punishing losses on mainland retail investors and prompted any number of skeptical international commentators to declare that mainland China’s stock markets were a bubble that had now burst. The Shanghai Composite Index fell 13% over the week, losing an eye-watering 6.4% on Friday alone to round off the worst week for Chinese equities since the financial crisis of 2008. With the index...

    0
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    Gavekal Research

    Still A Lonely Power

    China, the political scientist David Shambaugh declared last year, is a “lonely power”—lacking close friends and possessing no allies. That is something that Xi Jinping’s “proactive” foreign policy aims to change. His New Silk Road vision—now officially termed the “Belt and Road Initiative”—is to forge a “community of shared destiny,” in which Asia’s prosperity is tied to China’s rise. Rather than building formal alliances, Beijing’s goal is to...

    0
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    Gavekal Dragonomics

    China Update: Local Government Bond Issuance Takes Off

    From a standing start just one month ago, China’s local government bond market has leapt into life with remarkable vigor. Since mid-May, when Jiangsu became the first province to issue bonds under Beijing’s local government debt restructuring program, a further 16 provinces have also tapped the market, raising a total of RMB600bn.

    0
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    Gavekal Research

    Five Corners (June 17): Bond Market Shakeout

    Overview: Charles Gave argues that the lack of market-making capacity in the financial sector means that the next big market move could be highly disorderly. United States: 10-year Treasuries look overvalued on a fundamental basis, but don’t expect an immediate correction says Tan Kai Xian. Europe: German bond yields have had a roller coaster ride of late so François Chauchat checks in to reassess their valuation anchors. China: From a standing...

    0
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    Gavekal Dragonomics

    Turning Cautious On Land Reform

    The Chinese leadership’s recent enthusiasm for “modern agriculture” featuring large, mechanized farms has waned in recent months, as abuses mount and efficiency gains fail to appear. The evolution of land reform policy is thus an excellent lesson in how reformist ambitions do not always survive an encounter with China’s messy reality.

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    5C China: Local Government Bond Issuance Takes Off

    From a standing start just one month ago, China’s local government bond market has leapt into life with remarkable vigor. Since mid-May, when Jiangsu became the first province to issue bonds under Beijing’s local government debt restructuring program, a further 16 provinces have also tapped the market, raising a total of RMB600bn. The rapid pace at which local governments are issuing bonds to pay down their short term debts means that Beijing’s...

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    Gavekal Dragonomics

    The Capital Spending Downshift

    Easier monetary policy and targeted stimulus may stabilize China’s economy, but anyone hoping for a rebound in capital spending growth is sure to be disappointed. Real gross fixed capital formation rose a meager 6.6% in 2014, the slowest pace since 1999 and far below the 15% average in 2002-11. It is likely that investment growth will fall a bit further this year. One reason is that even after rate cuts, China’s real cost of capital is still...

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    Oil At Its Ceiling, Not Floor

    With oil prices rebounding strongly this week, despite the non-event of last Friday’s meeting of the Organization Of Petroleum Exporting Countries, it seems appropriate to re-examine the case for cheaper oil that we have been presenting since late last year. Specifically, our view in December that US$50/bbl was more likely to be a ceiling than a floor for the Brent oil price in the long term has been contradicted by market actions of recent...

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    Gavekal Dragonomics

    Making Sense Of Corporate China

    Like it or not, financial liberalization means that global portfolios will soon have to include far more Chinese stocks and bonds. Investors need to pay close attention to what they are buying.

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    Gavekal Dragonomics

    CEQ Q2 2015 - How To Invest In Shanghai Without Losing Your Shirt

    Investing in Chinese equities will soon no longer be optional. Doing so successfully is a challenging task, but not an impossible one.

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    Gavekal Dragonomics

    Youku Tudou: Watch With Care

    Youku leads in China’s raucous online video market, but will struggle to stay independent thanks to government censorship and a business model combining the worst aspects of YouTube and Netflix.

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    Gavekal Dragonomics

    Gome: A Second Life, From Behind Bars

    The once and perhaps future king of bricks and mortar retail shows how to come back from the dead, survive the online onslaught, and thrive while its founder serves a 14-year jail term.

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    Gavekal Dragonomics

    Nu Skin: Life In The Gray Zone

    A multi-level marketing firm shows it is possible to survive while skirting the edges of Chinese commercial law.

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    Gavekal Dragonomics

    Tingyi: Scale Over Margins

    Conventional wisdom says consumer-products firms do best to sacrifice volume for margins. China’s biggest instant-noodle maker proves otherwise.

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    Gavekal Dragonomics

    Biostime: High-End Success Story

    A leader in the ethically challenged infant formula industry proves the value of a high-priced strategy.

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    Gavekal Dragonomics

    Books-Straight From The Crocodile's Mouth

    Alibaba’s World: How a Remarkable Chinese Company Is Changing the Face of Global Business

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    Gavekal Dragonomics

    By The Numbers

    Deflation tightens its grip. Headline YoY GDP growth fell to 7% in the first quarter, but more striking was the drop in nominal GDP to 5.8%, the lowest figure since 2009. This implied a GDP deflator of -1.1%, compared to an average of 0.8% in 2014. QoQ GDP growth also slowed to an anemic 5.3%. The slowdown was led by weakness in heavy industry and property; employment, wages and consumption all maintained solid gains.

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    Gavekal Dragonomics

    CEQ: The Chinese Company

    In this special issue of the CEQ focusing on the Chinese company, Matthew Forney lays out the rules of the road for investing in China, and how avoid getting caught by the stereotypes of Chinese companies entrepreneurial miracles or fraud-ridden freak shows. Five profiles offer bottom-up lessons on how Chinese companies work.

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    Gavekal Research

    Protect And Survive

    Bond yields keep rising, emerging markets are softening and key cyclical stocks have taken a bath. The more I look at the global situation the more I am convinced that both economies and markets are reaching a point of transition. And as that old sage Yogi Berra said: “When you come to a fork in the road, take it!”

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    Gavekal Dragonomics

    Chinese Equities And The Taiwan Syndrome

    Is China’s equity market going through a structural re-rating, or blowing up a bubble fueled by easy money and dumb investors? The broad Gavekal view is that China is again pursuing transformative economic reform which should end with a less meddling state and a greater role for market forces (see The New Way To Think About China). In emerging markets, such bursts of reform usually follow a financial crisis so conditions are rarely conducive to...

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    Thinking Big About China

    There are two big facts about China today. One: its economy is slowing, and will almost certainly continue to do so for the next couple of years. Two: under its forceful president Xi Jinping, it is making a big push on many fronts to increase its influence around the world. The question is which of these facts deserves more attention.

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    QSCB: The New Way To Think About China

    China’s annual economic growth rate has slowed to its lowest level since the early 1990s, and is set to slow further over the next few years. But for investors the headline growth numbers are likely to prove rather less important than President Xi Jinping’s determination to establish China as a major international financial power at the center of its own regional trading and investment network. If realized, Beijing’s objectives imply clear...

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    The Spat In The Spratlys

    It is typhoon season once again in the South China Sea. Last May, China ignited a storm of violent protest across Vietnam when it started drilling for oil off the Vietnamese coast. This year the squall is further south in the disputed waters of the Spratly Islands, where the US has demanded that China halt its land reclamation efforts. Ordered to leave the area by the Chinese military last week, a US Navy surveillance aircraft ignored the...

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    Five Corners (3 June): Shifting Capital Flows

    Overview: Louis Gave traces China’s rejection of planned economy shibboleths over the last 30 years and contends that Beijing is charging full tilt toward the final frontier: the liberalization of capital itself. United States: With the strength of the US dollar favoring imports over US-made goods, the US current account balance is set to deteriorate. This, argues Will Denyer and Tan Kai Xian, will mean a bigger supply of US dollar liquidity in...

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    5C China: Capping Capital Outflows

    The People’s Bank of China has achieved its purpose. Since mid-March, when the central bank intervened in the foreign exchange market to halt the depreciation of the renminbi against the US dollar, capital outflows from China have diminished, averting the threat of domestic financial instability.

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    Gavekal Dragonomics

    A New Market For Power

    China’s government has a new plan to reform the electricity sector, introducing a more competitive, market-based pricing system and encouraging cleaner power. If the reforms are successful, the big winners will include end-users and greener, more efficient producers. The losers will be the grid companies, which face a future of squeezed margins.

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    Growth & Markets Monthly (June 2015)

    This month saw a clear deterioration of our growth indicators. The pattern of the last few years with a weaker than expected first half of the year appears to be holding up. The question is whether 2015 will see the habitual pick-up in the second half of the year? On the inflation front, things remain quiet. US breakeven inflation rates, which looked as if they may have been breaking upwards last month, are now heading south again. Given the...

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    5C Overview: First You Get The Money

    In Scarface, Al Pacino observes “First, you get the money, then you get the power, then you get the women”. To some extent, this sums up the challenge facing China’s leadership. Indeed, the lesson the Party learnt once Deng Xiaoping took over from the power-mad Mao Zedong was that ceding control over a part of the economy delivered more power internationally as booming growth made China a more credible regional, then global, power.

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    Beijing’s Margin Risk Calculus

    It is easy to point to possible triggers for yesterday’s gut-wrenching -6.5% sell-off in China’s Shanghai Composite A-share index. The Communist Party’s People’s Daily newspaper ran an editorial warning against the risks of an asset bubble. The central bank drained liquidity from the interbank market ahead of a series of initial public offerings next week which could lock up as much as RMB5trn. One of China’s sovereign funds reduced its...

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    In Shanghai Rally, Two Worlds Collide

    After reaching touching distance of 5,000 the Shanghai Composite fell 6.5% yesterday, capping off a tumultuous month for China’s equity markets. Yet with accommodative policy, positive political signals, and increased openness to foreign fund inflows all continuing to support the bull market, it seems unlikely that this is the rally’s end. Meanwhile valuations continue to take a back seat. Indeed, with the median price to earnings ratio now...

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    A Question Of When, Not If

    The cacophony emanating from China can be disorientating. On the one hand, China’s domestic stock markets are in the throes of a vigorous bull run. Locally-listed equities are up 140% in the last 12 months, with repeated government support measures and rising openness to international fund flows sustaining the momentum. On the other hand, China’s economic growth continues to slow, while the geopolitical drumbeat is increasingly daunting. With...

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    Gavekal Dragonomics

    Making Sense Of China’s Reform Strategy

    Since coming to power in late 2012, Xi Jinping has delivered one surprise after another. Simple labels of reformer or conservative are an increasingly difficult fit. Instead, we should take Xi at his word: he is mainly a nationalist pursuing a dream of national revival.

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    Two Steps Forward, One Step Back

    A series of developments over the last week have called into question how committed Beijing really is to reforming the finances of China’s local governments, which in recent years have accumulated enormous debts. We believe the recent stream of statements and new policy measures is consistent with Beijing’s broad debt management strategy, which aims to avoid the risk of disruptive deleveraging and defaults (see [China] The Emerging Strategy For...

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    Five Corners (20 May): Assessing Oil's Comeback

    Overview: In light of the rebound in oil prices Anatole Kaletsky questions his own view that the oil market is becoming driven by “marginal cost producers”, rather than classic monopoly dynamics.

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    Gavekal Dragonomics

    Can Wage Growth Continue To Outpace GDP?

    Labor is taking home more of China’s economic gains, and will continue to do so, though the reasons have more to do with fortunate demographic timing than brilliant policymaking. This trend, Thomas argues, will help keep consumer spending resilient amid the investment slowdown.

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    The Dissonance In Markets

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

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    5C China: Why The Crude Buying Spree?

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

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    Gavekal Dragonomics

    Property Responds To Treatment

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

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    Why Asia Should Suck Up Tantrum II

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

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