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    Gavekal Research

    Five Corners (3 September): World Labor Markets

    In our latest bi-weekly review of global economics, we take a searching look at the forces affecting labor markets in the world’s major economies. How robust are the medium term prospects for wage growth? And how will the longer term forces of ageing populations and increasing automation affect the outlook for jobs? Overview: Arthur Kroeber examines how the wage-positive influence of developed world demographics will balance the job-negative...

    1
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    Gavekal Research

    Killing Democracy To Save Capitalism

    Beijing is tightening its control over Hong Kong’s institutions and political processes. Last week anti-corruption agents raided the homes of three of the city’s prominent pro-democracy figures. Then on Sunday Beijing handed down a long-awaited decision on constitutional development which crushed the city’s hopes for open elections. China’s increasing influence over the nominally-autonomous territory is deeply resented by many in the former...

    0
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    Gavekal Research

    Market Review: A Summer Series

    In late July and early August Anatole went up the mountain so to speak and penned a series of articles that aimed to explain where we were in the current market cycle, and more importantly where we are likely headed. With most major asset classes continuing to head higher we thought it worth republishing Anatole’s consolidated thinking in a single document. Please click on the pdf link above, or, alternatively, the articles can be read...

    2
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    Gavekal Research

    Growth & Markets Monthly (September 2014)

    This month we note a slight deterioration in our global growth indicators, which probably mirrors the significant economic deceleration seen in Europe. On the risk side, markets do not appear stressed, although there has been a slight widening in the US corporate spread (albeit from very low levels). On the question of inflation vs deflation our indicators offer a mixed picture: on the one hand our diffusion index of US CPI components keeps...

    0
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    Gavekal Dragonomics

    CEQ Q3 2014

    “Selective easing” of monetary policy temporarily boosted GDP growth. Premier Li Keqiang has shifted emphasis away from structural reform and toward supporting growth. Credit growth picked up in Q2 and fiscal spending accelerated, enabling GDP growth to rebound modestly to 7.5%. But the cyclical support is not enormous and growth will likely slow again in early 2015.

    0
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    Gavekal Dragonomics

    CEQ Q3 2014 - Stirring Dragon, Nervous Neighbors

    Asia’s Cauldron: The South China Sea and the End of a Stable Pacific by Robert D. Kaplan (Random House, 2014)

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    Gavekal Dragonomics

    CEQ Q3 2014 - Food Security, China Corruption, Asia Pacific High Anxiety

    A New Line On Food Security

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    Gavekal Dragonomics

    CEQ Q3 2014 - Beijing Eyes The Bay Of Bengal

    China wants to build road and rail links from Yunnan all the way to Kolkata, thus securing a virtual western seacoast. Myanmar and India want the investment but are wary of the strategic implications.

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    Gavekal Dragonomics

    CEQ Q3 2014 - Keeping The Dinner Table Healthy

    After enduring milk powder laced with industrial chemicals and pork tainted with dangerous steroids, Chinese consumers are ramping up demand for imports and organics. Local firms are responding by consolidating markets and upgrading their technology, and the government is tightening food safety rules.

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    Gavekal Dragonomics

    CEQ Q3 2014 - Bringing Back The Blue Sky Days

    After Beijing’s infamous Airpocalypse, Premier Li Keqiang declared war on air pollution. Official data show surprising progress in the past year. To sustain this progress, the government must embrace more systematic and market-oriented approaches.

    0
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    Gavekal Dragonomics

    CEQ Q3 2014 - A Real War, More Ammo Required

    China’s pollution problems may not be the worst in history, but they are bad enough. Progress in correcting them has been real but inconsistent. Loud commitments by the new leadership, and a tough new environmental law, offer hope of a faster clean-up.

    0
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    Gavekal Dragonomics

    CEQ Q3 2014 - Summertime, And The Jailin' Is Easy

    Xi Jinping’s war on corruption is far more than just a cynical power-play. Will it work?

    0
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    Gavekal Research

    5C China: Wage Growth Still Solid For Now

    As China’s economic growth has downshifted over the past few years, one of the big surprises has been the absence of bad news from the job market. Wages are still rising at double digit rates, and employers still have trouble filling vacancies. The reason, as is now widely understood, is that the structural slowdown in investment growth is happening at the same time as a structural shift in the labor market. Changing demographics and the...

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    Gavekal Research

    5C Overview: Demography vs Technology

    We have written a lot about two trends with big potential impacts on the balance of power between labor and capital. The first is demography, which since World War II has been a tailwind for growth, but is now turning into a headwind. Virtually every major economy faces a steep fall in its worker-to-retiree ratio, even the US which is often thought to be exempt from demographic destiny because of its relatively high birth rate and openness to...

    0
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    Gavekal Dragonomics

    CEQ Q3 2014 - Small Business To The Rescue?

    Premier Li Keqiang’s most successful economic reform so far is deregulation that has led to a surge in registrations of new private businesses. The next step will be to let these little companies become big ones.

    0
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    Gavekal Research

    China Avoids A Summer Soft Patch

    Has China’s growth hit yet another soft patch? Growth disappointed early in 2014 as a property downturn led to severe pain in construction and heavy industry, prompting the government to ease up on fiscal and monetary policy. Better data in May and June seemed to show that looser policy had succeeded—until a suite of surprisingly weak readings in July raised the prospect that the mini-recovery had just been a mirage. Particularly concerning was...

    0
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    Gavekal Research

    The US Dollar Breaks Out

    Is there a more consensus trade then being bullish on the US dollar? With a) the US economy outperforming those of Europe and Japan, with b) the Federal Reserve looking to withdraw some of the extra-ordinary stimulus that it has deployed in the past five years, just as the need for the European Central Bank, and possibly the Bank of Japan, to become a lot more aggressive becomes ever starker, with c) the Pentagon limiting its defense spending...

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    Gavekal Research

    Iron Ore’s Battle Of Attrition

    Iron ore prices in China are down almost 30% this year, and have languished below US$100 a ton for three months—an unusually protracted downturn in a volatile market. Last year I argued that the iron ore price would stay around US$120 for the next three years, with a relatively high floor set by the rising production cost of Chinese ore, and the reluctance of global miners to invest in new supply capacity. Is this year’s price plunge a temporary...

    0
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    Gavekal Research

    Five Corners (20 August): Velocity Of Money

    In the latest bi-weekly review of global economics and investment we focus on the velocity of money and the credit cycle in the major economic regions: Overview: Charles Gave notes with concern the downturn in the Gavekal Velocity Indicator. US: Will Denyer looks where the US is in the credit cycle and argues it looks more like 2004 than 2007. Europe: François Chauchat argues that contrary to popular belief Europe’s long credit crunch is...

    0
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    Gavekal Research

    A Spectacular Eur-Asian Divergence

    Financial markets are nothing if not a real time survey of real people playing with real money. Hence, no one can seriously doubt that markets contain a huge amount of highly pertinent information. The problem for the investor is how can this be profitably extracted?

    6
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    Gavekal Dragonomics

    The Mystery Of Provincial GDP

    Among all the criticisms on the accuracy of Chinese statistics, the most famous and obvious one is that the sum of China’s provincial GDP is always substantially higher than the national figure released by the National Bureau of Statistics. This reflects the fact that GDP is the most important criterion used to evaluate local government officials, so they have a strong incentive to gussy up their numbers.

    0
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    Gavekal Dragonomics

    Beijing Eyes The Bay Of Bengal

    Under President Xi Jinping, Beijing is pursuing a foreign policy with one grand aim: to restore China’s historical status as the dominant power in Asia. In the South China Sea, this shift towards a muscular, “proactive” diplomacy has intimidated and angered its neighbors (see Perilous Seas). Yet Beijing knows that it cannot simply bully its way to Asian domination: it must offer carrots as well as sticks. So along its southern and western...

    0
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    Gavekal Research

    5C China: Uneasy Easing Undermines Market Reforms

    How do you ease without easing? That is the conundrum China premier Li Keqiang has set for himself. After a disappointing round of July data made clear that economic recovery was still fragile, Li’s cabinet, the State Council, issued a document asking the People’s Bank of China (PBOC) and other ministries to “lower borrowing costs.” But it stopped short of signaling an interest-rate cut.

    0
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    Gavekal Research

    Beijing's Misguided Antitrust Game

    Is Xi Jinping’s China friendly to private enterprise? The answer seems to be yes, if you are a Chinese private company, and no if you’re a foreign one.

    0
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    Gavekal Dragonomics

    The Enduring Hatred Of Big Cities

    China’s government has been promising a “new-style” urbanization policy that will remedy some of the past decade’s many ills. But the ideas behind it are old: planners still seem convinced that the growth of big cities growth must be controlled, and are continuing wasteful efforts to shift resources to smaller and less productive cities.

    0
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    Gavekal Research

    Momentum Shifts From Europe To Asia

    European equity markets have taken a beating in the last 50 days. The average eurozone stock is down 6%, while Portugal and Austria are both down more than 10%, putting them in correction territory. Germany and France are not far behind, down almost 9%. However, this broad underperformance masks a lot of intense individual pain: 20% of eurozone companies have fallen more than 20%. As always with a large sell-off, there are two approaches one...

    0
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    Gavekal Research

    Five Corners (6 August): Central Bank Balance Sheets

    In our latest bi-weekly review of global economics and investment, we examine the bloated balance sheets of the world’s major central banks. We ask what exit strategies the central bankers have prepared to slim them down again, or whether expanded balance sheets are here to stay. If so, how will central bank bloat will affect investors in the coming years? Overview: Anatole Kaletsky argues persuasively that the US Federal Reserve and other...

    0
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    Gavekal Dragonomics

    The RMB's Depreciation Is Over

    After falling by 4% from mid-February to April, the renminbi has now appreciated for three months in a row, gaining 1% against the US dollar. Since February, we have argued repeatedly that the renminbi’s depreciation was stage-managed by the People’s Bank of China in order to curb speculative capital inflows and that it would prove relatively short-lived. Following the recent gains, we are now convinced the renminbi’s depreciation episode is...

    0
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    Gavekal Research

    Growth & Markets Monthly (August 2014)

    This month saw a further improvement, albeit a small one, in our growth indicators. Risk appetite, on the other hand, now looks much more mixed compared with last month’s strong positive tendency. Also noteworthy is the recent spike in our diffusion index of US CPI components, which highlights the abatement of US deflationary pressures. On the asset side, government bonds continue to look expensive, especially in France. Meanwhile, equities are...

    2
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    Gavekal Research

    Wider Spreads And Weaker Equities

    Over the past five weeks, the spread between US high yield debt and US Treasuries has widened by almost a full percentage point. Admittedly, this move could be dismissed as an overdue correction after spreads for high yield debt narrowed to unsustainably tight levels. Unfortunately, it seems that equities markets are no longer in such a forgiving mood. In the past week, the widening of high yield spreads has weighed heavily enough on equity...

    2
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    Gavekal Dragonomics

    How Resilient Are Consumers?

    It’s increasingly clear these days that China has not one economy but two: the investment-driven complex of housing, infrastructure, materials, and the consumption-driven complex of services and consumer goods. Investment was the leader for many years, but since 2009 growth in capital spending has slowed very sharply. Heavy government stimulus and easy credit has smoothed rather than stopped this slump, which does not yet look to be over. The...

    0
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    Gavekal Research

    5C China: Sticking To A Conventional Monetary Policy

    Is China’s monetary policy even looser than it seems? In July, central bank governor Zhou Xiaochuan said that in preparation for interest rate liberalization, he will introduce a new tool called pledged supplementary lending (PSL) to guide medium-term interest rates. Soon after that, local papers reported that the People’s Bank of China had used PSL to hand RMB1trn to China Development Bank to support loans for slum redevelopment programs....

    0
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    Gavekal Dragonomics

    The Last Tiger

    The big game hunter has now bagged his finest trophy. On Tuesday, the Communist Party officially announced a corruption investigation into Zhou Yongkang, a former member of the ruling Poliburo Standing Committee. Over recent months investigators have already detained many of Zhou’s relatives and associates. But no official of Zhou’s rank has been formally disciplined for corruption in the reform era, and it has been uncertain when or if he would...

    0
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    Gavekal Dragonomics

    China: Still Waiting For The Re-Rating

    China’s equity markets are finally beginning to play catch-up. Over the first half of 2014, the Shanghai composite index and Hong Kong’s ‘H-share’ China enterprises index were the worst performing markets in the region, both recording losses while the rest of emerging Asia enjoyed a great run. Lately, however, both the Shanghai market and H-shares have showed signs of renewed vigor. Over the last five trading days both have risen by around 5% to...

    0
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    Gavekal Research

    Housing’s Quiet Period Is Over

    A turning point in China’s housing policy has arrived, half a year into a downturn in property sales and construction. Since late June, major cities such as Hohhot, Jinan, Haikou, Tianjin and Chengdu have moved to support their housing markets. This is a change from earlier months, when local governments were more hesitant and often failed to publicize their policies, limiting their effect. The central government’s implicit approval of the new...

    4
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    Gavekal Research

    Playing Emerging Asia's New High

    Some 18 months after US stocks regained the ground lost in the 2008-09 crisis, emerging Asia has finally made a new high. Yesterday the MSCI emerging Asia US dollar total return index closed above its 2007 peak for the first time, having risen 10% year-to-date. That makes emerging Asia the best performing major regional market in the world so far in 2014. If you invest equally in the countries in the index’s universe, your gains are even better...

    0
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    Gavekal Dragonomics

    Beijing Battles With Bureaucrats

    It’s official: Li Keqiang is fed up. China’s mild-mannered premier has recently been described in official press releases as “speaking in an extremely severe tone” and “shaking his fist.” The target of this display of temper: government officials who are not moving fast enough to implement economic reforms. And Li’s temper tantrums are not just for show. Nine months after the publication of an ambitious modernization agenda, many of Beijing’s...

    2
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    Gavekal Research

    The Price Of A Diminished US Dollar

    Nature, it is said, abhors a vacuum. In much the same way, geopolitics cannot tolerate a power vacuum. So it is small surprise that as a chastened and diminished United States has retreated from direct involvement in the Middle East and adopted a less interventionist diplomatic and military stance elsewhere in the world, ambitious opportunists have stepped forward to fill the gap. In East Asia, China has assumed a far more assertive attitude...

    2
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    Gavekal Dragonomics

    The Future History Of China’s Deleveraging

    If there’s one thing almost everyone can agree about on China, it’s that its rise in debt has been very rapid, and is not sustainable. But where does China go from here? In this chartbook, we use historical examples to think about how a future deleveraging process might occur.

    14
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    Gavekal Research

    Emerging Asia's Leverage Problem

    Aggregate debt levels in Asia (ex-China) are back to levels seen just prior to the 1997-98 Asian Financial Crisis. This does not pose a near term macro-economic risk since most Asian economies have large foreign currency reserves and run flexible currency regimes. Indeed, this was the mercantilist lesson most Asian economies learnt from the late '90s crisis. Still, Joyce and KX show in this chart book that the likes of China, South Korea...

    0
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    Gavekal Research

    5C China: Uncertainty Is The Real Problem

    Chinese equities look cheap, both in historical terms and compared with other markets. The price to earnings ratio for the Shanghai Composite has fallen from highs of more than 60 in 2007 to around 10, well below the MSCI World average of 15. But given the economic transition China is going through, neither its own history, nor other countries, are a good guide to whether current valuations are low. On examination, the earnings growth rates...

    0
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    Gavekal Dragonomics

    Fears For China's Growth Postponed

    The Chinese government has once again successfully stabilized the economy. Spooked by decelerating growth and a property market correction early in the year, the government has spent the last few months loosening credit and rolling out supportive policies. Today’s economic data release showed the pay-off: GDP growth in the second quarter picked up slightly to 7.5%, beating expectations it would be flat at 7.4%. This means that investors’ fears...

    1
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    Gavekal Dragonomics

    Of Reform And Red Tape

    Is China’s reform drive for real? Since Xi Jinping and Li Keqiang took over the reins of government at the beginning of 2013, they have promised sweeping changes to economic policy, foreign affairs and public morality, among other areas. But they have also faced persistent skepticism that the substance of these changes lags behind their lofty rhetoric—and it is true that many of their biggest reforms remain mostly in the planning stages.

    0
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    Fathom China

    The Crucial Smell Test For Investors In Chinese Companies

    With asset prices around the world continuing to rise, low-priced Chinese equities now look extraordinarily attractive to value investors. But investors should not check their skepticism at the border. Many investors in seemingly vibrant Chinese private sector firms have become victims of frauds, often later exposed by short sellers. However, the fear of falling for such scams is no reason to avoid investing in all Chinese firms. Straightforward...

    0
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    Fathom China

    Profile: Due Diligence: Don't Get Fooled Again

    Many investors in Chinese firms check their skepticism at the border, and so have been easy prey for short sellers who benefit from exposing fraudulent companies. This report shows how investors can gain confidence that Chinese companies will be unlikely to come under successful short attacks. Solid due diligence can prevent a lot of pain.

    1
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    Gavekal Research

    Five Corners (9 July 2014)

    Nothing should stay the same and so we are tweaking the format of Five Corners to make the whole report focus on a key thematic issue that impacts all major centers of the global economy. We kick off with an in depth look at inflation which is again rearing its head even as the specter of deflation continues to haunt the most growth-challenged regions.

    0
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    Gavekal Dragonomics

    The Wrong Kind Of Leverage

    For years now the Chinese government has been trying to make it easier for private-sector firms to borrow. Its recent measures to encourage bank lending have privileged those banks that lend more loans to (overwhelmingly private) small and medium-sized enterprises. This is a worthy goal: since private firms make much higher returns on investment than their clumsy state-owned cousins, economic growth will get a boost if private firms borrow and...

    0
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    Gavekal Research

    Growth & Markets Monthly (July 2014)

    Having watched our growth indicators soften over recent months, we are now witnessing a momentum shift since our economic activity indicators have perked up markedly. Moreover, the velocity of money has risen rapidly, while our price indicators continue to show lessening deflationary pressure. Hence, it was not surprising to see that bonds are getting more expensive. Unfortunately, equities are not cheap, and this makes it a challenging...

    0
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    Gavekal Research

    5C Overview: Gold & inflation

    An investor who bought gold upon Arthur Burns’ arrival at the Federal Reserve and held it up until the day Ben Bernanke announced the second round of quantitative easing would have done about as well as someone who bought-and-held US equities (using the S&P 500 total return as the proxy). Both assets compounded at a little over 10% a year between February 1970 and August 2011. Amusingly, most gold-bugs reacted to QE2 (and then QE3) with glee...

    0
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    Gavekal Research

    5C China: Looking For The Exit From Deflation

    From the consumer’s perspective, China’s inflation trends look wonderfully benign, with the consumer price index showing the kind of stable and low-but-positive inflation readings beloved of central bankers. Since 2012, CPI inflation excluding food has hovered around 1.6% YoY, never going above 1.9% or below 1.4%. Yet from the producer’s perspective, China has been going through an extended and wrenching period of deflation: the producer price...

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