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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...

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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.

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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.

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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...

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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.

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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...

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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.

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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.

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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...

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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.

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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.

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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:

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