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    Gavekal Dragonomics

    Bringing The World To China's Doorstep

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

    3
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    Gavekal Research

    No Savior On The New Silk Road

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

    1
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    Gavekal Dragonomics

    A Less Distorted Mirror

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

    0
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    Gavekal Dragonomics

    Breaking Down The Services Cycle

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

    1
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    Gavekal Dragonomics

    The Benefits Of Membership

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

    0
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    Gavekal Research

    A Happy Apologist

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

    2
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    Gavekal Dragonomics

    Dead Cat Bounce Or Tiger’s Leap?

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

    5
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    Gavekal Research

    The Limits Of Xi Jinping’s Grand Plan

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

    2
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    Gavekal Dragonomics

    The Chinese Dream (I): The Empire Strikes Back

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

    0
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    Gavekal Dragonomics

    The Never-Ending Slowdown

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

    0
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    Gavekal Dragonomics

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

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

    0
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    Gavekal Dragonomics

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

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

    0
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    Gavekal Dragonomics

    Financing China’s Global Dreams

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

    0
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    Gavekal Dragonomics

    China And Russia: Locked In Reluctant Embrace

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

    0
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    Gavekal Dragonomics

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

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

    0
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    Gavekal Dragonomics

    How Should The US Respond To China’s Rise?

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

    0
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    Gavekal Dragonomics

    Two Cheers For Hypocrisy

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

    0
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    Gavekal Dragonomics

    CEQ: China Reshapes Asia

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

    0
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    Gavekal Dragonomics

    Justifying The Bond Bull Market

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

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    Gavekal Dragonomics

    The Housing Recovery Is Fading

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

    0
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    Gavekal Research

    The Gavekal Monthly: A Possible Return Of US Inflation

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

    0
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    Gavekal Dragonomics

    A Plan For Less Planning?

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

    0
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    Gavekal Dragonomics

    Housing & Construction Review 2015

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

    0
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    Gavekal Research

    London Seminar Audio And Slides

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

    0
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    Gavekal Dragonomics

    London Seminar: The Aggresively Friendly Giant

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

    0
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    Gavekal Dragonomics

    A New Era For China’s Monetary Policy

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

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    Gavekal Dragonomics

    Cross-Border Flows And The Renminbi

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

    2
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    Gavekal Research

    The Long And Short Of Liquidity

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

    0
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    Gavekal Research

    Excerpt From Anatole Kaletsky's Hong Kong Seminar Presentation

    Excerpt From Anatole Kaletsky's Hong Kong Seminar Presentation

    0
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    Gavekal Research

    Hong Kong Seminar

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

    0
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    Gavekal Dragonomics

    Hong Kong Seminar: Housing Explains Everything

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

    0
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    Gavekal Dragonomics

    More Headwinds Than Tailwinds

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

    0
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    Gavekal Dragonomics

    When Will Construction Rebound?

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

    0
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    Gavekal Dragonomics

    A Rough Road For Retailers

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

    0
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    Gavekal Research

    Can Stimulus Save China?

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

    0
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    Gavekal Research

    The Fallacy Of Containment

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

    0
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    Gavekal Dragonomics

    Spreading The Urban Wealth

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

    0
  • Gavekal Research

    The Best Financial News In Months

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

    0
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    Gavekal Research

    The Birth Of A Pain Trade?

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

    0
  • Gavekal Dragonomics

    The Stimulus Question: Not When But How

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

    0
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    Gavekal Research

    Asia's Good For A Bounce

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

    0
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    Gavekal Research

    The Gavekal Monthly: More Questions Than Answers

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

    0
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    Gavekal Research

    QSCB: What Is The Trade Slowdown Telling Us?

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

    0
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    Gavekal Dragonomics

    Macro Update: The Next Step Down In Growth

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

    0
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    Gavekal Research

    A Worrying Set Of Signals

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

    0
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    Gavekal Dragonomics

    The Mixed-Up Case Of Mixed Ownership Reform

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

    6
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    Gavekal Dragonomics

    The Diverging Fortunes Of The Two Chinas

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

    0
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    Gavekal Research

    How Much Does China Really Matter?

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

    0
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    Gavekal Dragonomics

    From Empire Builders To Traders

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

    1
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    Gavekal Research

    Is The China Panic Abating?

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

    5
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