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Gavekal Research
Jan 28th 2015
Five Corners (28 January): In Central Banks We Trust
Overview: When central banks led a war on inflation in the late 1970s and 80s they kept on fighting long after the enemy was beaten into submission. They are likely to take the same approach of using overwhelming force in today’s fight against deflation, says Anatole. United States: The Swiss may have given forward guidance a bad name, but the Fed should be taken at its word, argues Will Denyer. Unlike Anatole, he thinks that interest rate...
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Gavekal Research
Joe Studwell
Jan 27th 2015
The Case For A Real Chinese Bull Market
This report makes the case for a secular improvement in returns from Chinese equities. It does so by a political economy analysis of long-run equity market performance in the three East Asian developmental success stories most akin to China: Japan, South Korea and Taiwan. The basic argument is that when a high-growth economy shifts from policies of “financial repression” to a more liberalized financial system, a sustained period of improved...
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Gavekal Research
Arthur Kroeber
Jan 27th 2015
Chinese Equities: A Guide For The Perplexed
The 60% rally in China’s main onshore stock market was clearly one of the big stories of 2014. Whether this bull market can continue is obviously one of the big questions for 2015. As attentive readers will have noticed, we at Gavekal have formed a wide range of views on this subject. This note is an effort to summarize and, we hope, clarify our various opinions.
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Gavekal Research
Long Chen
Jan 25th 2015
5C China: The PBOC Loves To Be Feared
With consumer inflation modest, producer prices falling, and many other central banks in easing mode, the People’s Bank of China looks set to cut interest rates further this year following last November’s reduction (see Five Macro Questions For 2015). At the same time the central bank also seems intent on maintaining the pace of financial reform after last year’s moves to widen the renminbi’s permitted trading band and liberalize deposit rates...
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Gavekal Dragonomics
Long Chen
Jan 21st 2015
The Inevitable Rise Of Fiscal Deficits
China is now pushing forward the biggest reforms to its fiscal system in 20 years.. These important changes will however have one major and rather counter-intuitive consequence: the official government budget deficit will have to get much larger. In China’s case, a wider budget deficit will be evidence of progress not regress.
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Gavekal Research
Long Chen
Jan 20th 2015
In China, Bad News Is Just Bad
It never rains but it pours. China’s official statisticians announced today that the economy’s annual growth slowed to 7.4% in 2014, the slowest rate in 24 years. Their news came hard on the heels of yesterday’s -7.7% slump in the domestic A-share market, triggered by a tightening in the regulations governing margin trading. That intervention came out of the blue, although the regulators are clearly concerned by the growth of illicit margin...
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Gavekal Research
Thomas Gatley
Jan 14th 2015
Where's The Arbitrage In China Shares?
The rally in China’s domestic equity market over the last two months has been spectacular; the run-up in Hong Kong’s offshore market less so. While the Shanghai composite index has shot up 33% since late November, the MSCI China index—composed of mainland businesses listed in Hong Kong—has climbed a relatively feeble 5%. As a result, onshore and offshore valuations have diverged markedly, defying expectations that November’s launch of a channel...
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Gavekal Research
Long Chen
Jan 14th 2015
5C China: A Mixed Bag Of Blessings
Most researchers have rightly argued that China will on balance benefit from US$50 a barrel oil since it is a large net-importer of the stuff. The standard story runs that the trade surplus should swell and consumers can use their effective tax cut to buy other items. We have addressed the regional impact of cheaper oil, but on the whole the negative consequences have gotten less attention (see The Losers From Lower Energy Prices). This is a...
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Gavekal Research
Tom Miller
Jan 12th 2015
Still Aiming For The Top
China has long criticized the dominant role of the US, arguing instead for a “multipolar” world. But a recent and surprisingly dovish speech by Vice Premier Wang Yang has stirred up a debate about whether Beijing’s foreign policy is becoming more accommodative. So is China really willing to accept a US-led international order? Don’t believe it for a moment.
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Gavekal Research
Joyce Poon
Jan 09th 2015
Discrimination Pays In The Emerging Markets
Viewed as a single asset class, the emerging markets had a tough time of it in 2014. A world characterized by weak global demand, soft commodity prices and a stronger US currency left US dollar-reliant emerging economies exposed and vulnerable. Today, as we roll into 2015, emerging markets are still facing the same headwinds. The US will struggle to support global growth single-handedly and the oil price is unlikely to stage a meaningful...
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Gavekal Research
Tom Miller
Jan 08th 2015
Stay Long The Renminbi
With the Federal Reserve expected to raise interest rates, Europe seemingly about to embrace quantitative easing, and Japan’s economy still in the doldrums, the US dollar’s rise looks unstoppable. But for investors seeking a longer term store of value, the Chinese renminbi is a surer bet.
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Gavekal Dragonomics
Andrew Batson, Rosealea Yao, Thomas Gatley, Ernan Cui, Long Chen
Jan 07th 2015
Five Macro Questions For 2015
For our first China research piece in the new year, we offer a guide to the economic outlook in the form of short answers to some big questions: Will the pace of economic reform accelerate? Will monetary policy keep getting looser? Will the property market recover convincingly? Can corporate profits hold up? Is consumer spending in trouble?
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Gavekal Research
Louis Gave
Jan 05th 2015
The Long Shadow Of The Commodity Bust
The commodity boom of the past decade had all the hallmarks of a typical bubble: massive retail participation (through ETFs, mutual funds etc…), large pension fund involvement, a widespread belief that ‘this time, things were different’ and that a ‘commodity super-cycle’ was unfolding. But like all bubbles, this one too has come to an end. There were plenty of potential triggers in the shape of (i) the Federal Reserve’s decision to stop printing...
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Gavekal Dragonomics
Long Chen
Dec 18th 2014
Macro Update: Easing Policy In The New Normal
China’s government has moved to more decisively support growth by cutting interest rates. But at the same time the leadership is emphasizing that China also faces “new normal” of slower growth. How will the latest move to easier policy play out in this new context? We think lower rates will offer some support to the real economy, but that the upturn in the credit cycle will be modest by recent standards. In the latest installment of our China...
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Gavekal Dragonomics
Michael Komesaroff
Dec 17th 2014
Beijing Will Call The Shots In Resource Sector Battle Royal
In October the world’s fourth largest mining company, Glencore, launched an audacious merger bid for the world’s second biggest miner, Rio Tinto. The approach was rebuffed, and United Kingdom takeover rules—both companies have London listings—forbid Glencore from making any further overtures for the following six months. Yet few in the mining business believe that is the end of the story. Glencore’s chief executive officer Ivan Glasenberg has...
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Gavekal Dragonomics
Andrew Batson
Dec 15th 2014
Deflation: Local Or Global?
Another month, another fall in Chinese producer prices. Last week’s release of inflation data showed that consumer-price inflation is still low at 1.4%, and producer prices are still dropping, by 2.7%. The producer-price index (PPI) has now fallen every month since March 2012. This extended spell of falling prices is giving rise to worries that China’s deflationary pressures could spread beyond its borders, weighing down attempts by Europe,...
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Gavekal Research
Joyce Poon
Dec 11th 2014
China And North Asia’s Deflation Syndrome
Northeast Asian economies are “fated” to experience a structural deflation as they mature due to the nature of their industrialization model. Such economic determinism means that China faces an imminent risk of structural deflation similar to that experienced by Taiwan 20 years ago. In this piece Joyce argues that the way Northeast Asian economies protect their financial systems helps them avoid acute financial crises, but ensures a date with...
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Gavekal Research
Dec 10th 2014
Five Corners (10 December): Contrarian Ideas For 2015
Overview: Anatole Kaletsky looks at the struggle between the Middle-East sheiks and US oil producers and concludes that oil is about to finally conform to standard economic theory. One unintended consequence may be the effective liquidation of western oil majors. United States: Will Denyer considers the dramatic scaling back of the US shale oil sector but argues that US capital spending should do just fine next year. Europe: Francois Chauchat...
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Gavekal Research
Joyce Poon
Dec 09th 2014
China A-Shares: Beyond The Leverage
It is no secret that China’s A-share market has risen as far and as fast as it has over the last few weeks because stock prices have been propelled by an explosion in margin trading and soaring interest in index futures. But although rising leverage can add enormously to the momentum of a stock market rally to create a runaway snowball effect, leverage by itself is not enough to set the ball rolling in the first place. At least some of the...
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Gavekal Research
Charles Gave, François-Xavier Chauchat, Will Denyer, Tom Miller
Dec 09th 2014
New York Seminar December 2014 - Charles, Francois, Tom & Will
We held our winter seminar in New York on December 5 with Charles, Francois, Tom and Will offering their views of the global economic pulse and recent market developments.
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Gavekal Research
Andrew Batson
Dec 08th 2014
5C China: No One Expects Chinese Inflation
Not many prices are rising in China these days. Core consumer-price inflation has averaged less than 2% over the past two years. The producer price index has been falling for nearly three years. Prices of coal, iron ore and now oil, once bolstered by Chinese demand, are in retreat globally. Housing prices are in their longest correction since 2008.
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Gavekal Research
Tom Miller
Dec 08th 2014
A Dream Of Asian Empire
After years of passive diplomacy, China is now making it clear that it wants to play a substantive role on the global stage. In foreign policy, Xi Jinping’s “Chinese dream” means restoring China’s historical dominance in Asia. China is serious about winning friends and helping its neighbors to benefit from its rise, but its own interests come first: it wants to generate new trade networks, open up transit routes for its exports, and develop its...
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Gavekal Research
Research Team
Dec 05th 2014
Normalization of Chinese oil demand
China’s investment–heavy and energy-intensive model of economic growth over the last decade meant that the country accounted for about two thirds of global oil demand growth. A frenzy of building, manufacturing and freight movement resulted in an extra 450,000 barrels of oil, on average, being consumed each day. But as China’s economy eases into a lower growth trajectory and energy efficiency policies are adopted, oil demand growth could halve...
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Gavekal Dragonomics
Long Chen
Dec 05th 2014
A Leverage-Driven Rally
China’s domestic “A-share” market is on steroids. The Shanghai Composite index has now risen by 42% since the middle of the year, and has shot up by 18% just in the nine trading days since the People’s Bank of China cut benchmark interest rates. Sure, the rate cut provided a fillip to sentiment, yet even so the current rally looks highly unusual. Over the last three years, the A-share market has broadly mirrored China’s economic cycle, rising...
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Gavekal Research
Long Chen
Dec 04th 2014
China's Leverage-Driven Rally
China’s domestic ‘A-share’ market is on steroids. The Shanghai composite index has now risen by 38% since the middle of the year, and has shot up by 15% just in the eight trading days since the People’s Bank of China cut benchmark interest rates. Sure, the rate cut provided a fillip to sentiment, yet even so the current rally looks highly unusual. Over the last three years, the A-share market has broadly mirrored China’s economic cycle, rising...
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Gavekal Research
Louis Gave
Dec 03rd 2014
The Burning Questions For 2015
With two reports a day, and often more, readers sometimes complain that keeping tabs on the thoughts of the various Gavekal analysts can be a challenge. So as the year draws to a close, it may be helpful if we recap the main questions confronting investors and the themes we strongly believe in, region by region.
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Gavekal Research
Pierre Gave
Dec 03rd 2014
Growth & Markets Monthly (December 2014)
This month saw our main growth indicator drop into negative territory for the first time in more than a year. The key drags were the commodity-related components and the underperformance of growth-sensitive stock markets such as South Korea and Sweden. The chief concern for markets is whether lower oil prices and the new monetary activism of the Bank of Japan and promises of action from the European Central bank can help reignite market momentum...
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Gavekal Dragonomics
Research Team
Dec 03rd 2014
CEQ: The Xi Jinping Scorecard
How is Xi Jinping doing? A year after the landmark Third Plenum at which China's leader laid out his vision for reforming China, this issue of the CEQ takes a close look at the progress of the reform program. Our expert contributors assess the achievements and the shortfalls, the winners and the losers.
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Gavekal Dragonomics
Long Chen
Dec 02nd 2014
The Dilemma Of Deposit Insurance
After debating it for more than 20 years, China has begun the process of setting up a deposit-insurance system, which will give the government’s formal backing to most bank deposits. Deposit insurance is the conventional protection against financial crises in 112 countries: it shields households from the vagaries of financial markets, helps prevent bank runs and improves financial stability. But China’s different starting point means that it...
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Gavekal Research
Louis Gave
Dec 01st 2014
A Better Class Of Bubble
We never tire of pointing out that, when it comes to bubbles, no two bubbles are ever the same. Firstly, bubbles can bid up asset values because of their perceived ‘scarcity’ (typically land and real estate, but also tulips, or gold…) or because of their productivity (canals, railroads, telecom lines, energy…). This distinction matters because, in the first case, an economy is left with no more land (or gold, or tulips…) than at the outset. In...
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Gavekal Research
Research Team
Dec 01st 2014
Quarterly Strategy Chartbook - Avoiding The Pitfalls Ahead
Forces of creative destruction are building up in the world economy as never before. Several of Gavekal’s key indicators are signalling that we are moving into a mild deflationary boom, in which cheaper resources, lower technology costs—especially for robotics—and accelerating disintermediation—notably in the financial sector—all promise to act as game-changers over the coming years. Reliably picking winners in such disruptive times is difficult...
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Gavekal Dragonomics
Research Team
Nov 30th 2014
CEQ Q4 2014
China’s growth decelerates again. After a short mid-year recovery, China’s GDP growth slowed again to 7.3% in the third quarter. Senior leaders’ comments about the “new normal” for economic growth show a further slowdown is expected. The trade balance is solid, thanks to decent demand from the US and Europe and falling commodity prices. But consumption and income growth are starting to weaken.
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Gavekal Dragonomics
Research Team
Nov 30th 2014
CEQ Q4 2014 - Irresistible Advance Of The Private Sector
Markets over Mao: The Rise of Private Business in China, by Nicholas R. Lardy (Peterson Institute for International Economics, 2014)
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Gavekal Dragonomics
Research Team
Nov 30th 2014
CEQ Q4 2014 - Socialist Rule Of Law, Hong Kong Democracy Movement
So What Exactly Is 'Socialist Rule Of Law With Chinese Characteristics'?
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Gavekal Dragonomics
Research Team, Thomas Gatley, Long Chen
Nov 30th 2014
CEQ Q4 2014 - The Market Is Open - Should You Buy?
Foreigners can now invest in domestic Chinese shares through their Hong Kong brokers. Unfortunately, there are precious few reasons to buy.
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Gavekal Dragonomics
Tom Miller, Research Team
Nov 30th 2014
CEQ Q4 2014 - Quiet Empire Building Along The New Silk Road
China is pursuing infrastructure diplomacy in Central Asia, and it wields a big checkbook. The recipients of its largesse have mixed feelings.
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Gavekal Dragonomics
Arthur Kroeber, Research Team
Nov 30th 2014
CEQ Q4 2014 - End Of The Golden Age
Xi Jinping’s reforms are clearly designed to benefit Chinese firms at the expense of their foreign competitors. Even so, foreign investment keeps pouring in.
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Gavekal Dragonomics
Andrew Batson, Research Team
Nov 30th 2014
CEQ Q4 2014 - The Not So Grand Plan For Fixing State Enterprises
China has launched a new round of state-owned enterprise reform, a welcome move after a decade of stasis. So far this reform is less a coherent plan than a collection of initiatives by officials and executives.
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Gavekal Dragonomics
Research Team
Nov 30th 2014
CEQ Q4 2014 - Squaring The Circle: How The Reforms Can Work
China could keep economic growth running at 7% or morewith the right policy package. Xi Jinping’s blueprint gets fiscal reform right,but falls short in other areas.
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Gavekal Dragonomics
Arthur Kroeber, Research Team
Nov 30th 2014
CEQ Q4 2014 - Our Country, Your Problem
Much commentary on China assumes that beneath its tough veneer the Party is fragile and walks on a knife-edge of popular discontent. Nothing could be further from the truth.
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Gavekal Research
Anatole Kaletsky
Nov 27th 2014
The Great Policy Convergence
Yesterday’s announcement that the European Central Bank is preparing to buy government bonds from the first quarter of next year is an event of historic importance. As the logical follow-up to Mario Draghi’s commitment to expand the ECB’s balance sheet by €1trn, yesterday’s statement by ECB vice-president Vitor Constâncio confirms beyond reasonable doubt that Europe is ready, at last, to implement full-blown quantitative easing, over-riding the...
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Gavekal Dragonomics
Rosealea Yao
Nov 27th 2014
Housing & Construction Review
Is the latest downturn in China’s housing market just another cyclical correction, or the bursting of an unsustainable bubble? To cut through the confusion surrounding this key part of the economy, it is crucial to understand the fundamentals. In this chartbook, our annual review of the housing and construction market, Rosealea explains our outlook for the long-term prospects for housing demand in China; explores the implication of changing...
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Gavekal Research
Research Team
Nov 26th 2014
Five Corners (26 November): Capital Spending In 2015
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Gavekal Research
Will Denyer, Tan Kai Xian
Nov 25th 2014
Global Central Banks Are Driving Appetite For US Cyclicals
The rebound in US equities since their mid-October trough has been impressive. After giving up almost all its year to date gains in just four weeks, the S&P 500 snapped back even more quickly, ending October at a new record high. Since then, it has extended its advance to notch up a YTD gain of 12%. Yet, until just a few days ago, the relative performance of sectors within the index indicated a degree of caution on the part of investors....
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Gavekal Research
Thomas Gatley
Nov 25th 2014
5C China: Rate Cuts Are No Cure For Weak Capex
As inflation has weakened in China since 2011, the real interest rates paid by corporate borrowers have risen steadily. At the same time demand growth has slowed across the board. Heavy industrial firms in particular—and most state-owned enterprises fall into that basket—operate in sectors suffering from overcapacity with scant top line growth and particularly acute deflationary pressure. It is little wonder then that few are keen to pay higher...
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Gavekal Research
Long Chen
Nov 24th 2014
China's Rate Cut: Diminished Returns
First the Bank of Japan, then the European Central Bank, now comes the People’s Bank of China. On Friday evening the PBOC cut its benchmark interest rates for the first time since July 2012. The direction of the move had long been foreseen, but the timing of the announcement came as a surprise. We had expected concerns over China’s high levels of domestic debt would enable the central bank to resist pressure to cut rates until the first quarter...
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Gavekal Dragonomics
Michael Meidan
Nov 20th 2014
The Great Normalization Of Chinese Oil Demand
China’s investment-heavy and energy-intensive model of economic growth has meant that it accounted for about two-thirds of global oil demand growth over the past decade. This frenzy of building, manufacturing and freight movement resulted in an extra 450,000 barrels of oil, on average, being consumed each day. But as China’s economy eases into a lower growth trajectory and energy-efficiency policies are toughened, oil demand growth could halve...
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Gavekal Research
Arthur Kroeber
Nov 18th 2014
Xi’s Long Game
Summit meetings of APEC, the Asia-Pacific economic cooperation talking shop, rarely produce much of interest beyond a funny group photo of 21 heads of state struggling to look comfortable in ersatz local dress of the host country. But last week’s summit in Beijing, the companion state visit of President Obama, and the subsequent G-20 summit in Australia produced a surprisingly substantial feast of positive news. The deal flow was a testament to...
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Gavekal Research
Joyce Poon
Nov 17th 2014
What If The Yen Falls Another 20%?
Japan’s woeful third quarter performance—the economy contracted at an annualized 1.6% rate, pushing the economy into a technical recession—has killed any remaining expectations that the government of Shinzo Abe will proceed with its original plan to raise the country’s sales tax for a second time next year to 10%. In the absence of further fiscal consolidation, this will leave the prime minister’s ‘Abenomics’ policy to revitalize Japan’s economy...
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Gavekal Dragonomics
Rosealea Yao
Nov 17th 2014
A Creditless Recovery For Housing?
The extended decline in China’s housing sales is finally showing clear signs of reaching a bottom. The latest data show the decline in national property sales narrowed sharply in October, with volumes dropping just 1.6% after a 10.3% fall in September. And the daily transaction figures reported by a number of major cities suggest market activity continued strengthening in November. This improvement is primarily a response to the favorable...
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