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    Gavekal Dragonomics

    Profits Follow Housing Up, And Down

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

    0
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    Gavekal Dragonomics

    Iron Ore’s Battle Of Attrition Is Over

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

    0
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    Gavekal Research

    The Flow Through To EM Equities

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

    2
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    Gavekal Dragonomics

    The Mixed Progress On Excess Capacity

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

    0
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    Gavekal Research

    The Growth Trade-Off Gets Harder

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

    0
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    Gavekal Research

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

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

    3
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    Gavekal Dragonomics

    The Weak Links In The Financial System

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

    0
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    Gavekal Research

    A Storm Brews In The South China Sea

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

    1
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    Gavekal Dragonomics

    Behind The Jobs Target

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

    0
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    Gavekal Research

    The Renminbi Falls; No One Cares

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

    0
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    Gavekal Dragonomics

    The Caution Of Chinese Corporations

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

    0
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    Gavekal Dragonomics

    The Natural Gas Glut

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

    0
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    Gavekal Dragonomics

    A Boring Infrastructure Bank

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

    0
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    Gavekal Dragonomics

    Macro Update: The Limits Of Stimulus

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

    2
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    Gavekal Dragonomics

    Household Savings: A Permanently High Plateau?

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

    0
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    Gavekal Research

    What Does China’s Propaganda Ministry Do All Day?

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

    1
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    Gavekal Dragonomics

    CEQ: The State Sector’s New Clothes

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

    0
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    Gavekal Dragonomics

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

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

    0
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    Gavekal Dragonomics

    State Enterprise Reform: Missing In Action

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

    0
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    Gavekal Dragonomics

    Return Of The Line Ministries

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

    0
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    Gavekal Dragonomics

    Stability Above All

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

    0
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    Gavekal Dragonomics

    The Future Of China’s Oil Demand

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

    0
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    Gavekal Dragonomics

    The Long March To Europe

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

    0
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    Gavekal Dragonomics

    Making Sense Of The Economic Policy Mess

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

    0
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    Gavekal Research

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

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

    0
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    Gavekal Research

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

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

    1
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    Gavekal Dragonomics

    Capex Lacks All Conviction

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

    0
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    Gavekal Research

    South China Sea Risks

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

    5
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    Gavekal Dragonomics

    The Housing Cycle Is Aging Rapidly

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

    0
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    Gavekal Dragonomics

    How Fast Is China’s Debt Really Growing?

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

    14
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    Gavekal Research

    Reduced Chance Of Renminbi Storms

    The recent strength of the dollar has pushed the renminbi back down to the lows of January. And the renminbi could make new lows if Fed rate hikes trigger a run-up in the dollar—a big if, with the dollar still stuck in a trading range. But such moves are unlikely to trigger anything like the global volatility caused by previous depreciations.

    2
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    Gavekal Research

    The Gavekal Monthly: Risks For Equities—Populism And The Dollar

    Even as markets nudge higher, investors are unnerved by a rising tide of populist politics whose tangible expression will be tested on June 23, when UK voters must choose between Brexit or a less than perfect status quo inside the European Union. Investors are also concerned that the US dollar will strengthen further as the Federal Reserve mulls the question of whether to raise interest rates. In this monthly our writers weigh these big issues...

    0
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    Gavekal Dragonomics

    The Risk In The Service Sector's Rise

    The rising share of services in China’s GDP is often touted as a positive change to a more sustainable structure. But this change is less positive than it appears, since the fastest-growing part of the service sector in recent years has been finance. The rapid financialization of the economy is a process that increases rather than reduces risk.

    0
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    Gavekal Research

    How Much Geopolitical Risk In Asia?

    With the global economy in the doldrums and most asset markets stuck in neutral, the last thing that is needed is a trade war or an armed confrontation in the world’s most vibrant region, East Asia. The risk of either is low, but inching up.

    3
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    Gavekal Dragonomics

    Despite The Bounce, Housing Has Peaked

    The rebound in China’s housing sales early this year raises the obvious question of whether we were too quick to proclaim the peak in housing demand. Housing sales in 2016 are indeed on track to surpass 2013, but this is a stimulus-driven bounce. The long-term trend still points to a 10-20% decline in annual construction volume by 2025.

    0
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    Gavekal Dragonomics

    The Migrant Housing Solution

    In hundreds of smaller cities around China, rows of apartment blocks lie unsold. Can this inventory ever be absorbed? The government hopes migrant workers, long too poor to urban property, will be part of the solution. On a recent trip to southwest China, I did find signs that migrants are becoming a factor at the low end of the housing market.

    0
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    Gavekal Dragonomics

    The End Of The Migrant Miracle?

    China’s growth has long been driven by the shift of millions of people from low-paid farm work to better urban jobs. But latest survey of migrant workers shows the flood of rural labor slowing to a trickle. So is the migrant miracle ending? Not quite. Slower economic growth is curbing migration, but other causes of the slowdown are more benign.

    0
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    Gavekal Research

    No More Easing Likely

    The latest dump of monthly Chinese economic data was generally soft, but what grabbed headlines was an apparent sharp slowdown in broad credit growth. In fact, a closer inspection shows that the pace of credit expansion remained robust in April and the real issue looking forward is whether policymakers respond by dialing back stimulus policies.

    0
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    Gavekal Research

    The Chinese Debt Resolution

    China’s chosen development approach of investment-led industrialization meant it was fated to face an eventual debt crisis. Like Taiwan 30 years ago, China has moved from an export-driven economy to one motored by domestically-focused investment spending. Its challenge has been to “rebalance” toward consumption and in the process stop an escalating build-up of debt which funds projects with ever lower returns. Yet so long as China has a...

    0
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    Gavekal Dragonomics

    The Glory Days For Affluent Consumers

    While China’s economy is slowing, growth in some consumer markets is booming. The cause is what we call the “acceleration phenomenon” of rapid growth in affluent households, which is driving surging sales of goods and services they favor. The flipside of the affluent growth story, however, is that more mass-market consumer goods are slowing down.

    0
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    Gavekal Dragonomics

    Is The Rumpus In The Bond Market Over?

    After a long rally, China’s onshore bond market has finally had a correction. Corporate bonds are experiencing a repricing of credit risk after a recent jump in defaults, and this could go on for a while. But the rise in government bond yields should be a buying opportunity, as China’s interest rates are still headed down over the medium term.

    3
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    Gavekal Dragonomics

    AMCs Are Back: More, Smaller, Shadier

    As the bad loans of China’s banks mount, many wonder how the government will deal with the problem. In the 1990s, four big asset management companies led the bank cleanup, and recently a new crop of smaller local AMCs has emerged. Yet these AMCs do not seem to be helping banks resolve bad loans, but instead are helping them hide problem debts.

    1
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    Gavekal Research

    Making Sense Of The Rally In Cyclicals

    By all accounts, 2016 has so far proved to be a challenging year for “market neutral” funds, and “smart beta” strategies, along with various quant funds. Before we have even reached the seasonally-challenging part of the year—sell in May and go away, and all that—a quick glance at year-to-date returns for “low volatility” hedge funds illustrates that the pain is pretty widespread. In a sense, this is surprising; after all, spreads are tighter...

    2
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    Gavekal Research

    The Gavekal Monthly: Glass Half Full Or Glass Half Empty?

    The past month has seen the US dollar seemingly top out, the oil price settle into a trading range and China’s economic outlook stabilize. Emerging markets in particular have bolted higher despite weak global trade, an oversupplied commodity complex and worries about high levels of leverage. In this edition of The Gavekal Monthly we ask a pressing question for EM investors: is the glass now half full, or half empty?

    0
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    Gavekal Dragonomics

    The Future Of China’s Oil Demand (II)

    Stockpiling has become a key driver of China’s crude oil imports, as Beijing builds up its strategic petroleum reserve and as state-owned oil companies add to their own inventories. But constraints on the capacity to store these stockpiles mean that this boost to oil imports will likely stall within the next two to three years.

    0
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    Gavekal Research

    Asian Plowshares Into Swords

    Japanese Prime Minister Shinzo Abe invested time and prestige in a failed bid to supply Australia with 12 new attack submarines and service them for the next 50 years. It was announced yesterday that the approximate US$38bn contract was scooped by a rival French bidder due to its technical competence, but also after a strong lobbying effort by China which does not want to see a resurgent Japanese defense sector. Canberra’s decision represents a...

    0
  • Gavekal Dragonomics

    The Future Of China’s Oil Demand (I)

    While China’s demand for coal and other basic commodities has gone into decline, its consumption of crude oil has continued to climb. Rosealea projects the GDP intensity of different oil products to conclude that China’s demand for crude oil is set to continue rising over the next five years, despite the slowdown in many sectors of the economy.

    0
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    Gavekal Research

    The End Of Asian Equity Market Underperformance?

    With Asian equities having underperformed their global equivalents by almost 40% since 2011, the past five years have not been much fun for regional investors. Encouragingly, however, just as the panic over a possible China currency crisis and economic implosion reached its apex last summer, Asia’s underperformance seems to have abated. Over the following eight month period or so, Asian equities have held their own with a number posting decent...

    1
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    Gavekal Dragonomics

    How Long Can This Keep Going On?

    Has China salvaged growth only by inflating a housing bubble? How much tolerance the government has for a surge in housing prices and mortgage debt is a crucial question for judging how long the new construction cycle can last. History suggests the price gains are now strong enough for the government to start cooling things down at the margin.

    0
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    Gavekal Research

    The Sum Of All Fears

    As “China implosion” and renminbi devaluation fears have faded, risk assets around the world have enjoyed a sustained a rally led by “China sensitive” assets such as commodities, Asian equities and emerging market high-yield debt. In short, all the assets that were priced for a scenario just short of Armageddon. But following this rebound, what next? The most obvious point is that, with the pick-up in fiscal stimulus, the rebound in construction...

    0
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    Gavekal Dragonomics

    A Regional Guide To The Property Recovery

    The rebound in real-estate investment is behind China’s growth stabilization, but flies in the face of still-high inventories of unsold housing. The regional pattern is very mixed: some genuine improvement, and a lot of government stimulus. Construction in 2016 will be better than expected, but the lack of destocking will drag on future growth.

    7
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    Gavekal Dragonomics

    The Jaws Begin To Close

    China’s growth divergence in 2015 was dramatic. But that divergence is narrowing in 2016, with industry picking up as services slow. While markets have welcomed the stabilization, it’s largely the result of short-term stimulus—and it’s also becoming harder to tell a positive story about the “good” growth drivers of services and consumption.

    1
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    Gavekal Research

    Oil’s Busted Flush

    Buoyant expectations that the world’s major oil producers could agree a production freeze when they meet in Doha on Sunday have helped push the price of crude to a four-month high this week. The international Brent blend benchmark reached just shy of US$45/bbl, up 66% from its late January low of US$27, with at least some brokerage houses predicting the price could breach US$50 in the event of a deal. Maybe—but forecasts that the crude price...

    0
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    Gavekal Dragonomics

    The End Of Deflation Is Nigh

    China’s growth slowdown has been much worse in nominal terms than in real terms—and often, nominal matters more. So it is good news that both consumer and producer price indexes are picking up in early 2016. And even if commodity prices do no rally further, China’s GDP deflator is likely to turn positive by the second half of this year.

    1
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    Gavekal Research

    From Black Hole To Muddling-Through

    Over the past few months, sentiment towards China has shifted dramatically. Fears that China was a black hole at the heart of the global financial system have morphed into mild optimism, as growth indicators have stabilized. There remain plenty of longer-term problems, but muddling through rather than collapse is the likely scenario for 2016.

    4
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    Gavekal Research

    Debt Swaps Are No Panacea For China

    To help troubled borrowers, China’s government is embracing debt-for-equity swaps. But while such swaps will reduce the burden on indebted companies and avoid an abrupt deleveraging, they will also load more stress onto bank balance sheets. Beijing will still eventually have to come up with a workable plan to recapitalize banks; this is not it.

    0
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    Gavekal Dragonomics

    CEQ Q1 2016 - Powerhouse, Menace, Or The Next Japan?

    Two popular narratives about China are that it will either reform its economy and become the next superpower, or fall victim to a dramatic financial crisis. There is a third and perhaps more likely scenario: gradual stagnation, along the lines of 1990s Japan.

    0
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    Gavekal Dragonomics

    CEQ Q1 2016 - China's Impending Minsky Moment

    The Chinese authorities have given up even trying to geta handle on the country’s spiralling debt problem.This means that a financial crisis and severe growth downturn are likely by 2020.

    0
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    Gavekal Dragonomics

    CEQ Q1 2016 - The Fall Of Productivity And The Rise Of Debt

    Productivity of capital is falling, and debt is rising. Does this mean China is headed for low-growth, high-debt stagnation? Not necessarily. Economy-wide returns on capital remain solid; the biggest problems are an inefficient state enterprise sector, and excessive infrastructure debt. Strong state enterprise reforms could enable growth to stabilize at a high level.

    0
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    Gavekal Dragonomics

    CEQ Q1 2016 - Excess Capacity, Zombie Companies, And Debt Deflation

    The story goes that excess capacity and debt-ridden ‘zombie companies’ will drag down China’s economy. But the problems are mainly confined to steel, coal, and other construction-related industries—and are less dire than in the 1990s. A long, slow restructuring is possible, though perhaps not ideal.

    0
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    Gavekal Dragonomics

    CEQ Q1 2016 - What We Learned From The Stock Market Crash

    The mess that are China’s stock markets cost securities regulator Xiao Gang his job in early 2016. Sacking him was the easy task. The real work remains to be done if the country’s financial markets are ever to fulfil a real role as an allocator of capital.

    0
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    Gavekal Dragonomics

    CEQ Q1 2016 - The End Of Non-Interference

    China’s Strong Arm: Protecting Citizens and Assets Abroad by Jonas Parello-Plesner and Mathieu Duchâtel (International Institute for Strategic Studies, 2015)

    0
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    Gavekal Dragonomics

    CEQ: Avoiding The Japan Trap

    Growth is slowing, debt is rising, and the government is openly talking about "zombie companies" in key industries. This is China today, but there are also echoes of 1990s Japan. This issue of the CEQ examines the similarities and differences, and handicaps China’s chances of dodging a Japanese scenario of low-growth, high-debt stagnation.

    0
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    Gavekal Research

    The Gavekal Monthly: The Dollar Weakens; Time To Buy Jewels?

    The big change over the last month is that the US dollar is now falling on a year-on-year basis. This weakness reflects a more abundant international supply of dollars as the US trade balance, ex-China and ex-oil, has swung back into the red after six years in surplus. In this edition of The Gavekal Monthly, Louis outlines why, in such a plentiful-dollar environment, investors should consider prioritizing “jewels” over “tools”.

    0
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    Gavekal Dragonomics

    How Big Is The Zombie Army?

    China’s economy is reportedly being dragged down by an army of “zombie” companies—unprofitable firms clinging to life through subsidies. In fact, the data show only about 10% of Chinese firms are truly financially troubled. “Zombies” look less like a huge systemic problem and more like a normal effect of the downturn in housing and heavy industry.

    6
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    Gavekal Research

    The China Factor In The Fed’s Equation

    Janet Yellen yesterday confirmed that uncertainty over the global outlook was why the Federal Reserve scaled back expected interest rate hikes. But just what happened in the world to change her mind? Rather than slightly weaker global growth prospects, market turbulence is the more likely culprit—in particular the stress over China’s currency.

    0
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    Gavekal Dragonomics

    Macro Update: Of Stimulus And Stability

    Our quarterly overview of China’s economy reviews the eventful start to 2016 and reassesses the outlook. The renminbi has returned to relative stability, property is picking up again, and stimulus is continuing. But growth is still reliant on state spending, national leverage is still rising, and services and consumption are set to weaken.

    0
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    Gavekal Dragonomics

    No Worries From China's Rebalancing?

    For a country that gained so much from China’s commodity boom, Australia seems quite sanguine about the bust. Mining investment may be falling, but optimism on tourism is rising. So has Australia already switched from the old commodity-driven to the new consumer-driven China? And will this rebalancing also be painless for the rest of the world?

    0
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    Gavekal Dragonomics

    Five Trends From The Five-Year Plan

    What to make of China’s five-year plan? The 13th and most recent plan has lost some uniqueness: it is now just one of Xi Jinping’s many long-term plans, strategies and initiatives. So figuring out what is new and important can be even more challenging. To cut through the clutter, we highlight five important trends for next five years.

    5
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    Gavekal Research

    Dollar Liquidity And Its Dependents

    One of our long-standing rules of thumb has been that a deteriorating US trade balance is good news for the rest of the world, and especially for emerging markets. It is thus a positive sign that the ex-energy, ex-China trade balance shifted from surplus to a deficit in 2015, sending US$150bn to the world outside of China and the oil exporters. The overall trade balance is likely to continue worsening through late 2017, thanks to the lagged...

    5
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    China’s Buying: It’s A Good Time To Sell

    A flurry of big cross-border mergers and acquisitions by Chinese companies has left many people scratching their heads. Announced Chinese international acquisitions are on track to exceed US$100bn in the first quarter—almost as much as in the whole of 2015. What is driving this torrent of cash?

    1
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    Gavekal Dragonomics

    A Turn Too Soon

    The biggest surprise in China’s latest data was the rally in property: housing sales surged and real estate investment picked up in the first two months of 2016. But this improvement is unlikely to be sustained: the turn in property has come far earlier than fundamentals warrant, and suggests the government does not have a firm grip on the market.

    2
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    Gavekal Dragonomics

    What To Make Of Industrial Layoffs

    When China’s labor minister said the troubled coal and steel industries could shed 1.8mn jobs, the news provoked a lot of excited commentary. But this is not 1998 all over again. The government’s layoff plan does not mean China is about to be swamped by a wave of unemployed workers, nor that officials are “getting serious” about excess capacity.

    2
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    Gavekal Research

    Parsing The Decline In China’s Reserves

    After falling by almost US$300bn in the three months to January, China’s foreign reserves showed signs of stabilizing in February. The slower pace of decline is certainly welcome news for the central bank. But the reduced stress owes a lot to recent dollar weakness, and it is too early to say Beijing is fully in control of its new currency regime.

    0
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    Gavekal Dragonomics

    Papering Over The Credibility Gap

    The aura of technocratic competence that once surrounded China’s leadership is tarnished these days. A recent burst of transparency from top officials has not done much to change that. The bigger problem is that the government has locked itself into a growth target that is not credible, which makes all economic policy less credible.

    0
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    Gavekal Research

    Not Yet The Buy Of A Lifetime

    With emerging market equities up 13% over the last three weeks, and outstripping developed markets over the year to date, the notion is gaining traction that after four years of underperformance emerging markets are now “the buy of a lifetime”. Investors should be cautious. While it is indeed possible that emerging markets could continue to rally over the next few months as the US dollar tops out and commodity prices stabilize, the longer term...

    2
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    Gavekal Dragonomics

    Where Is The Value In A-Shares?

    With the Shanghai market down by nearly half from its peak, are Chinese A-shares starting to get cheap? Unfortunately no: most stocks other than banks are still highly valued. But technology and healthcare firms, many of which trade in Shenzhen, are still good growth stories, and are cheaper relative to the market than they have been for years.

    0
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    Gavekal Dragonomics

    Keeping Control Of The Interbank Market

    When the central bank cut reserve requirements this week, in its first policy move in four months, confusion resulted. Analysts wondered whether the PBOC’s main priority is supporting the currency or stimulating the economy, and which tools it wants to use. We think its top priority now is maintaining low and stable interbank interest rates.

    2
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    Gavekal Research

    The Avoidance Of Debt Traps

    Yesterday saw Asia’s two big emerging economies adjust economic settings to deal with their respective debt problems. China cut the required reserve ratio that banks must hold by 50bp and India’s government rolled out a cautious budget. Both countries' actions, while different in nature, reflect sensible responses to testing circumstances.

    0
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    The Gavekal Monthly: Nothing To Fear But Fear Itself

    February saw some stability return to markets as investors got more comfortable with China’s currency policy and became less convinced that the Federal Reserve made a fatal mistake in December by raising interest rates. In this edition of the Gavekal Monthly Anatole assesses the big worries for global investors, while other writers focus on the burning currency questions in the major economic regions.

    0
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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.

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    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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    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.

    0
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    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
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    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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    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...

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