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    Gavekal Dragonomics

    Small Is Not So Beautiful

    There is a growing disconnect in China’s housing market. Sales have soared in big cities since the final quarter of 2012, but construction growth remains anemic. Developers for now remain reluctant to aggressively expand new construction, preferring instead to sell down their existing inventory. This behavior is consistent with our analysis that the housing market, after more than a decade of undersupply, swung into oversupply in 2012. Around...

    8
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    Gavekal Research

    China: Applaud From The Sidelines

    In many ways we applaud China for forcing a liquidity squeeze on the interbank lending market, which sends a tough message to the country’s often irrepressible speculators, and places the long-term health of the Chinese economic model above the short-term relief of easy credit. However we will be applauding from the sidelines: the adjustment will be hard on investors.

    0
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    Gavekal Dragonomics

    How To Raise China's Return On Capital

    In China, you hear lots of talk about the growth of investment, but very little about the returns on investment. Indeed, China has not had to worry much when about the returns to capital since reforms were launched in 1978, as the economy was then severely undercapitalized after decades of neglect. These enormous capital needs allowed for both rapid investment growth and sustained high returns to investment—a combination that persisted for...

    1
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    Gavekal Research

    Get Ready For A Slower China

    The recent gyrations in the Chinese interbank market underscore that the chief risk to global growth now comes from China. Make no mistake: credit policy will tighten substantially in the coming months, as the government tries to push loan growth from its current rate of 20% down to something much closer to the rate of nominal GDP growth, which is about half that. Moreover, in the last few months of the year the new government will likely start...

    4
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    Gavekal Research

    Never Mind The Fed, Here Comes The PBoC

    China is tightening credit and the People’s Bank of China does not seem minded to offer relief. Today, interbank rates continued to flare up, with the 7-day repo closing at 11.2%, having briefly surged to 25%. Ben Bernanke and the Federal Reserve look gentle by comparison.

    13
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    Gavekal Dragonomics

    DragonWeek - From Oversupply To Undersupply

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    Gavekal Research

    The Incredible Deflating Gas Market

    Emerging markets are taking a pounding with commodity-producing centers worst affected. Everywhere we look we see resource markets that are either over-supplied or have the potential to be so. The old market adage that the best cure for high prices is high prices would seem as relevant as ever. But it isn’t just iron ore and copper stocks which are bulging; LNG prices have plunged almost 25% in the last couple months.

    6
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    Gavekal Dragonomics

    China's Retail Revolution Rolls Online

    Depending on which way you turn when exiting Dragonomics’ office in central Beijing, you will find yourself in wildly different retail settings. Head north and you’ll stroll past a Gome electronics outlet, one of the world’s busiest Apple stores, branches of Uniqlo and Mango, a multiplex cinema, and a Versace flagship. Head east and you’ll experience a more traditional retail experience—a bustling wet market filled with polystyrene boxes of live...

    0
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    Gavekal Research

    The Dog That Didn't Bark

    Emerging and OECD government bond markets have been roiled in recent weeks, but meanwhile, the offshore renminbi bond indices have held up, and the Chinese currency is appreciating. Like the hounds in Silver Blaze, the renminbi bond market is looking like the dog that did not bark; and just as Sherlock Holmes was quick to deduce an important message from the dogs’ silence, perhaps we should listen to the sound of the RMB bond market’s stability?...

    2
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    Gavekal Dragonomics

    Closing China's Credit Gap

    The disconnect between rhetoric and reality in China is finally starting to close. The pro-market rhetoric heard from new Premier Li Keqiang over the past few months has been a welcome relief from the vague platitudes of his predecessor. But this language has also been difficult to square with the fact that credit has been allowed to grow at double the rate of nominal GDP. It has always been more likely that the gap between credit growth and...

    3
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    Gavekal Research

    Asia And The Dollar

    Asian risk assets have been sucked into the volatility vortex since the latest panic started over the end-game for the Federal Reserve's quantitative easing program.

    0
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    Gavekal Dragonomics

    China Economic Quarterly June 2013 - Southeast Asia

    Deng Xiaoping used to say that the foreign policy breakthrough he was most proud of was the full normalization of China’s relations with the countries in Southeast Asia. In the 1980s, Deng’s policies helped China transform itself from a deadly enemy of its southern neighbors to a potential partner. Over the next two decades, China nurtured relationships in its backyard. Yet over the past few years many of these efforts have gone to waste: from...

    0
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    Gavekal Research

    Five Corners (5 June 2013)

    2
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    Gavekal Dragonomics

    CEQ Q2 2013 - Books

    In the opening chapters of China Goes Global: The Partial Power, David Shambaugh describes the cacophony of voices seeking to influence China’s foreign policy. These range from rabid nationalist “nativists” at one end of the spectrum to full-on “globalists,” eager for China to play a responsible role in world governance, at the other. This diversity of views is startling—and salutary reading for anyone who believes that Chinese officials,...

    0
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    Gavekal Dragonomics

    CEQ Q2 2013 - Corporate Subsidies

    Received wisdom holds that state enterprises in China gorge on government subsidies while private companies jostle for scraps. Such thinking needs reexamination. Although small private firms remain starved of both credit and government handouts, big private companies now enjoy large-scale government grants. FathomChina recently examined 50 representative private Chinese firms that are listed on overseas exchanges, and discovered that nearly all...

    0
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    Gavekal Dragonomics

    CEQ Q2 2013 - Indonesia

    Gandaria City is the largest retail mall amid the growing high rises of south Jakarta,but for many years it stood as a half-finished skeleton. Its Indonesian-Chinese developer, Pakuwon Group, racked up huge debts during the Asian Financial Crisis of 1997 and was unable to complete the project. Yet soon after making forays into China during the mid-2000s, the firm suddenly found itself in aposition to finish the massive complex—supported, it is...

    0
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    Gavekal Dragonomics

    CEQ Q2 2013 - Social Media

    Will the internet help to democratize China? China already has more than 500m internet users, nearly half the population. Most of these get online using smartphones—and with the price of a smartphone tumbling below US$100, soon anyone who carries a mobile phone will be online. Within a decade or so, it is quite possible that 1bn people in China will have access to online social media. Many breathless media reports have predicted that China’s...

    0
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    Gavekal Dragonomics

    CEQ Q2 2013 - Chinese Immigration

    How scared should Southeast Asian nations be of the giant on their doorstep? China’s enormous population and military strength are a frightening combination: Tibet, Xinjiang and a large chunk of Mongolia have been Chinese territory for many years. But as China’s regional tentacles grow longer and thicker, the more immediate fear is one of economic vassalage. Ethnic Chinese tycoons rule the roost in the Philippines and Thailand, and control...

    0
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    Gavekal Dragonomics

    CEQ Q2 2013 - Myanmar

    Follow the old Burma Road from Mandalay through the rolling hills to China’s southwest border, and you will catch glimpses of narrow strips of freshly dug farmland, scattered with white marking posts. Underneath the deep-red earth lie twin pipelines, about a meter in diameter, that will carry oil and natural gas 800km from Myanmar’s western coast to the Yunnan border town of Ruili, and then onto the provincial capital of Kunming. From there, an...

    0
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    Gavekal Dragonomics

    CEQ Q2 2013 - Vietnam

    “Follow America and save the country; follow China and save the Party.” This saying, ubiquitous in Vietnam, distills the geopolitical dilemma facing its ruling Communist Party. Forty years after the last American troops left Vietnam, the Party thatwon independence and unified the nation has lost much of its legitimacy. No amount of harking back to the virtues of Ho Chi Minh and his comrades canrestore its élan nor, it seems, root out systemic...

    0
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    Gavekal Dragonomics

    CEQ Q2 2013 - Trade Relations

    Do Aseanand China enjoy a special economic relationship? Many policy makers in Southeast Asia, pointing to the tidal waves of trade roaring across the SouthChina Sea, believe the answer is self-evident. Trade with Asean has surged morethan 10-fold since China’s accession to the World Trade Organization (WTO) in2001, reaching US$401 bn in 2012. China is Asean’s largest trading partner—ahuge export market, especially for commodities and processing...

    0
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    Gavekal Dragonomics

    CEQ Q2 2013 - Regional Geopolitics

    Deng Xiaoping used to say that the foreign policy breakthrough he was most proud ofwas not the full normalization of China’s relations with the United States.Neither was it the dramatic improvement of his country’s relations with Japan.It was, he told his advisers, the revolution in how China was seen by countriesin Southeast Asia. In the 1980s, Deng’s shrewd diplomacy helped China transformitself from a deadly enemy of its southern neighbors to...

    0
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    Gavekal Dragonomics

    CEQ Q2 2013 - Capital Markets

    It’s all change atthe securities regulator. After less than a year and a half in the job, GuoShuqing is off to Shandong to become deputy Party chief. Stepping into thevacant seat is the ex-chairman of the Bank of China, Xiao Gang. Why Guo hasmoved on is far from clear. Did his reformist agenda upset too many people—orwas he frustrated by the obstacles in his way? We simply do not know. Whetherhis successor will pursue similar policies is also...

    0
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    Gavekal Dragonomics

    CEQ Q2 2013 - Property

    Something strange is going on in China’s property market. Sales have soared in big citiessince the final quarter of 2012, but construction growth remains anemic (see “Economicsurvey” on p3). The weak numbers suggest that we can no longer rely on sales todrive construction starts, and also point to a structural shift towards slowingdemand. This leaves one central question: if demand remains healthy in China’s70 largest cities, as the official...

    0
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    Gavekal Dragonomics

    CEQ Q2 2013 - Retail

    China’s consumerdata in the first quarter were poor. Year-on-year real urban consumption growthdropped to a measly 4.7%, down from 6.2% in the last quarter of 2012, depressedby slowing real disposable income growth. A number of retail sectors and goods,notably expensive restaurants and luxury watches, were hit particularly hard.One obvious explanation for the spending squeeze was, simply, slower economicgrowth. But the government’s much-...

    0
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    Gavekal Dragonomics

    CEQ Q2 2013 - Metals Man: Slower Burning

    In November 2011, the price of standard-grade coal delivered to ports in Bohai Bay—the key benchmark price for coal in China—peaked at a record Rmb853 per ton. Yet within six months it had plunged below Rmb650, where it remains today. For years, China’s coal prices rode high on strong demand from power stations, steel mills and cement plants, which the country’s coal mines were unable to satisfy. The collapse in coal prices reflected two things...

    0
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    Gavekal Dragonomics

    CEQ Q2 2013 - Economic Survey

    The first few months of 2013 delivered two important pieces of news about China’seconomy: the recovery is weak, and the new leadership is committed tostructural reform. GDP growth cooled to 7.7% year on year in the first quarter,a disappointment after the rebound to 7.9% in the last quarter of 2012. Whilethe worse-than-expected GDP figure may have been affected by some one-off issues,it is nonetheless clear that the recovery in housing sales did...

    0
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    Gavekal Dragonomics

    DragonWeek - A Respite For Japan

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    0
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    Gavekal Dragonomics

    China: How Close To Credit Meltdown?

    One of the worries most frequently expressed by clients these days is whether China is in the midst of a credit bubble that could lead either to financial crisis or a dramatic slowdown in growth. Fitch Ratings’ excellent China financial sector analyst has sounded a warning that credit growth is dangerously unsustainable, and the IMF yesterday concluded its annual review of the Chinese economy with a warning that credit pressures are rising and...

    0
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    Gavekal Dragonomics

    Chartbook: Upgrading China's Export Machine

    China’s new premier says he wants to “upgrade” the nation’s economy. To do so successfully, he will have to ensure China’s exporters can keep on making ever more higher-value and higher-technology goods. In this chartbook, Andrew assesses the challenges China faces in completing the next round of upgrades to its export machine.

    2
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    Gavekal Dragonomics

    DragonWeek - Locating The Consumer Boom

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    0
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    Gavekal Research

    China's Waning Coal Era

    Today’s People’s Daily report that Beijing city will eliminate all large scale coal boilers within the city center by 2015 is another sign of the shifting winds in global commodity and asset markets. The move is certainly a self-interested one on the part of China’s new leaders, who breathe the same filthy air as the proletariat when they leave the carefully filtered confines of their private compound in Zhongnanhai.

    0
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    Gavekal Research

    It's The Volatility That Matters

    0
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    Gavekal Dragonomics

    After Wealth Products' Rise, A Fall?

    It has been a challenge to keep up with the explosive growth of China’s wealth management products (WMPs; in Chinese, licai chanpin), the retail investment products that offer savers higher returns than traditional bank deposits. As more and more banks have jumped on the WMP bandwagon in order to attract and retain depositors, the total size of bank WMPs outstanding has grown to Rmb7.1 trn as of end-2012, from Rmb4.6 trn in 2011. Regulators have...

    2
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    Gavekal Research

    Five Corners (22 May 2013)

    In the latest Five Corners biweekly review of global economics and investment:

    2
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    Gavekal Research

    Hail The New Marginal Oil Producer

    Since mid-April oil has pointedly outperformed metals. While diggers have been beaten up on concerns about Chinese demand and potential large-scale supply responses, the drillers have been given something of a pass. We would argue this is a miscalculation since the oil sector faces similar structural challenges to the rest of the commodities complex. In particular, new supply responses will apply downward pressure on prices for years to come—a...

    10
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    Gavekal Dragonomics

    DragonWeek - A Turn To The Supply Side

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    0
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    Gavekal Dragonomics

    Finding Investment's Future

    China’s investment growth is slowing, but that slowdown is not equally distributed. The huge investment surge of the past decade was primarily driven by a domestic housing boom, which in turn demanded big investment in industrial capacity to supply construction materials. But the volume of property construction will see at best very modest growth in coming years, as the growth in domestic housing supply is reaching a plateau (see Reaching The...

    0
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    Gavekal Research

    Weaker For Longer

    China’s economic indicators for April confirmed that the weak recovery in Q1, and especially March, was not simply a blip. While growth in industrial value-added and other manufacturing indicators did tick up somewhat, the improvement was quite modest given the extremely low base set by the slowdown in April 2012. Credit continues to be very loose and housing sales are still doing very well, but these traditional leading indicators are taking...

    0
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    Gavekal Dragonomics

    DragonWeek - Mixed Signals On Capital Flows

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    0
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    Gavekal Dragonomics

    China Restructuring Monitor

    Everyone agrees that China needs to reform—but how will we know if they are really doing it? Andrew and Joyce have come up with a set of useful quantitative measures of whether or not structural change is actually happening in the Chinese economy. This concise presentation uses just 10 charts to show what market prices and economic data are telling us about China’s progress toward a new growth model.

    0
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    Gavekal Dragonomics

    China's Self-Imposed Revolution

    Are China’s leaders efficient technocrats who can rule without the messy impediments of democracy, or hapless bureaucrats ensconced in a corrupt system they cannot change? Many foreign admirers prefer the former picture, but within China the corrupt-bureaucrats image is ever more widely held. Former Premier Wen Jiabao stoked popular cynicism by repeatedly making grand, sweeping statements about the urgency of economic and political reform, and...

    2
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    Gavekal Dragonomics

    DragonWeek - Finding The Excess Infrastructure

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    0
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    Gavekal Dragonomics

    Reform Sails Against The Wind

    China’s ship of state now has a new captain and first mate. Their first mission is to rethink and restructure a government that has enormous influence over every aspect of the economy, and yet has great difficulty in meeting its promises to the public. So what kind of helmsmen will they prove to be?

    1
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    Gavekal Research

    Commodities: This Is Structural

    0
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    Gavekal Dragonomics

    The Myanmar Dilemma

    Follow the old Burma Road from Mandalay through the rolling hills to China’s southwest border, and you will catch glimpses of narrow strips of freshly dug farmland, scattered with white marking posts. Underneath the deep-red earth lie twin pipelines, each a meter in diameter, that will carry oil and natural gas 1,000 km from Myanmar’s western coast to the Yunnan border town of Ruili, and then on to the provincial capital of Kunming.

    1
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    Gavekal Research

    Implied Assumptions

    Financial markets operate on a number of implied assumptions about growth, policy direction and other factors. Experience tells us that these assumptions often turn out to be erroneous. The goal of this paper is simply to test the rationality of the current set of assumptions.

    9
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    Gavekal Dragonomics

    Chartbook: Learning To Spend

    In this presentation, recently delivered to clients at our seminars in Europe, Tom lays out our views on consumer spending in China. To summarize: consumption has already started to take over from investment as the main driver of China’s growth, though this is more because investment has slowed sharply than because consumption has accelerated. But the population of Chinese with discretionary spending power is now quite large, and urban incomes...

    0
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    Gavekal Dragonomics

    DragonWeek - Where Is All The Credit Going?

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    2
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    Gavekal Dragonomics

    China's Local Debt Fears Return

    The surprising re-acceleration of credit growth in China—total credit grew at a 22% pace in the first quarter, against just a 9.6% rise in nominal GDP—is drawing attention again to the role of local governments. Growth-obsessed local agencies have been turning in large numbers to the dodgy “shadow” finance markets to borrow money for new infrastructure projects. With this borrowing coming so soon after the 2009 splurge on debt-funded...

    0
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