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    Gavekal Dragonomics

    Don’t Wait For China’s Consumption-Led Growth

    Consumer spending has not been repressed in China, so there is no point in waiting around for it to be finally unleashed. We should not expect China’s consumption to accelerate in the midst of an investment slowdown that is dragging down overall economic growth. China’s real economic problem is not deficient consumption but inefficient investment.

    2
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    Gavekal Research

    5C China: Investment Kicks The Construction Habit

    In sharp contrast to better than expected industrial output and export growth in August, residential construction is spluttering. Construction starts fell -20% YoY and were largely flat in the 3Q13 period. Sales growth for both apartments and development land also decelerated. Given the importance of property construction to overall Chinese investment spending, the weakness implies one of two things: either the recovery will be short lived, or...

    0
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    Gavekal Dragonomics

    Hard Choices For Housing Policy

    China’s new leadership has tried for a fresh approach on many economic policies this year. But on the key issue of housing, they have opted for continuity. The so-called housing purchase restrictions, the key housing policy of the last administration, have been firmly in place since mid-2010. Applied in most major cities, these measures put penalties on new housing purchases by those households that already own a house. By limiting housing...

    0
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    Gavekal Dragonomics

    DragonWeek - Charting An Export Recovery

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    Gavekal Research

    Dalian Man vs Davos Man

    The Davos economic forum, held every winter in the Swiss Alps, allows its participants to look down at the world from above: topographically because of the high-altitude location, but also symbolically, because of the high incomes, high status or high-minded rhetoric that characterize the jet-setting global elite dubbed “Davos Man” by the American political scientist, Samuel Huntington. This week, however, I discovered a sub-species of Davos Man...

    2
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    Gavekal Dragonomics

    In China, Stability Without Stimulus

    The pendulum has swung back. Fears about China’s growth and financial strains reached their peak in June, but since then optimism has started to return, as business surveys and economic data have begun to improve. And the latest economic data indeed confirm that growth has stabilized and started to recover somewhat. China’s most important monthly indicator of growth momentum, industrial value-added, accelerated to a 10.4% YoY gain in August,...

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    Gavekal Dragonomics

    Why China Ain't Cheap

    Many consumer goods in China, from luxury items to ordinary high-street brands, cost more than they do in rich countries like the US. Why? As Tom Miller explains in this piece, the equation is quite straightforward: huge demand plus limited supply equals silly prices.

    9
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    Gavekal Research

    5C Energy: Chinese Drivers May Take A Backseat

    Things are looking up in China — a situation which has usually meant higher oil prices in the past. With the Middle East on a knife edge and Brent prices already at a six-month high, will Chinese demand now add another upward pressure to global gas prices?

    0
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    Gavekal Research

    5C Asia: Time For The Yield Hunt To Recommence?

    With US 10 year government bond yields stabilizing at around 3%, QE tapering expectations appear broadly priced in. As such, bargain-hunters have already returned to emerging market bonds, nudging down yields. There is still plenty of opportunity left for those who think the worst of the tapering storm has passed.

    0
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    Gavekal Dragonomics

    China Economic Quarterly September 2013 - Agriculture

    [LEFT]China is the world’s biggest producer of rice, wheat, pork, eggs, cotton, fruit and vegetables, and the second biggest producer of maize and poultry meat. It manages this with only 8% of the world’s farmland and 6% of its renewable water resources. Yet most of China’s farms are too small to be commercially viable and food-safety standards are poor. To raise productivity and meet the demands of more discerning consumers, China needs to...

    0
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    Gavekal Dragonomics

    China's Food Supply: Enough for Everyone

    For 20 years, doom-laden predictions about rising food demand and its impact on domestic farmers and global agricultural markets have failed to materialize. First we were told that China would struggle to feed itself and massive food imports would eventually starve the world. And then, when China entered the WTO in 2001, we were told that cheap food imports would impoverish Chinese farmers. Yet the reality was quite different: agricultural...

    1
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    Gavekal Dragonomics

    DragonWeek - The Road To The Plenum

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    Gavekal Dragonomics

    Korea And China: Rhyme Or Repeat?

    Stop me if you’ve heard this one before. An Asian country emerges from a period of internal strife to take global markets by storm. Sweeping domestic reforms and a hands-on industrial policy result in a surge in manufacturing capabilities and exports, which in turn drive years of sustained and rapid economic growth. But once exports start to slow, the government tries to keep growth going by pushing up investment. This works for a while, but...

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    Gavekal Research

    A Big Purge In China?

    This morning the South China Morning Post, Hong Kong’s English-language daily, reported that the Communist Party has launched a corruption investigation against Zhou Yongkang, a recently retired member of China’s top leadership body and a patron of Bo Xilai, the senior official who recently stood trial for corruption and will probably be handed a lengthy prison sentence. If confirmed, it is huge news, because it would show China’s new president...

    1
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    Gavekal Dragonomics

    CEQ Q3 2013 - Books

    Stop me if you’ve heard this one before. An Asian country emerges from a period of internal strife to take global markets by storm. Sweeping domestic reforms and a hands-on industrial policy result in a surge in manufacturing capabilities and exports, which in turn drive years of sustained and rapid economic growth. But once exports start to slow, the government tries to keep growth going by pushing up investment. This works fora while, but...

    0
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    Gavekal Dragonomics

    CEQ Q3 2013 - Retail Prices

    One of the most popular tweets on China’s microblogging sites over the past couple of years went something like this:“China—earn US$800 per month; eat at KFC for US$5; dine at a restaurant for no less than US$15; buy a pair of Levi’s for US$65. America—earn US$5,000 per month; eat at KFC for US$4; dine at a restaurant for US$40; buy a pair of Levi’s for US$20.” The point of the joke was to highlight a depressing fact of life for local consumers...

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    Gavekal Dragonomics

    CEQ Q3 2013 - Financial Risk

    A shudder went through China’s strained financial system in June, when rates on the interbank market briefly spiked to over 25% and some smaller banks scrambled to fund themselves. Coming on the heels of weaker economic growth and Federal Reserve Chairman Ben Bernanke’s hint that the days of ultra-easy money may soon end, the Chinese mini-crisis was a reminder of the perilous foundations of the nation’s financial health.

    0
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    Gavekal Dragonomics

    CEQ Q3 2013 - Growth Model

    China’s economic slowdown and proposals that growth needs to be more consumption driven have revived concerns about its policy options. The nearly universal view is that China’s growth is unbalanced and at risk. Household consumption as a share of GDP has declined to below 35%—the lowest of any major economy—while its investment share has risen to nearly 50%.Even former Premier Wen Jiabao falls in this camp with his oft-quoted statement that “...

    0
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    Gavekal Dragonomics

    CEQ Q3 2013 - Rural Life

    In winter the land is frozen and still. A cloudless cobalt sky shines off snow-covered rice paddies, reflecting light so bright you have to shield your eyes. Mine water from the punishing wind, blowing me east off Red Flag Road. I lean into the gale and head north toward the foothills, to my house, in a village named Wasteland.

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    Gavekal Dragonomics

    CEQ Q3 2013 - Agribusiness

    The drive to the town of Half Tower, set amid the countryside of north*ern Anhui province, has changed dramatically in the last 20 years. A government construction initiative has transformed the road, once a muddy track, into a ribbon of solid concrete. Egrets still forage along the banks of a reservoir, but now they are supervised by 16 huge windmills spinning slowly on low hills. And though some rice paddies sur*vive, many have been dug up and...

    0
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    Gavekal Dragonomics

    CEQ Q3 2013 - Food Supply

    For 20 years, doom-laden predictions about rising food demand and its impact on domestic farmers and global agricultural markets have failed to materialize. First we were told that China would struggle to feed itself and massive food imports would eventually starve the world. And then, when China entered the WTO in 2001, we were told that cheap food imports would impoverish Chinese farmers. Yet the reality was quite different:agricultural growth...

    0
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    Gavekal Dragonomics

    CEQ Q3 2013 - Modernizing Agriculture

    What is the future of farming in China? Thirty years ago, when more than 800m people lived rural lives, most farms were run by households and operated at a subsistence level. Since then, the rural population has fallen to around 630m and the number of farmers has shrunk to about 250m. Today most households earn more income from non-agricultural jobs or via remittances from family members working in the city than they do from farming. Yet China’s...

    0
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    Gavekal Dragonomics

    CEQ Q3 2013 - Capital Markets

    It’s déjà vu all over again: the Chinese stock market is back in the doldrums. The rally after last November’s 18th Party Congress rally is all but forgotten and the broad CSI 300 has given back almost all of its gains. There are still big jumps on some days, but they are always followed by just as dramatic falls. The broad index remains down over 40% from its 2009 stimulus high and over 60% below the heady days of 2007. Yet even in the doldrums...

    0
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    Gavekal Dragonomics

    CEQ Q3 2013 - Property

    After a thoroughly disappointing first half of the year, China’s government has been busily announcing targeted policies to shore up growth. One of the most important is a new program of slum renovation. This will start work on 3.04m units of new housing in the rest of 2013, and a total of 10m units by 2017. Given that new construction has been extremely weak so far this year, a renewed public-housing push has the potential to make a real...

    0
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    Gavekal Dragonomics

    CEQ Q3 2013 - Retail

    China’s online price war erupted again this summer. To mark its 10th anniversary, JD.com—formerly known as 360buy.com—launched the first big online sales promotion of the year. “Save Rmb100 when you spend over Rmb399—AND get coupons worth Rmb618!” the country’s second-biggest online retailer promised its 100m customers. The promotion, which ran for a month, was a loss-leading strategy designed to capture consumers from the enemy—Alibaba’s Tmall....

    0
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    Gavekal Dragonomics

    CEQ Q3 2013 - Metals Man

    As China’s economy slows, the price of iron ore has been sliding. In early 2011, it peaked at US$187 per ton. Since then, bar a brief rally in the final months of 2012, it has been heading downward. Many inves*tors are convinced that weak demand in China and the opening of new mines abroad mean it is only a matter of time before the US$100 thresh*old is breached. But we think expectations of an extended slump are wrong—and indeed,iron ore prices...

    0
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    Gavekal Dragonomics

    CEQ Q3 2013 - Economic Survey

    Watchers of China’s economy could be forgiven for suffering from whiplash after the summer of 2013. The swings between negative and positive sentiment were among the most severe and the most sudden we have ever experienced. These huge swings are in themselves evidence of the great uncertainty over China’s prospects as it tries to navigate a smooth exit from the last few years’ surge of investment and debt. But they also reflect the teething...

    0
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    Gavekal Research

    Winners And Losers In China's Rebalancing

    Investors may have noticed that Asia is having a pretty rough run. Capital is leaving the region and, unlike after the 1997 crisis, it is uncertain whether nations can “export” themselves back to health (see It’s Not A Balance Sheet Problem). Indeed, China has been the region’s key export growth market in recent years, and as we all know, her era of investment-fuelled hyper-growth is giving way to a slower, more balanced growth model. This...

    0
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    Gavekal Dragonomics

    DragonWeek - Reform Advances, Growth Steadies

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    0
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    Gavekal Research

    It’s Not A Balance Sheet Problem

    There is a growing fear that emerging markets could be on the cusp of a general crisis of the type seen in the early 1980s or late 1990s. The concern is that too much debt was racked up during an easy money phase and chickens are coming home to roost as the US moves toward a tightening cycle (see Resetting Expectations For Emerging Markets). Attention has understandably focused on those emerging economies with sizeable current account deficits,...

    13
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    Gavekal Research

    5C China: Growth Is In The Air (Maybe)

    Growth is in the air! This is the refrain we are hearing increasingly from Chinese government spokesmen, and there are a number of indicators that give credence to the official sanguinity. Construction starts rebounded strongly in July. A stabilization in the producer price index and steel and iron ore prices suggests destocking is ending. With Europe out of recession and US data improving, exports should provide another tailwind.

    0
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    Gavekal Research

    Good News For Exporters

    One pleasantly surprising China manufacturing survey is not enough to blow away the clouds over the emerging markets. But the unexpected return to expansionary mode for China’s August flash PMI does offer some desperately needed good news—and more so when combined with yesterday’s stronger PMI prints from Europe and the US.

    0
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    Gavekal Dragonomics

    Hard Times In China's Inland Empire

    As Beijing, Shanghai and other eastern cities get increasingly glitzy and developed, the new frontier for China’s growth has been shifting westwards. Many manufacturers are relocating inland, to take advantage of lower labor costs and more land for new facilities. In fact, it is precisely the this lower income base that gives the interior the potential to generate sustained growth as it converges with the rest of the country (see this paper from...

    2
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    Gavekal Research

    Iron Ore Hits The Floor

    As China’s economy slows, the price of iron ore has been sliding. In early 2011, it peaked at US$187 per ton. Since then, bar a brief rally in the final months of 2012, it has been heading downward, and many investors are convinced that weak demand in China and the opening of new mines abroad mean it is only a matter of time before the US$100 threshold is breached. But we think expectations of an extended slump are wrong—and indeed, iron ore...

    0
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    Gavekal Dragonomics

    DragonWeek - Continuing The Credit Crackdown

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    Gavekal Research

    Buy The Lion, Sell The Baby Dragon

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    Gavekal Research

    All Hail China's PPI

    One of the questions we are most often asked about China is: what is the best economic indicator to watch? Like the sober, level-headed analysts we are, we usually reply that you can’t rely on any single number, and instead must make a balanced judgment using a variety of indicators. Though this happens to be true, most people don’t find it a very satisfactory answer.

    0
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    Gavekal Dragonomics

    Trimming The Long Tail

    As China’s economy slows, there is increasing pressure to revamp the nation’s industrial structure into a leaner, meaner manufacturing machine. Obsessed by visions of huge corporate champions bestriding national and global markets, many Chinese planners place the blame for their current woes on low levels of industry concentration—the small market share collectively held by the largest firms. Such thinkers argue that China’s potential is being...

    0
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    Gavekal Dragonomics

    Who Loses In China's Deleveraging?

    After a huge acceleration in credit growth since mid-2012, the tide is now turning for Chinese borrowers. China’s new leaders have made clear their determination to rein in credit growth, swearing off large-scale monetary and fiscal stimulus even as the economy slows. Credit growth has slowed noticeably since May, and a harsh crackdown on interbank borrowers in June reinforced the government’s reduced tolerance for risky lending. While Beijing...

    8
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    Gavekal Dragonomics

    DragonWeek - Mixing Growth And Austerity

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    Gavekal Research

    5C China: Li's Risky Growth Promise

    In comments leaked last week, Chinese Premier Li Keqiang declared that there is a “bottom line” below which the country’s GDP growth will not be allowed to fall. The magic number is 7%, a bit of a comedown from the totemic 8% of the previous decade, but lofty compared to the market’s worst fears. This declaration is understandable as an attempt to reverse weakening business confidence, which if unchecked could send corporate investment and...

    6
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    Gavekal Dragonomics

    Social Housing Makes A Comeback

    After a thoroughly disappointing first half, China’s government now looks increasingly worried about growth. Premier Li Keqiang, who started his tenure in office with much fine rhetoric about the need for structural reform, has recently been talking about the “bottom line” for growth (7%, in case you wondered) and the need to maintain confidence. While the administration says there is still no need for looser monetary or fiscal policy, it has...

    2
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    Gavekal Research

    Game Over For Austerians

    Margaret Thatcher used to say that “There Is No Alternative” to whatever policy she believed in. But there is always an alternative to banging your head against a brick wall—you can stop banging your head against a brick wall. The G20 meeting in Moscow last weekend may have marked such a moment of revelation.

    4
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    Gavekal Research

    Short-Term Japan, Long-Term China

    The weekend news from Asia featured two big items. On Friday night, China’s central bank announced the abolition of all controls on bank lending rates. On Sunday, Japanese PM Shinzo Abe’s coalition won a majority in the upper house of Parliament big enough for Abe to push through major economic reforms, (but too small for him to re-militarize the country). Both of East Asia’s biggest economies seem primed for major structural reforms under new...

    1
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    Fathom China

    Profile: Tencent: Winning At Games

    China’s biggest listed internet company, Tencent Holdings,stands nearly alone in figuring out how to earn money by offering freetechnology. Common online business models like advertising and e-commercecontribute little to Tencent, though they comprise nearly all revenue at itsChinese competitors along with global giants Google, Facebook and Amazon.Instead, Tencent earns billions of dollars selling virtual things, like clothesfor online game...

    0
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    Gavekal Research

    China's Global Impact

    China’s quarterly report on gross domestic product, long the totemic emblem by which it has measured progress, provided the usual confusing panoply of numbers. The headline YoY growth rate of 7.5% showed a modest slowdown from Q1, but was in line with reduced expectations. However, the less-closely-watched QoQ growth rate picked up to an annualized 7% in Q2 from 6.6%. Yet the nominal growth rate of GDP slowed more sharply, to 8% YoY in Q2 from 9...

    0
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    Gavekal Research

    Good Omens

    Two months ago I gave ten reasons for believing that April’s break-out of the S&P 500 from its 13-year trading range “could mark the start of a secular bull market in global equities”. This piece, which came out on May 20, was singularly ill-timed, since equity markets peaked the very next day and then plunged on May 22, after Ben Bernanke’s tapering comments (see Goldilocks And The Ten Bears). Luckily for my credibility, I did end this...

    5
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    Gavekal Dragonomics

    DragonWeek - Targets, Hopes And Expectations

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    0
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    Gavekal Research

    Australia And The China Syndrome

    So for the satellite supplier economies to the Chinese juggernaut, is it simply a matter of following the leader? This morning it was announced that China’s economic growth duly slowed to an annual rate of 7.5% in 2Q13 from 7.7% in the previous period. Moreover, the latest credit data shows that China’s credit cycle has decisively turned, implying that last month’s interbank rate spike was no aberration. Dragonomics will publish a detailed look...

    2
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    Gavekal Research

    Fed’s Fire Drill Obscures The Real Risk

    Whenever Alan Greenspan was praised for delivering a clear message on US monetary policy, he liked to reply: “If you think that, you have misunderstood what I said”. Ben Bernanke prefers the opposite approach, trying to explain in painstaking detail the precise conditions and possible timing of monetary tapering. He might do the world economy, and his own reputation, a favor by imitating Greenspan’s obfuscation. The Federal Reserve minutes...

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