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    Gavekal Dragonomics

    A Memo From The New Management

    The C-suite of China Inc. has some new occupants, and they’ve just sent a memo to the staff outlining their priorities for the next year. The new managers have been with the company a long time—this was not at all a hostile takeover—and they are not announcing a big restructuring. But they do see that some employees have gotten a little comfortable with the way things have been done, and would like everyone to sharpen their game.

    0
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    Fathom China

    Profile: Geely: The Swedish Gamble

    China’s love affair with the automobile over the past decade has led to two types of car companies: joint ventures between foreign brands and state enterprises, and upstart private-sector firms making cheap cars. In the second category, Geely ranks among the best. The company is run by a self-described peasant who maintains absolute control over a large number of auto makers and suppliers, some listed and some not. This report focuses on the...

    0
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    Gavekal Research

    A Halfway House For Infrastructure

    This year China, facing an unexpected and unwanted slowdown in growth has once again used infrastructure investment as a countercyclical tool. The infrastructure spending spree of the 2009 stimulus had led to a prolonged hangover in 2010 and 2011, and by the turn of this year total infrastructure investment was actually declining in YoY terms. Project approvals then accelerated, and growth turned positive by Q2; by October spending was rising by...

    0
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    Gavekal Research

    China's Ponzi Is Tomorrow's Problem

    In recent years China’s long suffering savers have sniffed an unfamiliar odor. After a decade of financial repression, so called Wealth Management Products (WMP) offered the smell of easy money. Since 2010 “sophisticated” Chinese investors have been able to buy yield-enhancing packaged products, presumed to be risk-free as they were sold by banks. Returns reaching into the mid-teens per year were based on rolling up bundles of loans to borrowers...

    6
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    Gavekal Dragonomics

    Industry Profits From Property's Recovery

    China’s economic data in November showed an increasingly firm domestic recovery. Heavy industry, particularly metals and other construction materials, led the sharp slowdown earlier this year, and is now leading the rebound. Indicators tied to this sector—notably electricity output—that have underperformed the rest of the economy are now catching back up. Importantly, the industrial profit cycle has also turned, and profits are likely to show...

    0
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    Gavekal Dragonomics

    DragonWeek - How Clean Does The New Broom Sweep?

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    Gavekal Dragonomics

    Moving Up The Food Chain

    Mergers and acquisitions have played a central role in China’s vigorous debate about the role of state-owned enterprises in its increasingly market-driven economy. Over the past few years, there have been several widely-reported cases of private companies selling out to SOEs in the coal, steel, electricity, and airline industries. These have led to a perception that successful private and foreign companies are increasingly vulnerable to forced...

    0
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    Gavekal Dragonomics

    China Economic Quarterly December 2012 - State-owned Enterprises

    One of the most persistent claims made about China’s economy is that an embattled private sector is getting squeezed out by increasingly powerful state-owned enterprises. This claim does not stand up to the evidence: private companies have increased their share of virtually every economic indicator, from exports to employment to bank credit. But that does not mean all is well in corporate China. Though large in aggregate, private firms remain...

    0
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    Gavekal Dragonomics

    CEQ Q4 2012 - Books: Yes, but...

    Kishore Mahbubani, dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore, says the world has two views of China. An Eastern one, which focuses on the country’s strengths and achievement. And a Western one, which offsets its praise of China’s achievements by listing the numerous obstacles that will likely prevent it from becoming an equal of Europe or America. Western commentators, he moans, are reluctant to...

    0
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    Gavekal Dragonomics

    CEQ Q4 2012 - Zhejiang Geely Holding Group: More Than A Sofa On Wheels

    Two years ago, a little-known Chinese company pulled off an audacious acquisition of a venerable but ailing European car brand. Zhejiang Geely Holding Group’s purchase of Sweden’s Volvo Cars in 2010 vaulted the upstart private Chinese company into the ranks of international car makers. Volvo will continue to operate independently overseas, and Geely will make Volvo cars in China for Chinese drivers. But, crucially, the purchase will allow Geely...

    0
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    Gavekal Dragonomics

    CEQ Q4 2012 - Collaborative Innovation: Still Searching For Eureka

    In 2006, China launched a 15-year plan to put the country at the heart of global science, technology and innovation. Six years on, despite huge investments in R&D and world-class laboratories, China’s performance has not met its leaders’ expectations. This summer, with the huge political specter of the 18th Party Congress lurking in the background, Chinese science and technology (S&T) officials moved decisively to put the national...

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    Gavekal Dragonomics

    CEQ Q4 2012 - Consumption: The Taiwan Model

    Businessmen have long salivated over the enormous potential of the Chinese consumer. In the 19th century, British merchants used to say that “just adding an inch to every Chinaman’s shirt tail will keep Manchester’s cotton industry going for ever.” Two years ago, after long scorning the extravagant claims made on its behalf, we concluded that the quasi-mythical beast known as the “Chinese consumer” had finally arrived. Since then, China’s...

    0
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    Gavekal Dragonomics

    CEQ Q4 2012 - Cement Industry Consolidation: Mixing With The Big Boys

    Lantian cement plant, nestled in the dusty foothills of Shaanxi’s yellow mountains, dominates the surrounding landscape. Two giant towers rise high above the arid valley below, grinding and heating a mixture of limestone and clay quarried from the surrounding hills. The resulting mixture is fed into huge rust-brown kilns that are blasted by a coal-fired furnace at 1,500°C. From this blazing womb emerge hot, gray-white lumps of raw cement.

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    Gavekal Dragonomics

    CEQ Q4 2012 - SOE Profits: Lazy Monopolists Or Sinister Octopi?

    China has an unusual problem with its state-owned enterprises (SOEs): they actually make money. After 15 years of market reforms, these former wards of the state are now profitable and largely self-sufficient. For defenders of China’s state capitalism, this achievement is evidence that their model works. Yet the new financial strength of China’s SOEs has also inspired a torrent of criticism: is it right for companies serving the public interest...

    0
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    Gavekal Dragonomics

    CEQ Q4 2012 - SOE Policy Debate: Six Tribes

    If there is one truth about the capitalist system, it is that markets produce inequality. Solving this problem was a major part of what a state-owned, planned economy was designed for. For the revolutionaries who followed Mao Zedong to victory, the Soviet model was the light on the hill: a way out of poverty and dependence that would rival capitalism in terms of economic performance, while also delivering social justice. At its core for half a...

    0
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    Gavekal Dragonomics

    CEQ Q4 2012 - Role Of The State Sector: Still In Retreat, But Getting Bigger

    One of the most persistent claims made about China’s economy in recent years is that an embattled private sector is getting squeezed out by the nation’s increasingly powerful state-owned enterprises (SOEs). Domestic critics, using the phrase guojin mintui (“advance of the state, retreat of the private sector”), warn that high-speed economic growth is threatened by the rising share of resources gobbled up by inefficient SOEs. Foreign analysts and...

    0
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    Gavekal Dragonomics

    CEQ Q4 2012 - Capital Markets: Spoiled Babes

    It is more than a year since Guo Shuqing took control of the China Securities Regulatory Commission (CSRC). Your correspondent sang the praises of Guo’s energetic attempts to brush away the cobwebs and breathe fresh air into a stagnant market. Yet the initial glow of reform has already faded, and the market still refuses to reward him for his efforts. The CSI 300 Index, which tracks the top three 300 companies listed in Shanghai and Shenzhen,...

    0
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    Gavekal Dragonomics

    CEQ Q4 2012 - Property: Nearing The Peak

    China’s housing boom reached new heights in 2010-11, on the back of a huge monetary stimulus and a new low-income housing program. The fading of this construction boom is clearly a big part of the sharp slowdown in China’s growth in 2012. But there remains a huge backlog of housing under construction that will hit the market over the next few years. Does this mean there will be a supply glut?

    6
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    Gavekal Dragonomics

    CEQ Q4 2012 - Retail: Only Dogs For Sale

    The world’s fund managers have a problem with Chinese retail spending. All the numbers show that retail sales remain robust, with real year-to-date growth close to 12%. Nevertheless, retail stocks continue to perform abysmally. Of the dozen or so Chinese retailers listed in Hong Kong that reveal their same-store sales, all have reported lower growth rates than a year ago. Same-store sales data are the only reliable barometer of growth, because...

    0
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    Gavekal Dragonomics

    CEQ Q4 2012 - Metals Man: Afghan Adventure

    Aynak, a rocky outcrop 35 km southeast of Kabul, is home to one of the most spectacular Buddhist archaeological sites in the world. Yet, in the eyes of the Afghan government, Aynak’s craggy hills hide something far more valuable: high-grade copper. In 2007, Kabul handed the right to mine Aynak to Metallurgical Corporation of China (MCC). The story of Aynak and MCC illustrates how China’s state-backed natural resource companies are reshaping...

    0
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    Gavekal Dragonomics

    CEQ Q4 2012 - Economic Survey

    This year the conversation about the Chinese economy’s sharp slowdown has degenerated into an increasingly irrelevant debate. Bears alternately claim that China is collapsing, or that it is only supported by government stimulus that will lead to a bigger collapse later. Beleaguered bulls promise that recovery is just around the corner, when a renewed government stimulus will finally take effect. Both the bears and bulls are wrong, because they...

    0
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    Gavekal Dragonomics

    DragonWeek - This Land Is Your Land

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    1
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    Gavekal Research

    A Buyers' Strike In China

    China’s equity market has always been a strange creature, in that valuations on the domestic market were always quite expensive, while foreign investors could buy the same asset for much cheaper in Hong Kong. These days, however, domestically listed Chinese companies are trading more cheaply, on average, than their offshore counterparts. The domestic market is experiencing a buyers’ strike: with both prices and trading volumes having slumped,...

    2
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    Gavekal Dragonomics

    The Unfinished Business Of SOE Reform

    China has an unusual problem with its state-owned enterprises: they actually make money. After 15 years of market reforms, these former wards of the state are now profitable and largely self-sufficient. For defenders of China’s state capitalism, this achievement is evidence that their model works. Yet the new financial strength of SOEs has also inspired a torrent of criticism: does it serve public interests or only their private ones?

    0
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    Gavekal Research

    Robots At A Tipping Point - Yuchan Li

    It has been clear for some years that mass adoption of low cost robots could revolutionize manufacturing and recast the relationship between capital and labor (see The Robots Are Coming). The adoption process has, however, been slow since production line robots are hard to make and expensive; the average such robot sells for about USD50,000, which is not much below their typical USD65,000 price tag back in technology dark ages of 1999. A...

    0
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    Gavekal Research

    Demystifying China's Gas Demand

    Natural gas is the fuel of the future—but the future might not arrive as fast as we had hoped. That is the apparent message of China’s newly approved five-year plan for the natural gas sector, which forecasts a modest 230 bn cubic meters of gas consumption by 2015. Before the publication of the plan, unofficial estimates for future use of the clean-burning fuel had ranged as high as 260 bn cu m in 2015, or 13% higher than the final target.

    0
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    Gavekal Dragonomics

    DragonWeek - Reformist Rhetoric Revives

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    Gavekal Research

    Not Drowning But Waving

    The workings of China’s interbank market have grabbed an unusual amount of attention recently, thanks to the enormous open market operations carried out by the central bank. In the month of October alone, the central bank injected Rmb1.1 trn into the interbank market through reverse repurchase agreements. Yet this surge does not indicate, as some fear, that the central bank is panicking about growth and desperately pumping liquidity into the...

    0
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    Gavekal Dragonomics

    The Biggest Migration In Human History

    The journey from farm to city is the story of China’s transformation from a poor and backward country to a global economic superpower. By 2030, when China’s urban population is projected to swell to 1 billion, its cities will be home to one in every eight people on earth. How China’s urban billion live will shape the future of the world.

    0
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    Gavekal Dragonomics

    Reaching The Housing Peak

    China’s housing boom reached new heights in 2010-11, on the back of a huge monetary stimulus and a new low-income housing program. The fading of this construction boom is clearly a big part of the sharp slowdown in China’s growth in 2012. But there remains a huge backlog of housing under construction that will hit the market over the next few years. Assessing the scale of this coming wave of housing supply is difficult because of inconsistent...

    0
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    Gavekal Dragonomics

    DragonWeek - Xi Rides The Turning Cycle

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    0
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    Gavekal Research

    Corruption And Party Control

    6
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    Gavekal Research

    Chinese Equities: Next Generation Leaders

    China’s economy looks to have averted the much feared hard landing, but the country’s equity markets have not. The MSCI China A-Share index is down -32% since the start of 2010, while its offshore equivalent has lost about -11%. Investors have fretted over the sustainability of high octane investment-driven growth, the profitability of banks and infrastructure-building firms that thrived during the last decade, and ever present corporate...

    4
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    Gavekal Research

    High Hopes For China's New Team

    Just before noon in Beijing, seven men in dark suits walked out in front of a horde of cameras, stood stiffly while their names were read out and their leader gave a speech, and then retreated from view. There was no shaking of hands, no thanking of supporters. This is how the world’s second-largest economy presented its new top leadership: the Standing Committee of the Political Bureau of the 18th Central Committee of the Communist Party of...

    0
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    Gavekal Research

    The Benefits Of A Receding Hairline

    One of the few benefits of getting old is that one gets to say: “I’ve seen this all before.” Take the current over-indebtedness of most Western democracies today. This is a situation that anyone with hair growing where one does not want it and not growing where one would like it to, has seen before. And not that long ago. Indeed:

    0
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    Gavekal Research

    Have Chinese Equity Markets Bottomed?

    The mid-September announcement of QE3 led many investors to pile into risk assets. However, since then, almost all equity markets have traded sideways to down. Almost all except for Chinese stocks quoted in Hong Kong. Indeed, since recording a trough on September 5th, the Hang Seng Index has rallied 11% and the H-Share index 14%. So is this a case of every dog having its day? Or have Chinese equities made a genuine bottom? To answer this...

    0
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    Gavekal Dragonomics

    DragonWeek - Yet MOR debt

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    0
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    Gavekal Research

    Why Dim Sum Bonds Is The Place To Be

    The three year dim-sum bond issued by Ford Motor Company is currently yielding around 3.7%. Compare this to Ford’s US dollar bond—with a 1.9% yield—and it is hard to avoid the conclusion that renminbi bonds are basically discounting approximately 180 basis points of Chinese currency depreciation a year for the next three years. But is this likely? After all:

    5
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    Gavekal Research

    European Seminar Presentations - With Anatole, Charles, Francois And Andrew

    0
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    Gavekal Dragonomics

    China Macro Chartbook Nov 2012 - Finding The Bottom

    The worst of the economic slowdown is over, as most growth indicators have steadied.

    4
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    Gavekal Dragonomics

    DragonWeek - Banks Versus Bonds

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    0
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    Gavekal Research

    Asia's Equity Dispersion Stretched

    Sun drenched southern economies do not always do worse than their more regimented northern neighbors. Just look at Asia where the heavily-industrialized, and more export-orientated north has struggled since early 2011, while the ASEAN markets have had their best streak since the late 1990s Asian crisis. A dollar invested in the ASEAN markets in early 2011 would have generated 29 percentage points more return than one invested up north. But with...

    0
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    Gavekal Research

    Politics And The HKD Peg

    Currency regimes are ultimately political constructs, and that is especially true of Hong Kong’s linked exchange rate system. The HKD link to the greenback was adopted in 1983 to stem a financial panic after Britain and China began discussions over the future of the then crown colony. In the intervening period the system has weathered a change of sovereignty, speculative attacks, and after the late 1990s Asian crisis a 70% fall in property...

    1
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    Gavekal Dragonomics

    Chartbook: The Future Of China's Investment

    In this presentation, delivered to clients at our seminar in London last week, Andrew summarizes our core arguments on the changing role of investment in China’s economy. We think the government’s modest stimulus efforts this year are not the result of political infighting, but instead a considered decision. China is increasingly aware of the structural constraints on its ability to stimulate growth, limits that mean investment growth will be...

    0
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    Gavekal Dragonomics

    DragonWeek - Profits Firm, Wages Steady

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    0
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    Gavekal Dragonomics

    Just One Word: Metals

    Every once in a while, there’s a really easy answer to a question about China. Even more rarely, there’s an easy answer to two questions about China. It’s almost unheard of for two questions to have one and the same easy answer. But today is a lucky day, and we are happy to present a single word that solves two puzzles that have bedeviled investors all year.

    0
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    Gavekal Research

    Will China Spur An Asian Rally?

    Overseas appetite for Chinese assets has been firing up Hong Kong this month. Capital inflows have forced the de facto central bank to twice intervene in order to alleviate appreciation pressure on the Hong Kong dollar. This hot money surge looks to be the result of investors betting on a stabilisation in the China growth outlook and improved domestic liquidity conditions—Chinese H-shares, quoted in Hong Kong are almost 8% higher on the month...

    4
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    Gavekal Dragonomics

    Deleveraging Deferred

    Growth may be stabilizing, but does a debt crisis loom? Despite an extended slowdown, China’s government has resisted calls to stimulate the economy through aggressive monetary easing. A big reason is concern about the quantity of debt built up during the 2009 stimulus. Last year we argued that China’s gross debt is not absurdly high—but the 41pp increase in the debt/GDP ratio 2009-10 was worrisome. A period of deleveraging was clearly called...

    6
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    Gavekal Dragonomics

    DragonWeek - Slower And Steadier All Around

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    Gavekal Research

    Mexico Rebounds-But Has It Overshot?

    Everyone loves a comeback story. These days we are getting one from Mexico. After China’s WTO entry in 2001, Mexico’s geographic advantage was no match against the sheer quantity and variety of goods that China’s low-cost industrial leviathan could send sailing across the Pacific, often carried on a massive fleet of state-owned ships. But in the past couple of years, Mexico has started to regain market share in US imports—and apparently at China...

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