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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...

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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...

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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....

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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...

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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...

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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...

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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.

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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...

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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...

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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.

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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...

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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...

    0
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    Gavekal Research

    Perilous Seas

    Across Asia, Xi Jinping’s much-vaunted “Chinese Dream” looks more and more like a Chinese nightmare. Last week, China unveiled an official map showing the South China Sea as an integral part of the country. The new map, which is designed to enhance awareness of China’s territorial claims stretching down the coasts of Vietnam, Malaysia and the Philippines, deepens concern that the China Seas are beginning to resemble central Europe in the early...

    0
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    Gavekal Dragonomics

    Growth, Reform Or Both?

    Is China’s government more focused on short-term growth or long-term reform? Those hoping for a clear answer are getting disappointed.

    0
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    Gavekal Research

    Perilous Seas

    Across Asia, Xi Jinping’s much-vaunted “Chinese Dream” looks more and more like a Chinese nightmare. Last week, China unveiled an official map showing the South China Sea as an integral part of the country. The new map, which is designed to enhance awareness of China’s territorial claims stretching down the coasts of Vietnam, Malaysia and the Philippines, deepens concern that the China Seas are beginning to resemble central Europe in the early...

    4
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    Gavekal Research

    Buried Krugerrands Or Outperforming Emerging Markets

    Approaching 2014’s half-way mark most major asset classes have returned between 3% and 6% over the year to date. There are two outliers: Japan, which has lagged other markets following 2013’s gains, and precious metals, which have outperformed. So far this year gold is up 9.4%.

    4
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    Gavekal Research

    Five Corners (25 June)

    In the latest bi-weekly review of global economics and investment:

    0
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    Gavekal Research

    Rising Velocity Is Driving Markets

    As we approach the half-year mark for 2014, it is remarkable how well asset markets have performed this year. Pretty much every major asset class has registered decent gains. US bonds? The long end of the US government bond market is up by 10%, even after the recent mild sell-off. Commodities? The CRB index is up by 8.6%. Global equities? The world MSCI is up by 6%.

    2
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    Gavekal Research

    The Hong Kong Crisis That Isn’t

    Over the weekend 700,000 inhabitants of Hong Kong, China’s dominant international financial center, voted in an unofficial referendum calling for full democracy and universal suffrage in the territory from 2017. The poll comes just over a week before a pro-democracy movement known as Occupy Central—or Occupy Central With Love And Peace, to give it its full name—has threatened to blockade key roads in the city, bringing the main financial...

    0
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    Gavekal Dragonomics

    Healthcare: From Demand To Supply

    The moment has come for China’s healthcare sector. As the nation’s economy shifts onto a slower growth trajectory, the boom sectors of the previous decade or two are in retreat, and domestic and foreign investors are looking for new growth areas. Healthcare fits the bill: the economic properties of healthcare mean that, at least over the longer term, demand for health services will grow at least as fast and probably faster than the overall...

    0
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    Gavekal Research

    5C China: Broccoli Or Cheesecake?

    It’s now official. In a speech delivered in London, China’s Premier Li Keqiang said his government “can guarantee economic growth won’t slip below 7.5%” this year. It’s the first time he has stated explicitly that Beijing regards 7.5% as its floor for growth in 2014. Until last week he had maintained that a moderate slowdown would be tolerable and that the government was focused more on the quality than the quantity of China’s GDP.

    0
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    Gavekal Dragonomics

    More Postcards From The Edge Of Sichuan

    Two years ago, we visited a small rural county near the southern edge of Sichuan province, whose residents and officials were able to give us some insights as to how central government policy was being implemented at the grassroots level (see Postcards From The Edge Of Sichuan). Since then, a new administration has come to power, which is trying to shake up how local government works. So we recently paid a return visit to the place we call...

    2
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    Gavekal Research

    Indonesia Ups The Ante On Resource Nationalism

    The China-driven resource boom over the past decade has created great wealth in developing countries with big mining industries. It has also created a move toward “resource nationalism,” as countries seek to capture more of the value of their natural resources by clamping down on exports of raw ores and forcing investment in domestic smelting and processing plants. The poster child for this movement is Indonesia, which banned exports of many...

    0
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    Gavekal Research

    China Property: How Bad Can It Get?

    The critical question in China today is the direction of the property market. Are we finally seeing the long overdue, bloody end to a mammoth housing bubble? Or is this simply a cyclical correction, similar to previous downturns in 2008 and 2012, that will quickly reverse after modest price cuts and an easing of credit?

    0
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    Gavekal Research

    New York Seminar June 2014 - Louis, Anatole & Andrew

    We held our summer seminar in New York on June 10, with Anatole, Louis and Andrew offering their take on the state of the world economy and financial markets. We were also joined by Henrik Christensen who is director of Robotics at Georgia Tech. Audio recordings of their discussions are available below:

    0
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    Gavekal Research

    A Chinese Bretton Woods?

    Even as it plants offshore oil rigs and rams foreign vessels in disputed waters, China is wooing its neighbors with infrastructure investment. Its next step is to create new multilateral banks whose twin goals are to allay fears about Chinese expansionism and to provide an alternative to the US-dominated system of development finance.

    2
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    Gavekal Research

    The Risks Of Selective Easing

    The Chinese government is finally getting worried about the economy. Following a series of inspection tours, Premier Li Keqiang has clearly signaled that he doesn’t want growth to slow much from the current rate. The State Council has asked the People’s Bank of China (PBOC) and various ministries to take supportive measures. The central bank is complying, reluctantly, but the risk is that its minimalist moves both fail to support growth and...

    0
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    Gavekal Dragonomics

    The Capital Spending Crunch Continues

    For an economy so reliant on investment, China suffers from a strange dearth of accurate and timely ways to gauge businesses’ capital spending. The most common reference—monthly data on fixed-asset investment—has been painting a bizarrely rosy picture, with nominal growth steady around 20% for years. In reality, investment has slowed very sharply since the big stimulus of 2009, as it takes only a glance at the current suffering of the heavy...

    0
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    Gavekal Research

    5C China: Squeezing Shadow Credit Is A Risky Business

    Last week the central authorities launched an investigation into a trading company in the port city of Qingdao, which supposedly pledged stocks of aluminum and copper multiple times to secure foreign currency bank loans. The immediate impact was a 5% fall in the copper price, which historically derived some support from the metal’s use as collateral in Chinese financing deals.

    0
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    Gavekal Research

    Overcoming The Macro Breakdown

    The financial crisis of 2008-2009 heralded a golden age for macro investors. As the wholesale market crash rendered the relative value judgments of stock pickers irrelevant, macro investors enjoyed a boom time—especially ones who had had the foresight to short US housing, global financials, or eurozone peripheral debt. Now, as the crisis recedes further into the rear view mirror, macro investors are struggling to adapt to a world in which...

    0
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    Gavekal Research

    Growth & Markets Monthly (June 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 Dragonomics

    CEQ: Investment Abroad — The Dragon Steps Out

    China is now the world's third biggest source of outward direct investment, and the things it is buying are rapidly changing. Gone are the days when Chinese outward investment was all about state-owned enterprises buying oil wells and iron ore mines. There are still plenty of state-driven resource deals, but 40% of Chinese direct investment is now conducted by private firms, who are mainly interested in consumer, technology and service...

    0
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    Gavekal Dragonomics

    How Much Pain For How Much Gain In China?

    Xi Jinping and his colleagues have been running China for a year, and they face a crucial set of decisions. They have reined in runaway credit growth and intimidated opponents of structural reforms with an anti-corruption drive of remarkable ferocity. Now the economy is growing at its most sluggish pace in 15 years, and a further slowdown is certain. How much more economic pain are the leaders willing to endure, and how much structural gain can...

    1
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    Gavekal Dragonomics

    CEQ Q2 2014

    Growth in 2014 will slow more than policymakers anticipated. It is almost certain that the 7.5% real GDP growth target will not be met, and a fall below 7% ispossible. The slowdown is led by property investment; consumption and exports are holding up well and the labor marketis still tight.

    0
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    Gavekal Dragonomics

    CEQ Q2 2014 - A Portrait Of China's Gilded Age

    Age of Ambition: Chasing Fortune, Truth and Faith in the New China, by Evan Osnos (Farrar, Straus and Giroux, 2014)

    0
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    Gavekal Dragonomics

    CEQ Q2 2014 - One-Child Policy, Foreign Companies

    Relaxing The One-Child Policy: Too Late, Too Little

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