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    Gavekal Dragonomics

    Softening Up On SOE Deleveraging

    China this year ordered central SOEs to bring down their asset-liability ratio down by 2pp by 2020. That might sound like a modest change, but it means doing much more deleveraging in the next two years than in the last two. With policymakers now starting to ease policy, this aggressive hard target for deleveraging will likely become a soft one.

    0
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    Gavekal Research

    The Fire Testing Of Asian Junk

    The strong US dollar, rising oil prices and a gathering trade war have sent capital fleeing from emerging markets. Asian high-yield debt has taken a hit with the benchmark (JP Morgan) index down -3% this year, sparking worries of a self-feeding cycle that ends with a debt crisis. We have taken a fairly constructive view on emerging economies due to their generally non-threatening macro-fundamentals. Hence, with EM asset prices stabilizing it is...

    2
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    Gavekal Research

    The Biggest Question Of The Day

    Should we take Donald Trump literally when he says he wants to eliminate the US trade deficit? In this paper, Louis examines the different ways the US might hope to cut its trade deficit, including its bilateral deficit with China, and explores why the outlook for risk assets depends enormously on the US administration's real aims in launching its international trade war.

    7
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    Gavekal Research

    No Good Choices For China

    China wants to show that it will stand up to US threats to escalate the trade war. Yet Yanmei argues that it has few attractive policy choices. It can neither back down from the confrontation nor retaliate enough to deter the US. With little prospect of a negotiated solution in the near term, Beijing is focused on stabilizing the domestic economy.

    5
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    Gavekal Research

    The Bullish Logic Of Trump’s U-Turns

    The news on Wednesday that Donald Trump’s administration is considering imposing tariffs of 25%—rather than 10%—on an additional US$200bn of Chinese goods might appear to be an aggressive escalation of its trade conflict with China. But there is a high probability the proposed tariffs will never be implemented. Trump has a track record of talking tough, only to back down before it comes to the crunch; a pattern of behavior that may help to...

    4
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    Gavekal Dragonomics

    Will Mergers Become A New Front In The Trade War?

    On July 25, Qualcomm canceled its US$44bn acquisition of NXP Semiconductors after it failed to get approval from Beijing before its self-imposed deadline. In this piece, Matt assesses the big question this failure raises: has China decided to use its merger-review process to punish US companies for the tariffs imposed by the Trump administration?

    0
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    Gavekal Research

    What Will Halt The Renminbi’s Fall?

    The momentum for a weaker renminbi is considerable, with the US ratcheting up its trade war with China and the Chinese government moving to easier fiscal and monetary policies. But Chen Long argues that the renminbi’s downside from current levels may prove limited even though the central bank is unlikely to intervene as much as it did in 2015-16.

    2
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    Gavekal Research

    Strategy Monthly: Towards A Global Liquidity Crisis?

    In our latest outlook for global investment strategy, Charles Gave warns that the world may be heading into a dollar liquidity squeeze. There have been seven such scarce-dollar episodes since 1971, and every one produced some big financial accidents. The basic symptom today is that the US is heading into an inflationary boom, while the rest of the world is seeing slower economic growth and weaker asset prices. Investors must be defensive; but...

    0
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    Gavekal Research

    No Cause For Celebration

    The US-EU trade truce announced by President Donald Trump and European Commission President Jean-Claude Juncker on Wednesday is good news for the world economy. Yet it is still far too early to write off global macro risk from a generalized trade war. US tariffs on steel and aluminum imports remain in place, as do the EU’s retaliatory tariffs on US goods; and the threat of American levies on US$335bn in car and car part imports has been...

    1
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    Gavekal Dragonomics

    Housing Inventories Hit Bottom

    The long decline in China’s housing inventories—the key factor driving the recovery in construction—now seems to have ended. After falling in 2015, 2016 and 2017, housing inventories are now on pace to end 2018 slightly higher. In this piece, Rosealea explains why this change will not spell the end of the construction cycle just yet.

    0
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    Gavekal Dragonomics

    Stemming The Tide Of Bond Defaults

    As China’s government shifts economic policy more explicitly into easing mode, will it relieve the growing strains in the corporate bond market? In this piece, Chen Long diagnoses the underlying causes of a recent wave of defaults that have spooked investors, and explains how the government is changing policy to ease that financial stress.

    0
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    Gavekal Research

    Destination Escalation

    Will we see any break in the escalation of Trump’s trade wars this year—either because one of the targets capitulates and tries to strike a deal with the US, or because blowback within the US against the negative impact of trade wars gets strong enough that Trump needs to beat a tactical retreat? The answer is a firm no, on both counts.

    2
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    Gavekal Research

    Fair Weather Friend, Or Safe Port In A Storm?

    On Thursday morning in Asia, the Japanese yen was trading at ¥112.7 to the US dollar. At that level the yen is down -7.2% from its late March high, a fall which has erased all its first quarter gains and left the currency exactly flat year-to-date. At first glance this fall might seem surprising, given the degree of nervousness in global markets and the yen’s reputation as a safe haven currency, not to mention its undervaluation relative to...

    0
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    Gavekal Dragonomics

    Don't Fixate On Fixed-Asset Investment

    If you believe China’s official statistics on fixed-asset investment, then capital spending is now collapsing across the country. But you probably shouldn’t believe those numbers, for reasons that Andrew explains in this piece. True growth in investment spending will slow in 2018, but much less catastrophically than the headline data suggest.

    2
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    Gavekal Research

    Video: China's Technology Strategy

    China has an ambitious industrial upgrading plan, called Made in China 2025, which targets Chinese leadership in about 30 technological segments. In this video interview Dan explains how the government aims to achieve this, how this plan differs from previous Chinese policy goals, and whether it is likely to succeed.

    0
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    Gavekal Dragonomics

    Time To Get Fiscal?

    China’s latest data reinforce an economic trajectory that is getting worrisome for policymakers, with weaker domestic activity, an escalating trade conflict and a greater-than-expected slowdown in credit growth. Further easing of monetary policy is definitely in the cards, but there is now rising pressure on Beijing to step up fiscal spending.

    1
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    Gavekal Research

    The Chinese Juggernaut Will Roll On

    In 2015, I sat down with Sri Lanka’s then-new finance minister. The “teardrop of India” had recently elected a fresh government, kicking out a corrupt president widely regarded as in China’s pocket. Vowing to scrutinize all Chinese deals, the new leaders suspended a massive real estate project in Colombo harbor. “The high costs come from nothing other than corruption, but we do not want taxpayers to pay for the past decisions of a corrupt regime...

    1
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    Gavekal Dragonomics

    The Biggest Winners In Real Estate

    China’s real-estate developers are getting hammered in stock and credit markets. But the largest of these firms are well-placed to ride out current strains, and are the main beneficiaries of accelerating consolidation and government policy. As the Chinese property market matures, the winners are likely to be a small group of the largest companies.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call July 2018

    In this call Arthur Kroeber outlined his view on why President Donald Trump’s trade war is not a bluff, and is likely to escalate ahead of the US midterm elections in November; Andrew Batson explained the macro-level effects caused by all this uncertainty; and Chen Long discussed the market impacts in China and the country’s likely response.

    0
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    Gavekal Research

    Policy Headwinds For Chinese Stocks

    Chinese equities have finally had a few solid trading sessions after their steep decline in the latter half of June. But the CSI 300 index is still down -14% year-to-date, and betting on a rebound from here looks unwise. A confluence of factors has been pushing down the market—tougher financial regulation, weak data, a falling currency, and the trade conflict with the US. And none of these factors is turning positive, especially with the US...

    0
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    Gavekal Research

    The Recession Of 2019

    Over the last three months, I have become increasingly concerned that a recession will hit the world economy in 2019. In this paper, I shall explain why. My reasoning is simple, and is based on the behavior of an indicator I have long followed, which I call the World Monetary Base, or WMB. Every time in the past that this monetary aggregate has shown a year-on-year decline in real terms, a recession has followed, often accompanied by a flock of...

    17
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    Gavekal Dragonomics

    The Global Rise Of Chinese Smartphones

    Xiaomi and other Chinese smartphone makers are among the first Chinese consumer-goods companies to have gained significant market share outside of China. In this piece, Dan explains where their success has come from and assesses their prospects: Chinese smartphones may not displace Apple and Samsung, but can limit their gains in emerging markets.

    0
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    Gavekal Research

    A National Security Imperative

    Depending on commodity prices, in any given year China spends between US$250bn and US$400bn on imports of the “big five” commodities it needs to continue growing: oil, iron ore, coal, copper and soybeans. Before it can do that, it must first “earn” those US$250-400bn. Only then can it can turn around and buy the stuff the country needs to ensure its long-term growth.

    10
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    Gavekal Research

    Hard Yards For Emerging Markets

    Emerging markets have been hit by the combined effect of a stronger US dollar, tighter international liquidity and rising trade tensions, causing their currencies to fall more in the last few months than in the 2013 “taper tantrum”. The big fear for EMs is that the end of easy money globally creates a giant margin call. As a firm, we have tended to be upbeat on their prospects in this cycle, and it may be that a huge buying opportunity has...

    2
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    Gavekal Research

    The Trade War And The US Cycle

    How will the US administration’s trade disputes affect the US economic cycle? In the worst case scenario, if Donald Trump follows through on all his threats the disruption to global supply chains could be great enough to push the world economy into recession. At this point, the greatest impact flows from the high degree of uncertainty about future actions.

    0
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    Gavekal Research

    Strategy Monthly: The Four Roads Ahead

    The first half of the year was not a great one for global equities, and the second half is clouded by risks: slowing growth, rising inflation, renewed political stress in the eurozone, and most of all the threat of massive protectionism by the United States. Louis Gave offers four scenarios of how things could play out, and Arthur Kroeber explains why it's time to start seriously worrying about a worst-case trade scenario.

    0
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    Gavekal Research

    What Could Turn The Tide?

    The global equity bull market is increasingly looking like the German soccer team: old, tired and getting slow, having reached its peak a while back. Even the “captain” of the bull market, the S&P 500, last made new highs five months ago. Since then, the asset classes that have delivered positive returns have been as few and far between as German goals. Year to date, investors have lost money on US investment grade bonds, on emerging debt,...

    2
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    Gavekal Dragonomics

    The End Of Normal Trade

    The US may have backed down from imposing new restrictions on Chinese investment in the US. But it would be wrong to see this as a de-escalation of the US-China trade conflict. In this piece, Andrew argues that the tariffs taking effect Friday will mark the end of two decades of normal US trade with China, and the return of political uncertainty.

    0
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    Gavekal Dragonomics

    A Rethinking Of Housing Subsidies

    China's government, worried about continued rapid growth in housing prices, is now reconsidering a major program for subsidizing housing sales. As Rosealea explains, this policy change shows the government is still more focused on curbing frothy housing prices than on boosting growth, and will weigh on housing sales in the rest of 2018.

    0
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    Gavekal Research

    The End Of Tech Codependency

    The US has backed away from the “nuclear” option of slapping new investment curbs on Chinese firms, but its likely use of export restrictions and tariffs on “strategic” sectors like semiconductors will hit all parts of the supply chain, regardless of nationality. At best chipmakers can expect to muddle through; at worst the industry takes a big hit.

    2
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    Gavekal Dragonomics

    How China Can Fight Back In The Trade War

    China is a veteran in economic warfare. As the US prepares to hit China with trade and investment penalties, China can draw on years of experience and an arsenal of regulatory tools to craft a response. The local operations of US companies present a large target. In this piece, Yanmei explains how China is most likely to retaliate against the US.

    6
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    Gavekal Research

    Oil After The OPEC Meeting

    Let us start with a simple reality: assuming the world economy avoids a 2008-type implosion, then global demand for oil should approach 100mn barrels per day by the year’s end. That represents an increase in global demand this year of roughly 1.5mn bpd—more or less the same pace of increase the world has had to deal with in recent years.

    11
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    Gavekal Dragonomics

    Macro Update: More Stress, More Easing

    In this concise chartbook, Chen Long explains where the Chinese economy stands today. The business cycle has been surprisingly strong but is likely to soften more in the second half. Trade conflict with the US is raising uncertainty just as domestic credit stress increases. Policy is adjusting, but to smooth the growth trajectory not reverse it.

    0
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    Gavekal Research

    The Trouble With Trade Retaliation

    When this week US president Donald Trump threatened to slap tariffs on an additional US$200bn of imports from China, on top of the US$50bn already targeted, the Chinese government immediately promised to retaliate in full proportion. The trouble is that retaliating will be a lot more difficult and painful than Beijing’s counter-threats make it sound.

    2
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    Gavekal Research

    Easing Won’t Help Chinese Equities

    When the White House rattled global markets earlier this week with its threat markedly to escalate the international trade war, mainland Chinese stock markets were hit the worst. That is not surprising, considering that the US administration’s threats were targeted specifically at imports from China. However, the fall in Chinese markets was so severe, and the subsequent recovery so anemic, in part because investors’ heightened fears over trade...

    0
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    Gavekal Research

    The Investment Scenarios Ahead

    The interaction of three prices—the US dollar, long-dated US interest rates, and oil—tend to determine the behavior of most other asset values, and so far this year, all three have moved higher. Investors have adjusted to this new reality with some trepidation: among major markets, only the US (S&P 500) and Japan (Nikkei 225, barely) are up year-to-date in US dollar terms.

    3
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    Gavekal Dragonomics

    The Restructuring Of Retail

    China’s rapid shift to online shopping is emptying malls and forcing retailers to close hundreds of stores. But at the same time, the big internet companies are investing billions to seek new growth from brick-and-mortar stores. In this piece, Ernan explains how Chinese retail is restructuring and where the growth opportunities are.

    0
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    Gavekal Research

    The Empire Strikes Back?

    Over the last 70 years the global population has tripled. Yet in defiance of every Malthusian theory out there, the average citizen of the world has never known such a high level of material comfort as today. To start with the obvious, the world has almost entirely eradicated the famines that plagued entire regions just a few generations ago (this isn’t to deny the humanitarian catastrophes unfolding today in Yemen or Syria, but these are caused...

    3
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    Gavekal Research

    Trade War Escalates. What’s Next?

    With the imposition of tariffs on US$34bn of imports from China last Friday, the US has expanded the trade war it launched two weeks earlier with steel and aluminum tariffs, mostly on friendly countries. More are likely to come by the end of the year: additional tariffs on China, and possibly levies on imports of cars and car parts (which again would mainly hurt US allies). It is possible that the US could pull out of Nafta. How worried should...

    1
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    Gavekal Dragonomics

    Parsing The Slowdown In Credit Growth

    China’s credit growth slowed to a new low in May, but the deceleration in real economic activity remains a moderate one—although sharp contrasts are now appearing among different indicators. In this piece, Chen Long explains why credit growth is likely to continue to slow, and how that will affect different parts of the economy.

    0
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    Gavekal Research

    The Way Ahead For North Korea

    After the Trump-Kim summit, North Korea's commitment to denuclearization still remains a fiction. Future negotiations will be mostly about stringing along the US administration. While Washington and Pyongyang talk, Beijing and Seoul will continue to try to normalize the existence of a nuclear-armed North Korea and cement peace.

    0
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    Gavekal Research

    Audio & Transcript — Gavekal Research Call June 2018

    During Friday’s monthly call, Louis Gave addressed the direction of the US dollar and the impact of expanding US fiscal deficits. Anatole Kaletsky focused on the rise of populist politics, which remains his major concern. Charles Gave considered the impact of resurgent nationalism on the investment environment. There was also significant discussion of the oil price with Anatole and Louis taking differing positions.

    0
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    Gavekal Research

    Video: When To Buy US Bonds

    With 10-year US treasury yields having failed so far to climb significantly above the 3% mark, investors are asking whether it is time to buy US long bonds. In this short video interview, Will presents a simple framework for approaching the bond market. With the yield curve flat by historical standards, and yields far below their natural ceiling set by returns on invested capital, investors should steer clear of long bonds.

    0
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    Gavekal Dragonomics

    The 5G Dream Will Not Be Denied

    Now that the US has backed away from putting crippling sanctions on Chinese telecom-equipment firm ZTE, China looks well-placed to achieve its dreams for 5G, the next wave of mobile technology. Huawei and ZTE may be effectively blocked from the US market, but they are well-placed to grab a significant share of the global market for 5G.

    0
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    Gavekal Dragonomics

    Is A Crisis Brewing Over Taiwan?

    Ominous clouds are gathering over Taiwan, as China steps up displays of military force and its campaign of international isolation. Could this escalate into a replay of the 1995-6 Taiwan Strait crisis, or something even worse? In this piece, Yanmei assesses the rising risks, but argues that military conflict is still a remote possibility.

    0
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    Gavekal Research

    America First, The Rest Of The World Second

    Bears are stealthy creatures that rarely offer much warning of their arrival. Based on my experience in the financial wilderness, I have rarely recognized the clear manifestation of a bear market until I was caught firmly in its clutches. In the US today, excitement about President Trump’s daily activities means there is a lack of clear thinking about this market’s outlook. Similarly, a meme for many investors, including Gavekal colleagues, has...

    2
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    Gavekal Research

    ‘Peak Politics’: Another Chance To Buy The Dip?

    In recent weeks, investors have been hit with multiple political shocks in the shape of Italian politics, American trade policy and global oil shenanigans. But even as President Donald Trump seems to escalate the American “trade war” and Italy’s new prime minister thumbs his nose at Brussels’ budget parsimony, Anatole asks if political risks have in fact peaked, offering a “buy the dip” opportunity.

    0
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    Gavekal Research

    A War On All Fronts

    I have previously argued that Trump Administration trade policy—and specifically policy on China—should be understood as a volatile reaction among four forces: the president, the trade warriors, the national security hawks, and the business community. While all four forces are still hard at work, it’s clear that President Trump has the upper hand—as a result of which the US now seems committed to waging trade war on all fronts.

    0
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    Gavekal Research

    Not Letting A Good Crisis Go To Waste

    At the beginning of 2018, one of Gavekal’s big themes for the coming year was that the liquidity environment was deteriorating. Behind this we saw three causes: 1) the US Federal Reserve’s decision to shrink its balance sheet; 2) the growing toll of rising energy prices, and 3) the coming liquidity drain from runaway US government spending.

    2
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    Gavekal Dragonomics

    Marshals Over Markets: China Tightens Cybersecurity

    Our first DeepChina report takes a close look at Beijing's efforts to exert tighter control over the internet, the flow of commercial data, and the security of its technological infrastructure. China ia nor alone in toughening regulation, but its efforts are far more expansive, and raise more serious concerns for multinational firms.

    2
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