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Gavekal Research
Tom Miller
Apr 08th 2014
In Laos, All Roads Lead To China
Two thousand years ago, in the days of the Roman Empire, it was said that “All roads lead to Rome.” Rome’s might was built on the back of metaled roads constructed by an army of 180,000 legionnaires, who pushed the expansion of the empire to its geographic limits. China’s expansion over its modern-day borders is primarily economic, not military. But as China’s massive domestic road-building program extends over its borders into Southeast and...
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Gavekal Research
Tom Miller
Apr 08th 2014
In Laos, All Roads Lead To China
Two thousand years ago, in the days of the Roman Empire, it was said that “All roads lead to Rome.” Rome’s might was built on the back of metaled roads constructed by an army of 180,000 legionnaires, who pushed the expansion of the empire to its geographic limits. China’s expansion over its modern-day borders is primarily economic, not military. But as China’s massive domestic road-building program extends over its borders into Southeast and...
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Gavekal Research
Tom Miller
Apr 07th 2014
No Bridgehead Too Far In China’s Expanding Empire
For centuries, China’s borders expanded and contracted as dynasties rose and fell. With its star in the ascendant, the Chinese empire is expanding once more. This expansion is based on economic power—trade and investment—not military conquest. But it will nevertheless reshape the geopolitics of Asia.
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Gavekal Research
Tom Miller
Apr 07th 2014
No Bridgehead Too Far In China’s Expanding Empire
For centuries, China’s borders expanded and contracted as dynasties rose and fell. With its star in the ascendant, the Chinese empire is expanding once more. This expansion is based on economic power—trade and investment—not military conquest. But it will nevertheless reshape the geopolitics of Asia.
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Gavekal Research
Anatole Kaletsky, Arthur Kroeber, François-Xavier Chauchat, Louis Gave
Apr 04th 2014
London Seminar April 2014 - Anatole, Arthur, Louis & Francois
We held our spring seminar in London on April 2, with Anatole, Arthur, Louis and Francois offering their take on the state of the world economy and financial markets. Audio recordings of their discussions are available below:
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Gavekal Dragonomics
Joyce Poon
Apr 03rd 2014
China: Support Not Stimulus
Last night China's State Council unveiled a plan to support growth through additional spending on railways and low cost housing, and via tax relief for small businesses. The offshore market leapt on the news as a signal of changing policy direction. Following recent economic data that appeared to undermine Premier Li Keqiang’s chances of achieving his declared goal of 7.5% growth this year, there were rising expectations for some sort of...
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Gavekal Research
Pierre Gave
Apr 03rd 2014
Growth & Markets Monthly (April 2014)
Please find the latest monthly review of our models and indicators. In this edition we note two important changes. First, our growth indicators have taken a turn for the worse, and second our indicators on risk appetite have deteriorated. Since we have seen no significant rises in market spreads, this is probably more a sign of a slightly overextended rally, then a real erosion of financial conditions. Could the rally in risk assets be about to...
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Gavekal Research
François-Xavier Chauchat
Apr 01st 2014
Bet On Europe Vs The US-EM Axis
Following decades of European economic integration, euro coins and notes were introduced with great fanfare in January 2002. Equity investors barely noticed as their attention was focused on the emerging trans-Pacific economic relationship between the US and China. Initially, this axis relied on the buying power of the US consumer and the production capabilities of the Chinese factory lands. But as the decade wore on this simplified “ChinAmerica...
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Gavekal Research
Research Team
Mar 31st 2014
A Good Scalping In Hong Kong
Massive rains and golf-balls sized hail pelted Hong Kong this weekend, but the weather did not stop the throngs from showing up and cheering on the annual Rugby Sevens. Yet surely it was a tough year for the scalpers, who gather outside the stadium on game days to sell coveted tickets at huge mark-ups to official prices. The rain and dark skies must have given the buyers the upper hand in this year’s price negotiations.
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Gavekal Dragonomics
Andrew Batson
Mar 31st 2014
The Unexpected Return Of State Enterprise Reform
Reforming China’s vast array of state-owned enterprises is once again on the government’s agenda, after a decade of drift. This development has caught many observers by surprise, since it runs against the conventional wisdom that SOEs are entrenched vested interests able to easily block change. In this chartbook, Andrew explains how SOEs’ failures opened the door for a new round of reform, how local governments are now taking the lead—and what...
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Gavekal Research
Nate Taplin
Mar 27th 2014
China's Shale Gas Getting Bubblier
A year and a half ago, China’s nascent shale sector looked like so much sound and fury, signifying nothing. The country’s shale potential is widely regarded as the largest in the world. But two rounds of auctions for exploration licenses had largely fallen flat—with conspicuous bids by real estate companies and other firms with no oil and gas experience. State controlled downstream prices, meanwhile, made Chinese shale look like a money-losing...
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Gavekal Research
Joyce Poon, Udith Sikand
Mar 26th 2014
5C Asia: Cyclical Prospects Favor India Over Indonesia - Udith Sikand & Joyce Poon
Differences in the way macroeconomic adjustment has affected Brazil, India, Indonesia, South Africa and Turkey have shown that lumping disparate economies together with tags like the “Fragile Five”, “BRICS” or “MINT” does little to illuminate the risk-reward trade-off for EM investors.
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Gavekal Research
Long Chen
Mar 26th 2014
5C China: Identity Of Mystery Gold Buyer Revealed!
A few hundred tons of gold went missing, statistically speaking, in China last year. According to the China Gold Association, Chinese consumers purchased 1,176 tons of gold in 2013, overtaking Indians as the world’s largest buyers of gold. But the supply of gold to China last year seems to have been much bigger than even that large figure: domestic gold mines produced 428 tons, scrap recycling another 126 tons, and imports, according to...
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Gavekal Dragonomics
Andrew Batson, Rosealea Yao, Thomas Gatley, Long Chen
Mar 26th 2014
The Ammunition Locker Looks Bare
No sooner had Chinese Premier Li Keqiang declared his goal of 7.5% GDP growth this year than economic data began to undermine his chances of achieving it. The weak readings from most indicators for January and February point were much worse than expectations, and on our models are consistent with GDP growth of 7.2% for the first quarter of 2014—a sharp slowdown from the 7.7% pace in the fourth quarter of 2013. While we can reasonably expect the...
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Gavekal Research
Joyce Poon
Mar 25th 2014
What Happened To The Asia Beta-Bounce?
Identifying an Asian upturn or downturn used to be straight forward. One just had to look at cyclical indicators in the developed economies, because Asia would be sure to follow. Yet the bounce in Asian exports promised by recent business surveys in the West has failed to materialize. China, Korea, Indonesia, Thailand—these and other Asian countries have released disappointing trade data so far this year. This is worrisome on a number of levels...
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Gavekal Research
Anatole Kaletsky
Mar 25th 2014
One Last Flicker Before The Japan Trade Goes Out
Most of us at Gavekal have been enthusiastic devotees of Abenomics since late 2012. But Anatole suddenly showed his true Keynesian colors by turning negative on Japan in September, when Prime Minister Shinzo Abe announced his decision to implement a controversial fiscal tightening planned by the Ministry of Finance (MoF) from April 2014. And indeed, the Nikkei has underperformed the S&P 500 by 15% since the consumption tax was announced on...
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Gavekal Research
Louis Gave
Mar 24th 2014
Due Like Yesterday's Bills
Following the 2008 global financial shock, almost every major government deployed massive fiscal and monetary firepower to prevent another Great Depression. One government, China (which was also still recovering from the devastating Gansu/Sichuan earthquake) did so more than most, compressing a five-year plan worth of rail, canal and motorway construction into just a couple of years. Of course, sending a large amount of public money down a...
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Gavekal Research
Thomas Gatley
Mar 24th 2014
Consumers Repaint The Industrial Landscape
The stereotypical image of China’s industrial landscape includes more coal mines than it does condiments or cars. But in 2013, the manufacturing of consumer goods contributed more to the nation’s economy than the heavy industrial sector. While the largest domestic IPO so far this year was of Shaanxi Coal Industry Co., the second-ranked was of Foshan Haitian Flavoring & Food Co.—the country’s biggest soy sauce manufacturer, and arguably now a...
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Gavekal Research
Charles Gave
Mar 19th 2014
The Sword Is The Axis Of History
As Anatole recently argued, we can all breathe a sigh of relief that the tussle over the Crimea has likely been resolved without serious bloodshed and at minimal cost (see All Over Bar The Annexation). But in the longer term it is clear that these events may cast a long shadow over international relations for years to come. Indeed, as British politician Ernest Bevin famously said, “don't open this Pandora’s box, it is full of Trojan horses...
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Gavekal Dragonomics
Andrew Batson, Research Team
Mar 19th 2014
Is Iron Ore Becoming The New Copper?
One of the hoariest of market clichés is that copper is “the metal with a PhD in economics” since its demand is supposedly closely related to real economic activity. This saying should produce a bit of a chuckle for those familiar with Chinese commodity markets, where copper is heavily used as collateral for financing. Because of this practice, copper shipments and prices often have no relationship whatsoever with economic fundamentals. In...
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Gavekal Dragonomics
Tom Miller, Research Team
Mar 18th 2014
Urbanization 2.0
China’s cities are a mess. The urbanization policies of the past decade encouraged rapid urban sprawl and wasteful investment, funded by large debts and pushing farmers off their land. Simultaneously, millions of rural migrants have been blocked from settling permanently. Pressure has been building for a comprehensive approach to these interlinked problems of debt, planning, land policy and social inequity. After internal wrangling and repeated...
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Gavekal Dragonomics
Long Chen
Mar 17th 2014
More Freedom For The Renminbi
China’s weekend announcement that it will double the permitted daily trading range of the renminbi, to plus or minus 2% around the daily fixing, is its latest signal that market forces will be playing a greater role in the nation’s economy. It should also finally put paid to the incorrect but widespread view that China has begun a steady devaluation of its currency in a desperate attempt to regain export competitiveness. The 1.5% fall in the...
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Gavekal Research
Louis Gave
Mar 16th 2014
5C Overview: A New China Rises From The Concrete
The recent weakness of the renminbi has stirred up new doubts about China’s economic trajectory. We are repeatedly asked how China’s economic model—based as it is on bank-financed infrastructure spending—can be sustainable. The answer is that it is not; and that China will need to see strong labor and capital productivity gains in order to keep the show on the road over the coming years. Which brings us back to French theorist Frederic Bastiat’s...
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Gavekal Research
Andrew Batson
Mar 16th 2014
5C China: Is Iron Ore Becoming The New Copper?
One of the hoariest of market clichés is that copper is “the metal with a PhD in economics” since its demand is supposedly closely related to real economic activity. This saying should produce a bit of a chuckle for those familiar with Chinese commodity markets, where copper is heavily used as collateral for financing. Because of this practice, copper shipments and prices often have no relationship whatsoever with economic fundamentals. In...
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Gavekal Research
Andrew Batson
Mar 14th 2014
‘Tis The Season For China To Disappoint
The trickle of weak economic data from China has turned into a flood, with yesterday’s publication of official readings of industrial output, investment and retail sales that were uniformly below market expectations. As a result, investors are increasingly doubtful of the ability of heavily indebted Chinese firms to survive the combination of weaker growth and tighter credit. Premier Li Keqiang, by coincidence giving his annual press conference...
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Gavekal Dragonomics
Research Team
Mar 11th 2014
CEQ: China And Japan
In this issue, we focus on the increasingly tense relationship between China and Japan. Frictions over disputed islands in the East China Sea have stalled bilateral trade and driven the confidence of Japanese businesses in China to the lowest level ever. China's increasing assertiveness, and Japan's election of strongly nationalist leader Shinzo Abe, have sparked worries over a damaging Sino-Japanese conflict. Yet the news is not all...
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Gavekal Dragonomics
Rosealea Yao
Mar 10th 2014
Neither Boom Nor Bust For Housing
The pattern has become all too predictable: when Chinese house prices rise, the media cries bubble. When prices slow, we are warned of a crash. In recent weeks the crash warnings have been piling up, as housing sales and price growth have decelerated. The more boring truth is that China’s housing market has its cyclical ups and downs. The year 2014 is shaping up to be cooler than the surprisingly torrid 2013. But collapse is not on the horizon,...
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Gavekal Research
Will Denyer
Mar 07th 2014
It's All Good In America, And All Bad In China
“By three methods we may learn wisdom: First by reflection, which is noblest. Second, by imitation, which is easiest. And third by experience, which is the bitterest.” - Confucius.
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Gavekal Dragonomics
Andrew Batson
Mar 06th 2014
Getting Serious About Fiscal Policy
This week’s session of the National People’s Congress is the first major public presentation of Chinese government policies since the leadership unveiled a major reform package last November. As such it provides an occasion to assess how much the government is following through on those plans. And Premier Li Keqiang did indeed reinforce market-friendly themes by pledging further steps on deregulating the economy and supporting private-sector...
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Gavekal Research
Long Chen
Mar 04th 2014
RMB Limbo: How Low Can It Go?
As we argued last week, the recent depreciation of the Chinese currency was engineered by the central bank—not as a competitive devaluation, but rather to rout speculators making one-way bets on renminbi appreciation. The People’s Bank of China (PBC) acted after January saw roughly US$73bn in net capital inflows, the biggest deluge of inward flows in 12 months. The question now, after a 1.4% fall in the renminbi in 10 trading days (a bigger fall...
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Gavekal Dragonomics
Andrew Batson
Mar 03rd 2014
How To Fix China’s State Sector
The government’s own data on SOEs show that neither of its two principal priorities for the state sector is now being achieved: SOE assets are not, in fact, being concentrated in the sectors the government wants; and the returns on SOE assets have sharply deteriorated. As a result, a significant part of the Chinese economy is underperforming. This creates a drag on economic output at a time when many other changes—an aging population, the...
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Gavekal Research
Tom Miller, Thomas Gatley
Mar 01st 2014
5C China: Factory Workers' Fairytale
Once upon a time, Chinese bosses lived in a fairytale world populated by an endless supply of cheap migrant labor. For two decades, nominal GDP growth outpaced migrant wage growth, as employers squeezed their migrant workforce dry. But around five years ago, the labor supply/demand dynamic flipped and migrant wages started to rise. As any reader of fairy tales knows, wicked bosses always meet their comeuppance in the end.
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Gavekal Dragonomics
Research Team
Mar 01st 2014
CEQ Q1 2014 - Data
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Gavekal Dragonomics
Research Team
Mar 01st 2014
CEQ Q1 2014 - Leadership, urbanization, local debt
Xi’s Style: Checks Without Balances, Policies Without Politics
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Gavekal Dragonomics
Tom Miller, Research Team
Mar 01st 2014
CEQ Q1 2014 - Cleaning Up Coketown: Can Air Pollution Be Controlled
After years of lip service, China’s leaders are finally getting serious about cleaning up the country’s dreadful air. An all-out assault on filthy and unprofitable steel mills in Hebei is a good start, but much more will be needed.
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Gavekal Dragonomics
Research Team
Mar 01st 2014
CEQ Q1 2014 - Japanese Business in China-Alive In The Bitter Sea
Growing belligerence by China’s government and populace has driven Japanese companies’ confidence in the China market to its lowest level ever. An increasing number are hedging their bets by investing more in Southeast Asia. But some still find ways to win in hostile territory.
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Gavekal Dragonomics
Research Team
Mar 01st 2014
CEQ Q1 2014 - The New 'Great Game' In Asia
Asia’s two largest nations are battling it out for the hearts and minds of their regional neighbors. So far Japan is doing a better job of making friends, as it shifts aid and investment toward Southeast Asia. In the long run, though, China’s market power will continue to be its strongest asset.
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Gavekal Dragonomics
Research Team
Mar 01st 2014
CEQ Q1 2014 - Shinzo Abe's Master Plan To Re-arm Japan
International media celebrate Shinzo Abe for his economic stimulus and reform package. But ‘Abenomics’ is just a fig leaf for Abe’s true aim: an aggressive nationalist plan to re-militarize Japan in response to the rise of China. Can anything stop him? Most likely, Abenomics will.
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Gavekal Dragonomics
Arthur Kroeber, Research Team
Mar 01st 2014
CEQ Q1 2014 - Unquiet On The Eastern Front
For the first time, both China and Japan have strong nationalist leaders who are striking aggressive international postures. The Sino-Japanese economic relationship has never been bigger, but sentiment has never been worse. The bet here is that political theatrics will give way to economic pragmatism.
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Gavekal Dragonomics
Arthur Kroeber, Research Team
Mar 01st 2014
CEQ Q1 2014 - Xi Jinping's Recipe For A Leaner, Stronger China
Xi Jinping aims to fix the Chinese economy—and strengthen the Communist Party’s grip on power—by shaking up state-owned enterprises and revamping a dysfunctional fiscal system. It is an impressive program, but if it succeeds it could validate strong-man rule and undermine progress to a more open and liberal society.
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Gavekal Dragonomics
Carsten Holz
Mar 01st 2014
CEQ Q1 2014 - Can We Trust The Numbers?
For years analysts have questioned the accuracy of China’s economic data, and especially its GDP figures. A careful look at the evidence shows that Chinese statistics get the big picture right. The key problem is not the quality of the data, but the government’s lack of transparency.
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Gavekal Dragonomics
Rosealea Yao, Nate Taplin
Feb 27th 2014
What Will It Take To Clean Up Beijing's Smoggy Skies?
With north China blanketed by soul-sapping smog for the past week, the disastrous state of the nation’s air is likely to be a top subject of corridor conversation at the upcoming National People’s Congress. Air quality is now a big enough concern for Chinese citizens that the government needs at least to seem like it is taking action against it (unless it decides to side with a much-mocked Rear Admiral who went on national television to praise...
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Gavekal Research
Arthur Kroeber, Long Chen
Feb 25th 2014
No, The Renminbi Is Not Tanking
Markets were taken off-guard by a sudden depreciation of the renminbi in the past week. Are we seeing the end of the era of RMB appreciation against the dollar, as some analysts now argue? Or are we simply seeing a move engineered by the People’s Bank of China (PBC) to take the edge off speculative inflows driven by the perception that the renminbi was a one-way bet? The second explanation is obviously the right one.
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Gavekal Research
Tom Miller
Feb 24th 2014
After Ukraine, Russia Risks Losing The New Great Game
Russian president Vladimir Putin sat stony-faced through yesterday’s closing ceremony in Sochi. The Winter Olympics were supposed to convince the world that a confident and modern Russia is once again rising as a great power. But after a stunning reversal of fortune in the burning streets of Kiev, Ukraine appears to be slipping from Putin’s grasp.
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Gavekal Dragonomics
Adam Hirschberg
Feb 20th 2014
Urbanization’s Winners And Losers
China’s urbanization boom in the first decade of this century was historic. New migration to the cities accelerated to over 20m people a year, from the previous trend of 12-15m annually, making a majority of the national population urban by 2011. This increase in urbanization was part of a great reshuffling of China’s population: in general, its people have been leaving less well-off areas and concentrating in better-off ones. Yet while...
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Gavekal Research
Andrew Batson, Long Chen
Feb 17th 2014
How Hawkish Is China's Central Bank?
At the start of 2013, the dominant worry among investors was that China was doing nothing to control its explosion of credit. At the start of 2014, the dominant worry among investors is that China is doing too much to control its explosion of credit, and that a sharp growth slowdown and financial turmoil will be the result. And just as the worries in early 2013 underestimated the government’s genuine commitment to structural reform, the current...
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Gavekal Research
Thomas Gatley
Feb 14th 2014
5C China: IPOs, A Narrow But Efficient Funding Channel
Restrictions on new stock offerings were lifted in January and 45 firms have since raised RMB21.5bn. Despite the horrible performance of Chinese equities since the mid-2000s super bubble, this is positive for China’s financial market development and also the wider economy, since capital is more likely to reach those firms best able to utilize it efficiently.
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Gavekal Dragonomics
Tom Miller
Feb 14th 2014
Better Governance Through Kung-Fu
Aside from its fine Cantonese cuisine, the district of Shunde in the southern city of Foshan is famous for one thing: it is the ancestral home of Bruce Lee, China’s revered kung-fu master. Lee’s personal philosophy of martial arts, known in English as “The Way of the Intercepting Fist,” teaches an economy of motion defined by efficiency, directness and simplicity.
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Gavekal Research
Nate Taplin
Feb 13th 2014
The Great Pacific Gas Arbitrage
Severe winter weather in the US has driven gas prices higher, forcing power firms to impose sizeable fuel bill hikes on consumers. But those who think that the low-cost US energy revolution is about to be dashed on the rocks of rising production costs are wrong. US shale gas still trades at a near 60% price discount to Asian liquefied natural gas (LNG) benchmarks, and the gap is unlikely to close quickly. As the US faces no meaningful constraint...
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Gavekal Research
Catherine Holcombe
Feb 13th 2014
Hong Kong's Banks: Not Iceland, But Still Chilly
In the gory aftermath of the global financial crisis, the International Monetary Fund investigated five countries with outsized financial systems. Iceland was in this group and got the harshest review, while Hong Kong, in contrast, was praised for its prudent financial regulation. Is it possible that in the few years since that report was penned, Hong Kong has morphed into the world’s next “Iceland”? This, at any rate, is the kind of talk we...
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