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    Gavekal Dragonomics

    CEQ Q3 2012 - Metals Man: Still Time To Peak

    For the past decade, the prices for most metals and minerals have well exceeded long-term historical averages, a phenomenon economists have dubbed the “super-cycle.” The reason for these sky-high prices is simple: unprecedented demand from China. But the recent collapse in metals prices has raised the prospect that Chinese demand has peaked. Is the super-cycle coming to an end?

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    Gavekal Dragonomics

    CEQ Q3 2012 - Economic Survey

    China continues to post disappointing growth figures, with GDP rising just 7.6% year on year in the second quarter, down from 8.1% in the first quarter. It was the third time in the past three years that quarterly GDP growth fell below the magic figure of 8%—yet another piece of evidence that China has entered into a structural slowdown. This transition will take China from its historic rate of 10% real GDP growth to a new trend closer to 7%.

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    Gavekal Dragonomics

    China Economic Quarterly September 2012 - China In Africa

    China’s growing influence in Africa has attracted many negative headlines. Critics fault Chinese policy banks for offering cheap loans to unpalatable governments in return for natural resources, and accuse state-owned enterprises of “neo-colonial” behavior across the continent. The truth is far more nuanced. Many African countries—and not only those ruled by vicious dictators or corrupt governments—welcome Chinese investment. And China’s role in...

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    Gavekal Dragonomics

    DragonWeek - Staying Cool In A Cooling Economy

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    Gavekal Dragonomics

    Still Looking For A Reform Roadmap

    The city of Wenzhou, a prosperous port town in the coastal province of Zhejiang, has long punched above its weight in China’s economy. The area’s entrepreneurs are legendary for the enthusiasm and success with which they have embraced major economic trends, like the surge in light manufacturing and the boom in Chinese investment overseas. In March this year, Wenzhou’s leading role was reinforced when the State Council declared the city would...

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    Gavekal Dragonomics

    Encircling The Cities From The Countryside

    Drive around the rural fringe of any large Chinese city and you will see block after block of apartment buildings. Many of these are built on state-owned urban construction land and are recorded in urban construction data. But an unknown number are built on rural construction land—officially owned by village collectives, not the state—and are not counted as part of the urban housing market. Much of this housing is occupied by rural hukou holders...

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    Gavekal Dragonomics

    DragonWeek - Stimulus, Real And Imagined

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    Gavekal Research

    Hong Kong Property: A Volume Game

    Hong Kong property developers have outperformed the Hang Seng Index in the two months since CY Leung became chief executive. This runs counter to the pre-election perception that Mr Leung was an outsider in Hong Kong’s business-friendly political circles who would threaten the local property cartel and flood the market with new (more affordable) supply (see Property & Populism In Hong Kong). The fact that top executives of Sun Hung Kai...

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    Gavekal Research

    Why China's Banks Are Still Raking It In

    It has been a grim year thus far for Chinese companies, with earnings hits seen in industries ranging from exporters to industrials to telecoms and retailers. Banks, however, have continued to rake it in. According to the CBRC, China’s financial-sector regulator, bank profits grew 23% YoY in the first half of the year, more than double the rate of nominal GDP growth rate. This has defied expectations that the days of state-supported riches for...

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    Gavekal Dragonomics

    What Life For Milk After Melamine

    What is China’s least successful industry? That ignominious prize goes to the dairy sector, after a stunning reversal of fortune. Just five years ago, China’s dairy farmers and milk processors looked set to turn a nation with no dairy tradition into one of milk slurpers and yogurt guzzlers. Between 2000 and 2007, Chinese milk production quadrupled and consumption doubled. But then disaster struck: in 2008, six children died and a further 300,000...

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    Gavekal Research

    Safe Is The New Risky

    This has been a year for the bears. By late July anyone invested in long-dated treasuries had 12 month gains of +35%—not bad for owning the world’s “safe haven” asset. But even havens can get overrun. UST gains have partially reversed in recent weeks with yields rising from 1.5% to 1.8%. The trigger was slightly improved US economic news and waning hopes that the Fed will adopt a QE3 monetary stimulus. For this reason, we recently argued that...

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    Gavekal Research

    Oil, Mullahs And American Cars

    Oil prices have rallied strongly from a bottom in late June and are confounding any simple analysis based on standard rules of supply and demand. Consider the following four fundamental developments and it is not obvious why Brent should be trading above US$110:

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    Gavekal Dragonomics

    Chartbook: China's Population Challenge

    China is in the midst of a profound demographic shift. Population growth has slowed, the number of young people entering the work force has begun to decline, and in a few years the ranks of retirees will start to swell as members of the baby-boom generations of the 1960s and 1980s stop working. By the middle of this century, China's population will be older than Japan's is today.

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    Gavekal Research

    GaveKal Five Corners—Asia

    For years it was fashionable to bemoan the scourge of “hot money” inflows into China. Now, with China’s foreign exchange reserves registering falls in three of the last four months, it is fashionable to talk about “hot money” flowing out of China. Another bit of evidence for the coming collapse of China? Hardly.

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    Gavekal Dragonomics

    DragonWeek - Current Account Swells, Capital Flows Out

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    Gavekal Dragonomics

    Bouncing Along The Bottom

    Despite a visible and sustained recovery in the property sector, China’s economy continued to slow in July. It is not collapsing, but neither is it very vigorous, and this picture is unlikely to change soon. A structural slowdown, whose conditions were evident in 2008 but whose onset was delayed by two years of massive monetary stimulus after the global financial crisis, is now firmly in train. Government policy remains mildly stimulative—with...

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    Gavekal Research

    Chinese Cyclicals Offer Value

    Chinese corporate profits have clearly decoupled from the wider economy. Unfortunately it has been the wrong sort of separation. Profits at industrial firms slumped -2.2% YoY during 1H12, down from 29% growth in the same period last year. Worryingly, sectors such as steel, which have benefitted from China’s investment-driven boom, have seen profits entirely evaporate. By contrast, the wider economy chugs along with steady if unspectacular growth...

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    Gavekal Dragonomics

    China Property: Steady As She Goes

    China’s property sector is clearly on the mend, but the recovery is slow and steady rather than meteoric. Policy makers probably welcome the modest rebound in transactions and prices, which should lead an uptick in broader economic growth later this year. But they remain vigilant about containing sharp rises in house prices, which could spark social discontent. So Beijing’s property policy will almost certainly stay on its present course, with...

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    Gavekal Dragonomics

    China Macro Chartbook Aug 2012 - The Art Of Easing

    Our quarterly chartbook reviews and interprets China’s major economic indicators in convenient graphical form. Main points in the latest edition include:

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    Gavekal Dragonomics

    The Electricity Conundrum, Revisited

    Growth in China’s industrial economy has clearly slowed this year—but growth in electricity production is not just slowing, it is flat-lining. In June, output of electricity grew by precisely 0% YoY, after meager gains of 2.7% in May and 0.7% in April. Over the same period, industrial value-added has been growing by around 9% YoY. This apparent disconnect has prompted incredulity and doubt among many observers of the Chinese economy: is it...

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    Gavekal Research

    Mongolia Takes The Slow Train

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    Gavekal Research

    Mongolia Takes The Slow Train

    Mongolia’s transition from Soviet vassal state to fledgling democracy has the potential to open up its vast mineral resources and shift global commodity markets. But it is not easy to realize that potential, because of Mongolia’s tricky geopolitical position. Mongolia’s government is keen to avoid dependence on either Russia or China.

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    Gavekal Dragonomics

    DragonWeek - Houses and Jobs

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    Fathom China

    Profile: Sany Heavy Industry: Coping With Collapse

    Good luck taking a snapshot anywhere in China without framing a bulldozer, excavator or crane. China’s 20-year construction orgy has meant boom times for makers of construction equipment, who have grown accustomed to 20% annual growth. Leading the way is Sany Heavy Industry, a spunky private company that has made dollar billionaires of its four entrepreneurial founders by producing many kinds of big outdoor construction machinery. But with...

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    Gavekal Dragonomics

    China's Unconventional Gas: Frack Or Famine?

    “Unconventional gas”—natural gas extracted from coal seams or relatively impermeable shale or tight rock formations—has already become a buzzword for the new decade. And with good reason: cheap shale gas in the US and coal seam gas in Australia are pushing down electricity costs and pushing up the supply of gas available for exports, portending big changes in the US economy and global gas markets.

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    Gavekal Research

    The Horribly Crowded Chinese Trade

    China’s economy is clearly slowing both structurally (as the potential growth rate falls from 11% to 7%) and cyclically (we estimate sequential GDP growth is now a bit over 6%, thanks to weak investment spending). The question for equity investors is what impact does this downshift have for the overall market?

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    Gavekal Research

    Unlocking Mongolia's Treasure Chest

    Commodity prices boom when supply cannot respond fast enough to rapidly escalating demand. Those booms are destroyed when enough new capacity emerges to restore market balance. The past decade’s boom in prices of metals and minerals has been driven by China’s apparently insatiable demand, and has yet to be dented by a sufficiently large response on the supply side. Mongolia could change all that: its plans for developing world-scale, low-cost...

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    Gavekal Dragonomics

    DragonWeek - Better Things Are On The Way

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    Gavekal Research

    Arresting China's Slowdown

    Months of subpar growth readings from China have now been capped with an unsurprisingly weak figure for 2Q12 GDP, which was up just 7.6% YoY. It was the third time in the past three years that quarterly GDP growth has fallen below the magic figure of 8%. This is yet another piece of evidence, if any more were needed, that China’s potential growth rate has come down from its historic 10%. But with inflation declining rapidly and other signs of...

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    Gavekal Dragonomics

    The High Cost Of Children

    While loosening the one-child policy is certainly desirable in terms of simple fairness, it might not have as big an impact on China’s demographics as some assume. This is because family planning policies are no longer the main driver of the low birth rate. Economic concerns are much more prominent, as many Chinese women will tell you.

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    Gavekal Dragonomics

    From Skinflints To Splurgers

    On summer evenings, once every other week, central Beijing grinds to a halt. Around the Workers’ Stadium—erected in 1959 to mark the 10th anniversary of the founding of the People’s Republic—the gray capital turns green, as thousands of Beijing Guo’an soccer fans throng the streets. More than 40,000 emerald-shirted supporters regularly watch Guo’an, the Chinese Super League’s best-supported team. In most respects, the scene is unremarkable: any...

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    Gavekal Dragonomics

    Fixing China's Monetary System

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    Gavekal Research

    Not All Central Banks Are Created Equal

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    Gavekal Dragonomics

    No Rush To Rebalancing

    The current slowdown in China’s growth, for all the hand-wringing it has occasioned, is hardly unanticipated. What else could follow the extraordinary stimulus-driven boom of 2009-10? But the dip is more than a simple cyclical downturn: it is the start of a transition to slower trend growth rates that China will undergo over the next decade. Since the high GDP growth of the past 20 years has come disproportionately from rapid investment growth,...

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    Gavekal Research

    Life Returns To China's Property Sector

    China’s recent economic numbers have been broadly disappointing—with the notable and very important exception of property. In May listed developers reported month-on-month sales increases ranging from 19% to 44%; even year-on-year figures rose as high as 20% to 30%. The momentum has continued in June, with many developers now having achieved 50% of their respective sales targets by mid-year. Weekly sales volume in the top 40 cities rebounded...

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    Gavekal Dragonomics

    DragonWeek - Freeing Up Financial Flows

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    Gavekal Dragonomics

    China Housing & Construction Review 2012

    Confused by China’s housing market? You are not alone. But fear not, our regular overview of housing and construction covers the fundamentals needed to understand the market in a convenient visual form. How much does real estate matter for China’s economic growth? Does urbanization really drive the housing market? Who buys housing in China, and how can they afford it? What drives the construction cycle? How does government policy affect the...

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    Gavekal Research

    Arthur Presents At Our June 26, 2012 NY Seminar

    At our recent seminar in New York, Arthur discussed why anecdotal evidence of China's economic strife does not necessarily reflect the bigger picture. Those interested can see his presentation attached.

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    Gavekal Research

    The Chance For Change

    Sometime this fall, a meeting of the elite of the Chinese Communist Party will briefly allow the outside world a glimpse of its inner workings, as it names the small group of people who will run this country for the next several years. At the Party Congress a combination of term limits and age limits will force the retirement of most of the current leadership, including President and Party General Secretary Hu Jintao, and Premier Wen Jiabao. The...

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    Gavekal Research

    Go East Young Bond Buyer

    In the past, when markets were in risk aversion-mode, Asian assets suffered, often in magnified terms. The chart on the following page underlines how even Asian investment-grade bonds become assets-non-grata in times of financial panic. Yet in the past few weeks, equities are holding up, and regional bonds have seen some support—despite the fact that risk-off mode remains firmly in place with the EMU mess still unresolved, China numbers still...

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    Gavekal Research

    China Loosens QFII Rules

    When Thomas Jefferson remarked that “the natural progression of things is for liberty to yield and governments to gain ground,” he probably did not have China in mind—even if the Middle Kingdom had spent the previous centuries concentrating ever more power into the hands of one emperor, and would spend the next two doing the same. But once all the power is concentrated into one man’s hands, then Thomas Jefferson’s rule no longer applies and the...

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    Gavekal Dragonomics

    Finally, A Piece Of The Pie

    It has long been conventional wisdom that China’s millions of private enterprises face great difficulty in getting financing, as the state-owned banks prefer to lend their friends in large state firms. What lending private entrepreneurs can get is from shady sources at punishingly high interest rates, and can be withdrawn at the first sign of trouble. Yet this caricature has not kept up with the rapidly changing reality. The truth is that the...

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    Gavekal Dragonomics

    DragonWeek - Power Prices And Bank Margins

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    Gavekal Research

    "Yambo" Takes A Shot At the HK$ Peg

    In a paper this week that laid out alternatives to the Hong Kong dollar peg, ex-central bank head Joseph Yam characterized the city’s leaders as lacking the courage and foresight to upset the status quo. Few would argue with this assessment. Yet to be fair, sticking to what has worked in the past also shows a degree of modesty which is rare in government. The Hong Kong Monetary Authority (HKMA) is one of the few Asian central banks that has not...

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    Gavekal Dragonomics

    Not As Bad As We Thought

    May’s economic data was better than we expected, particularly as PBC’s pre-emptive interest rate cut last Thursday appeared to signal increased official concern about the pace of growth (see China Rate Cut Signals Reform). Growth in all the major activity indicators, including industrial value added, fixed asset investment and retail sales, picked up slightly in May compared with April, while exports and imports accelerated more. Meanwhile,...

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    Gavekal Research

    China Rate Cut Signals Reform

    Comment on China’s 25bp interest rate cut has mostly focused on the impact on short-term growth prospects. This misses the point. The true significance of yesterday’s announcement lay in the loosening of restrictions on both lending and deposit rates. Interest rate liberalization—a crucial part of the effort to make growth sustainable and balanced—is clearly under way, although progress will be slow and incremental.

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    Gavekal Research

    Conventional Wisdom vs The March Of Events

    Over the past few months, we have had one of our young, intrepid analysts, Gavin Bowring, run around Asia and report from places investors do not always hear about. Gavin has penned missives from Inside a North Korean “SEZ”, explained how Bank Indonesia Bets On Growth, detailed The Window of Opportunity in the Philippines as well as The Reforms in Myanmar. Over the coming months, he will publish a couple of pieces on Mongolia and Vietnam....

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    Gavekal Dragonomics

    The Telescope Versus The Microscope

    There is more than the usual amount of disagreement about China’s economic prospects at the moment. More notable than the accustomed battle between bulls and bears is a split between those focusing on the top-down macro picture, which is not terrible, and those who highlight ugly reports of businesses shutting down and borrowers scrambling for cash.

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    Gavekal Dragonomics

    CEQ Q2 2012 - Books

    China’s spectacular economic rise over the past decade has generated a great deal of strategic anxiety in foreign capitals and particularly in Washington DC. A thriving cottage industry has sprung up around trum*peting the ominous import of China’s military build-up and Beijing’s supposed intent to remake or upset the world order. Many such fore*casts—often driven by bureaucratic imperatives to justify ever-larger defense budgets—rely on...

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    Gavekal Dragonomics

    CEQ Q2 2012 - Auto industry competitiveness

    In January 2012, violent protests erupted at Changhe Automobile’s factory in Jiangxi province. Two thousand workers downed tools and raised fists in an attempt to block plans by Chang’an Automotive, Changhe’s much larger parent company, to move all production of Suzuki-branded cars from Jiangxi to its main car factory in Chongqing, 1,000 km away. The protest came just two years after the National Development and Reform Commission (NDRC) hailed...

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